Written by: 0xmiddle
In recent years, there have been many complaints in Web3, with no more phenomenon-level innovations or new breakout effects in the industry; talent is returning to Web2 or switching to AI; VC currencies are facing crises, and memes have surprisingly taken center stage. We have long missed the excitement, shock, and anticipation we felt during the DeFi Summer and NFT Summer.
However, innovation is constantly happening quietly. At least in the DeFi space, I see the undercurrents - the emergence of DeFi 4.0.
To clarify what DeFi 4.0 is, let's first conduct a historical analysis of DeFi.
DeFi 1.0: Decentralization of Basic Financial Products
Time: Approximately 2018-2020
During this phase, first-generation DeFi protocols like MakerDAO, Compound, Uniswap, and Aave emerged, realizing the decentralization of basic financial services such as trading, lending, and asset management. Especially with the invention of AMM, a previously unprecedented paradigm was created, sparking a 'everyone can be a market maker' equality movement, and generating a wave of wealth mythology related to liquidity mining.
DeFi 2.0: Enhancing Capital Efficiency
Time: Approximately 2021-2022
During this period, a number of new DeFi protocols emerged. Overall, these protocols lack the simplicity and beauty of the first-generation DeFi protocols, and their mechanisms are relatively complex. However, their goals primarily revolve around enhancing capital efficiency, especially liquidity efficiency, while also attempting to solve the issues of liquidity accessibility and sustainability.
Typical representatives include: attempts by Abracadabra, Alchemix, and Frax Finance to bypass over-collateralization in lending protocols and stablecoin protocols through various mechanisms; LaaS (Liquidity as a Service) protocols like Tokemak that aim to help newly launched DeFi projects gain liquidity; and protocols like OlympusDAO that solve liquidity sustainability issues through self-held liquidity mechanisms.
It is worth mentioning that Uniswap V3 was also born during this period, and its range market-making algorithm significantly improved LP's capital efficiency compared to previous full-price range market-making.
Another significant innovation is the Gauge Voting of the Curve protocol, also known as the veToken governance mechanism. This is a token governance scheme that effectively realizes the sustainability of liquidity. This mechanism has since been widely adopted by many protocols in the DeFi industry.
DeFi 3.0: Expansion of Composability
Time: Around 2022
There is still a lack of consensus within the industry regarding the definition of DeFi 3.0. Some believe it involves LSDFi and Restake, others think it refers to cross-chain/all-chain DeFi, while some consider it as Farming as a Service. This reflects that in the 3.0 phase, DeFi has innovations and progress in multiple aspects. Overall, the development trend of DeFi in this phase mainly reflects an expansion of composability.
In the 1.0 era, DeFi Lego was already a term that was widely mentioned and discussed, but its combinability comparable to Lego was only fully realized in the 3.0 era.
Image source: Internet
Starting from the upgrade in Shanghai, Ethereum has officially completed its transition from PoW to PoS, and ETH LSD has become a fixed-income product similar to dollar bonds in the DeFi space. Against this backdrop, many protocols have begun to develop Restake scenarios based on ETH LSD to provide users with stacked yields, with representative projects including Eigenlayer and Puffer; there are also some protocols that leverage the earning characteristics of LSD to offer users interest rate swap products and diversified arbitrage strategies, such as Pendle.
With the improvement of Infra, the cost of creating chains has increased significantly, leading to the emergence of numerous L2 and new public chains, which has brought diversification but also fragmentation. Some DeFi protocols, empowered by underlying cross-chain protocols, attempt to create composability between different chains, allowing users to access funds, exchange assets, and participate in staking and lending across chains. Representative projects include all-chain DEX Stargate, all-chain lending protocol Radiant, and all-chain LSD protocol Bifrost.
Due to the increased composability of DeFi, a variety of 'one fish eats multiple meals' strategies have emerged. Some protocols have started to offer users FaaS (Farming as a Service), providing automated strategies through smart contracts, simultaneously offering users various high-yield strategies while simplifying user operations, providing a 'passive income' style of service. Representative projects include Rari Protocol, Harvest Protocol, and Yearn Finance, which has traversed from the 1.0 era.
DeFi 4.0: Self-Custody and Personalized Finance
Time: Starting in 2023
Finally, we are going to talk about DeFi 4.0. Due to the performance limitations of Ethereum, DeFi protocols on Ethereum cannot provide independent proxy computation capabilities for each user, thus adopting a model managed by a single contract. Whether it is Uniswap, Compound, or MakerDAO, and even the vast majority of Ethereum DeFi protocols, they require users to authorize funds to the contract and perform unified configuration and management within the contract.
However, with the birth of various L2s and high-performance new public chains, this performance limitation has actually ceased to exist. Yet, for a long time, the powerful inertia of past paradigms still plays a role. In fact, for high-performance new public chains, DeFi can be constructed in a more advanced form.
In this new form of DeFi, every user can deploy their own smart contract proxy, interact with protocols in a customized manner, and independently carry out personalized financial activities.
The industry has yet to reach a unified naming for this new form. New lending protocols like Morpho, Ajna, and Euler Finance have created a new term called 'modular lending'. Further expanding this, we can derive a new concept - 'modular DeFi'; the Arweave/AO ecosystem popularizes the term AgentFi, meaning 'proxy finance'. A term I personally favor is SovFi (Sovereign Finance), emphasizing 'individuals providing financial services' and 'financial independence of individuals'. This was first seen in a tweet by EverVision founder outprog, with Permaswap developed by EverVision being the leading DEX in the Arweave/AO ecosystem. The tweet mentioned that sovereign finance emphasizes 'individuals providing financial services' and 'financial independence of individuals'. In intuitive terms, it allows everyone to establish their own exchanges, banks, and any financial services.
Image source: https://x.com/outprog_ar/status/1853102029620805912
Regardless, as the industry develops and narratives rise, consensus will inevitably coalesce around a particular name, so let's set aside the naming issue for now and refer to it as DeFi 4.0.
The core features of DeFi 4.0 are threefold:
Firstly, self-control. Users do not need to authorize assets to a unified contract, but can manage their own funds through a proxy contract controlled by themselves and participate in financial activities.
Secondly, personalization and customization. Users can set the content and parameters of financial activities according to their own needs.
Thirdly, peer-to-peer. The trading model is no longer point-to-pool, but rather point-to-point, or point-to-network.
For example, Permaswap allows LPs to autonomously set market-making curves and ranges, matching trades with traders through a peer-to-peer matching mechanism. Users of so-called 'modular lending' protocols can create their own lending pools, autonomously set over-collateralization rates and lending rates, and execute trades with borrowers through a peer-to-peer matching mechanism. It is worth mentioning that to avoid future interoperability issues between differently developed proxy contracts, Permaswap has taken precautions by creating a standard protocol - FusionFi Protocol. All proxy contracts (Agents) established according to this standard can communicate with each other, thus enabling matching, effectively allowing Permaswap to potentially evolve beyond a pure DEX into a liquidity aggregator, and even a super aggregator integrating multiple financial forms.
Summary
New problems give rise to new solutions, and new solutions may contain new problems. Like the development of most things, DeFi is also advancing in this continuous cycle of negation. Looking back at the process from DeFi 1.0 to DeFi 3.0, we can see that the DeFi space is always filled with vibrant creativity; some innovations have visibly brought about changes, while others, though less noticed, may have equally profound impacts.
At the beginning of 2024, we vaguely discovered new trends in the DeFi space - autonomy and personalization. We see a new decentralized finance paradigm emerging - DeFi 4.0. It may not seem to be widely promoted yet, but 0xmiddle believes it will eventually form a powerful narrative. The era of sovereign finance is about to arrive!
