Author: Shijun
Reviewed by: 0xmiddle
Source: Content Guild - Research
Introduction
Now, more than 3 years have passed since the explosion of DeFi Summer, and it has been more than half a year since the compliance benchmark ETF was approved. Has the situation changed?
Looking back, Ethereum's smart contracts have enhanced the programmability of blockchain, transforming it from a simple accounting function into infrastructure supporting various applications. Among many fields, there is no doubt that the decentralized migration of traditional finance is the most practical application scenario.
Let's take a look at the DeFi TVL data from DeFiLlama. Currently, the TVL of DeFi applications has exceeded 80 billion USD. In recent years, many public chains have emerged, and even Ethereum's L2 is diverting space from Ethereum's L1. However, currently on the Ethereum platform, it still securely locks up more than half of the total DeFi assets.
Image source: defillama.com/chains
The original ambition of DeFi was to disrupt traditional financial models such as lending, payments, and insurance, allowing users to perform these operations without relying on traditional financial institutions like banks. However, the TVL of DeFi has remained stagnant for a long time, lacking breakthroughs in scale.
Most opinions believe that DeFi is limited by issues such as the performance and cost of the Ethereum network, preventing large-scale applications and complex financial scenarios. However, the DeFi ecosystem on various L2s and high-performance new public chains has not resulted in breakthroughs in DeFi scale; rather, it has led to liquidity fragmentation and decreased interoperability. Ethereum still retains the most complete DeFi ecosystem and the fullest interoperability, remaining the preferred platform for deploying DeFi projects.
Now, a new trend is emerging: a new DeFi paradigm based on AO—AgentFi. This innovation is breaking the limitations of traditional DeFi.
AO is built on the storage layer of Arweave, creating a computing layer that supports concurrently running processes, addressing scalability issues and achieving nearly infinite scalability. The combination of AO and Arweave is an implementation based on SCP (Storage-based Consensus Paradigm).
In AO, smart contracts exist in the form of processes. Freed from performance limitations, everyone can run their own processes to act on their financial behaviors, with consensus managed by Arweave's storage layer. This is the foundation of AgentFi.
Will this new form of DeFi, namely AgentFi, replace traditional DeFi and become the new mainstream form of DeFi? Let me elaborate.
Limitations of Traditional DeFi
In traditional blockchain architecture, block space is designed as a scarce resource. Users and applications need to compete for this resource. When the network is congested, people have to pay more to compete for block space, which is the fundamental reason for performance limitations. Ethereum's performance limitations are evident, with only around 30 TPS [1], which feels insufficient. During peak times, gas fees often surge by several dozen times, something people have become accustomed to. In fact, L2s and most high-performance public chains also have performance ceilings. Their ceilings may be higher, but accommodating the scale of traditional financial business is still quite difficult.
To save on performance consumption and gas fees for users, enhancing user experience, traditional DeFi has been designed to use a single smart contract to manage business assets and run financial operations. Because both funds and business logic are managed by a single unified contract, it becomes difficult to achieve true diversification and personalized business operations. While this design can simplify management processes and ensure consistency, it also deprives users of autonomy in business logic and financial operations, failing to meet increasingly diverse user needs.
For developers, writing contracts must consider gas fees and avoid writing complex contract codes as much as possible. On Ethereum, the gas limit for a single ETH transfer is 21,000 gwei, and for an ERC20 token transfer it's 65,000 gwei. Slightly more complex scenarios, such as swaps, NFT transactions, and lending, require at least 300,000 gwei [2]. If the business is more complex, gas consumption will become increasingly burdensome for users. This greatly limits developers' creative space and restricts the richness and innovation of DeFi.
To fundamentally solve the above problems, the market needs a more powerful infrastructure and supporting financial system.
Thus, AO was born, and AgentFi is a new exploration of the next generation of DeFi within the AO ecosystem.
AO: Infrastructure with Nearly Infinite Scalability
AO is an abbreviation for Actor Oriented, which is a decentralized computing protocol based on role orientation.
In fact, compared to Ethereum, AO is closer to the concept of a world computer. I understand AO as a super computing layer, with the core goal of achieving trustlessness and collaborative computing services without scaling limitations.
Let's take a look at the workflow diagram of the super-parallel computer built on AO:
Image source: AO white paper
Message generation: Users or processes initiate requests by generating messages. These messages must conform to the specifications defined by the AO protocol to be transmitted and processed correctly in the network.
Message Unit (MU) Relay: The Message Unit (MU) is responsible for receiving user-generated messages, acting as a router to direct messages to the appropriate SU nodes in the network. During this process, the MU will sign the messages to ensure data integrity.
Dispatch Unit (SU) Processing: When messages arrive at the SU node, the SU assigns a nonce to the message to ensure its order within the same process and uploads the message and nonce to the Arweave consensus layer for permanent storage.
Computing Unit (CU) Calculation: After receiving the message, the Computing Unit (CU) executes the corresponding computational tasks based on the message. After computation, the CU generates a signature with the computation results and returns it to the SU. This signature certifies the correctness and verifiability of the computation results.
So, where does consensus come from?
In AO, storage is equivalent to consensus. During the execution of a process, messages are transmitted, and these messages are written to Arweave, resulting in a 'holographic state.' This means that the running state of the process can be verified. In other words, Arweave's immutable storage guarantees verifiability. This may seem counterintuitive, but if you fully understand the SCP paradigm, it becomes clear instantly. If you still don't understand, you can analogize it to inscriptions.
In addition to verifiability, we also need to address the question of who will verify. With verifiability, anyone can provide verification services. In AO, applications can choose their own verification services and flexibly decide their security based on their business nature. Combined with the economic games of optimistic challenges, the reliability of verification can be ensured.
On the computers built in AO, applications are constructed by an arbitrary number of communication processes.
In AO, processes are not allowed to share memory, but they can communicate through native message passing standards.
Since message passing is asynchronous, by focusing on message transmission, AO achieves a scaling mechanism similar to traditional Web2 distributed system environments.
This means that theoretically, AO actually has no performance limitations.
For developers, they can choose public nodes, but they can also run their own services with their own nodes. In this case, if they encounter performance bottlenecks, they can simply scale their nodes, just like running a Web2 service.
Moreover, this working model brings additional benefits—computing nodes can offer computing power support for AI scenarios. We will have the opportunity to discuss this further in the future.
What are the differences of AgentFi?
Unlike traditional DeFi, which relies on a unified smart contract to manage funds and run financial operations, the concept of AgentFi allows everyone to run processes on the AO computer and manage their own funds, acting on their financial behaviors. What does this look like? Let's explain using AO's leading DEX, Permaswap, as an example.
In traditional DeFi, let's assume Alice wants to exchange Token A for Token B. First, a liquidity pool is needed on a DEX, with funds held by a smart contract to provide the exchange functionality for A/B tokens. The exchange rate is determined by the market-making curve adopted by that smart contract (e.g., x*y=k). In Permaswap, it is such a form, where each LP manages their own market-making funds through their proxy processes and can customize their market-making curve and strategy. Of course, LPs can also adopt an 'extreme market-making strategy'—by simply placing a limit order.
In fact, we find that Permaswap can integrate both AMM and order book trading forms. For users, when they initiate a transaction, the entity that matches them to complete the transaction could be AMM, or a limit order, or even both.
Overall, AgentFi has three characteristics:
1. Self-custody: Users manage their own funds through their controlled proxy processes, executing their own trading strategies instead of entrusting them to a unified contract.
2. Personalization: Users can flexibly set their financial business parameters through their controlled proxy processes. In other words, this is equivalent to users opening an exchange, customizing trading strategies and fees. If extended to lending services, it can be understood as users opening a bank, customizing interest rates. Further, users can entirely run custom financial strategy programs through self-custodied processes, which may even integrate AI for intelligent strategy programs.
3. Peer-to-peer: Matching between supply and demand is no longer the point-to-pool model of traditional DeFi but returns to a peer-to-peer model.
Ethereum distinguishes between contract accounts (CAs) and external accounts (EOAs), with different financial scenarios implemented through different contract codes, requiring active participation from individuals. In AO, it presents another concept oriented towards Agents, where different Agents can realize different functions, and financial behaviors can be carried out through Agents. I believe that the concept of AgentFi is more like building blocks, allowing for a richer decentralized financial ecosystem.
With a large number of self-custodied processes, how can they communicate with each other and possess composability? This is where the FusionFi Protocol comes in, which is a development standard and communication specification for Agents on AO. Almost all financial operations can be abstracted as the circulation and processing of tickets, and the FusionFi Protocol defines a standard format for these tickets. With such a standard, complex and diverse financial forms can achieve integration. Developers can implement various financial services such as exchanges, lending, futures, and even stablecoins based on the FusionFi standard. In the future, the FusionFi Protocol can reference the model of industry standardization proposals like BIP, EIP, and NIP, allowing more people to participate in formulating protocol standards and promoting sustainable ecological development.
A detailed explanation of the FusionFi Protocol will be provided in a separate article by the author.
Summary
The performance and cost issues of Ethereum limit the pace of current DeFi development. Although L2 and new public chains have made significant progress in scaling, invisible ceilings still exist that restrict the development of financial services.
To completely break the ceiling, a network different from the traditional blockchain paradigm—the AO super-parallel computer—has emerged. Due to AO's infinitely scalable performance, AgentFi has become possible. Users can run their own processes, manage funds themselves, and customize financial services.
The financial model oriented towards Agents has a broader range of application scenarios compared to traditional DeFi.
Data Source:
1. Interpretation of Ethereum TPS
https://www.chaincatcher.com/zh-tw/article/2102262
2. Statistics on Ethereum transaction gas usage
https://etherscan.io/gastracker
References:
1. Technical details of the AO super-parallel computer
2. AO Protocol: Decentralized, Permissionless Supercomputer
https://x.com/kylewmi/status/1802131298724811108
3. Smart Finance: From AgentFi to FusionFi
https://www.notion.so/permadao/AgentFi-FusionFi-6461feb8915c4ea5a1252eca80aa6a4a
