New form of DeFi: self-custody, personalized, and peer-to-peer.
Written by: 0xmiddle
In recent years, there have been many complaints about Web3. There are no more phenomenal innovations in the industry, and no new out-of-the-box effects. Talents have returned to Web2 or switched to AI. VC coins are in crisis, and Meme has become the protagonist. We have long missed the excitement, shock, and expectation of DeFi Summer and NFT Summer.
However, innovation is actually happening silently all the time. At least in the field of DeFi, I see the waves under the water - DeFi 4.0 is about to emerge.
In order to understand what DeFi 4.0 is, let’s first do a DeFi generation project.
DeFi 1.0: Decentralization of basic financial products
Time: Around 2018~2020
During this period, the first generation of DeFi protocols such as MakerDAO, Compound, Uniswap, and Aave were born, realizing the decentralization of basic financial services such as trading, lending, and asset management. In particular, the invention of AMM created an unprecedented paradigm, set off an equal rights movement of "everyone can make markets", and also created a wave of wealth myths related to liquidity mining.
DeFi 2.0: Improving capital efficiency
Time: Around 2021~2022
During this period, a number of new DeFi protocols have emerged. Overall, these protocols lack the simplicity and beauty of the first-generation DeFi protocols and have more complex mechanisms, but their goals are basically centered around improving capital efficiency, especially liquidity efficiency, while also attempting to solve the problems of liquidity availability and sustainability.
Typical representatives include: lending protocols and stablecoin protocols such as Abracadabra, Alchemix, and Frax Finance that attempt to circumvent over-collateralization through various mechanisms; LaaS (Liquidity as a Service) protocols such as Tokemak that attempt to help newly launched DeFi projects obtain liquidity; and protocols such as OlympusDAO that solve liquidity sustainability issues by maintaining their own liquidity.
It is worth mentioning that Uniswap V3 was also born during this period. The interval market making algorithm significantly improved the capital efficiency of LP compared with the previous full price range market making.
Another innovation with a significant impact is the Curve protocol’s Gauge Voting, also known as the CurveToken governance mechanism, which is a token governance solution that achieves liquidity sustainability. This mechanism was later widely adopted by many protocols in the DeFi industry.
DeFi 3.0: Expansion of composability
When: Starting around 2022
There is still a lack of consensus in the industry on the definition of DeFi 3.0. Some people think it is LSDFi and Restake, some think it is cross-chain/full-chain DeFi, and some think it is Farming as a service. This shows that in the 3.0 stage, DeFi has innovations and progress in many aspects. But overall, at this stage, the development trend of DeFi is mainly reflected in the expansion of composability.
In the 1.0 era, DeFi Lego was already a term that was fully mentioned and discussed, but its Lego-like composability was not fully demonstrated until the 3.0 era.
Image source: Internet
Since the Shanghai upgrade, Ethereum has officially completed the transformation from PoW to PoS, and ETH LSD has become a fixed-income product in the DeFi field similar to US dollar bonds. In this context, many protocols have begun to develop Restake scenarios based on ETH LSD to provide users with superimposed yields. Representative projects include Eigenlayer and Puffer. Some protocols, such as Pendle, provide users with interest rate swap products and diversified arbitrage strategies based on the interest-bearing characteristics of LSD.
As Infra improves, the cost of chain building increases, and numerous L2 and new public chains emerge, which brings diversification and fragmentation. Some DeFi protocols, empowered by the underlying cross-chain protocol, attempt to create composability between different chains, allowing users to perform cross-chain deposits and withdrawals, cross-chain asset exchange, cross-chain participation in staking, lending, and other operations. Representative projects include the full-chain DEX Stargate, the full-chain lending protocol Radiant, and the full-chain LSD protocol Bifrost.
Due to the improvement of DeFi composability, various "killing two birds with one stone" strategies have emerged. Some protocols have begun to provide users with FaaS (Farming as a Service). They provide users with automated strategies through smart contracts, provide users with a variety of high-yield strategies, simplify user operations, and provide users with "lying down and making money" services. Representative projects include Rari Protocol, Harvest Protocol, and Yearn Finance, which came from the 1.0 era.
DeFi 4.0: Self-custody and personalized finance
Time: Starting in 2023
Finally, let’s talk about DeFi 4.0. Due to the performance limitations of Ethereum, the DeFi protocol on Ethereum cannot provide independent proxy computing power for each user, so a single contract management model is adopted. Whether it is Uniswap, Compound, or MakerDAO, or even the vast majority of Ethereum DeFi protocols, users are required to authorize funds to the contract and perform unified configuration and management in the contract.
But with the birth of various L2 and high-performance new public chains, this performance limitation actually no longer exists. However, for a long time, the strong inertia of the past thought paradigm is still in effect. In fact, for high-performance new public chains, DeFi can be built into a higher-order form.
In this new form of DeFi, each user can deploy his or her own smart contract agent, interact with the protocol in a customized manner, and independently carry out personalized financial services.
There is no unified name for this new form in the industry. New lending protocols such as Morpho, Ajna, and Euler Finance have created a new term called "modular lending". By extension, we can get a new concept - "modular DeFi"; the Arweave/AO ecosystem is popular with the term AgentFi, which means "agent finance". My personal favorite term is SovFi (Soverign Finance), which means sovereign finance. It was first seen in a tweet from EverVision's initiator outprog. Permaswap developed by EverVision is the leading DEX in the Arweave/AO ecosystem. The tweet mentioned: Sovereign finance emphasizes "individuals providing financial services" and "individual financial independence." Intuitively speaking, it allows everyone to establish their own exchanges, their own banks, and any financial services.
Image source: https://x.com/outprog_ar/status/1853102029620805912
In any case, as the industry develops and narratives emerge, consensus will inevitably converge on a certain name, so let’s put aside the name issue for now and call it DeFi 4.0.
There are three core features of DeFi 4.0:
First, autonomous control. Users do not need to authorize their assets to a unified contract, but can manage their own funds and participate in financial business through an agent contract controlled by themselves;
Second, personalization and customization. Users can set the content and parameters of financial services according to their own needs.
Third, peer-to-peer. The transaction model is no longer peer-to-pool, but peer-to-peer, or peer-to-network.
For example, Permaswap allows LPs to set their own market-making curves and market-making intervals, and to trade with traders through a peer-to-peer matching mechanism. Users of the so-called "modular lending" protocol can create their own lending pools, set their own excess collateral ratios and lending rates, and trade with borrowers through a peer-to-peer matching mechanism. It is worth mentioning that in order to avoid the possibility that proxy contracts developed in different ways may not be interoperable in the future, Permaswap has prepared for the future and created a standard protocol - FusionFi Protocol. All proxy contracts (Agents) established in accordance with this standard can communicate with each other and then match each other, which in disguise makes Permaswap possible to go beyond a simple DEX and become a liquidity aggregator, or even a super-aggregator that integrates multiple financial forms.
Summarize
New problems give rise to new solutions, and new solutions may contain new problems. Like the development of most things, DeFi is also constantly developing and advancing in this law of negation of negation. Looking back on the process from DeFi 1.0 to DeFi 3.0, we can see that the DeFi field is always full of vigorous creativity. Some innovations have brought visible changes, while some innovations may be less noticed, but the impact may be equally far-reaching.
At the beginning of 2024, we have vaguely discovered new trends in the DeFi field - autonomy and personalization, and we have vaguely seen a new decentralized financial paradigm - DeFi 4.0. It seems that it is rarely advocated and has not become a trend, but 0xmiddle believes that it will eventually form a surging narrative. The era of sovereign finance is coming!
