Author: 0xmiddle
Reviewed by: outprog
Source: Content Guild - Research and Investment
Cover background source: unsplash.com
In recent years, there have been numerous complaints about Web3, with no groundbreaking innovations emerging in the industry, and no new breakout effects; talent is returning to Web2 or shifting to AI; VC coins are facing crises, and memes have unexpectedly taken center stage. We have long missed the excitement, shock, and high expectations we felt during the DeFi Summer and NFT Summer.
However, innovation is quietly happening all the time. At least in the DeFi space, I see the ripples beneath the surface — the impending DeFi 4.0.
To understand what DeFi 4.0 is, let's first perform a generational analysis of DeFi.
DeFi 1.0: Decentralization of Basic Financial Products
Time: Approximately 2018 to 2020
In 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 the invention of AMM created an unprecedented paradigm, initiating an egalitarian movement of 'everyone can be a market maker' and generating a wealth myth related to liquidity mining.
DeFi 2.0: Enhancing Capital Efficiency
Time: Approximately 2021 to 2022
During this period, a new batch of DeFi protocols emerged. Overall, these protocols lack the simplicity and beauty of first-generation DeFi protocols, and their mechanisms are relatively complex, but their goals generally revolve around enhancing capital efficiency, especially liquidity efficiency, while also attempting to address the issues of liquidity availability and sustainability.
Typical representatives include: Abracadabra, Alchemix, and Frax Finance, which attempt to bypass excessive collateralization in lending and stablecoin protocols through various mechanisms; Tokemak, which attempts to provide liquidity as a service (LaaS) to newly launched DeFi projects; and OlympusDAO, which resolves liquidity sustainability issues through protocol-owned liquidity.
It is worth mentioning that Uniswap V3 was also born during this period, and the range trading algorithm significantly improved LP's capital efficiency compared to the previous full price range trading.
Another significant innovation is the Gauge Voting of the Curve protocol, which is the veToken governance mechanism. This is a token governance scheme that has well realized the sustainability of liquidity. This mechanism has been widely adopted by many protocols in the DeFi industry.
DeFi 3.0: Expansion of Capital Efficiency
Time: Starting around 2022
Regarding the definition of DeFi 3.0, there is still a lack of consensus in the industry. Some believe it is LSDFi and Restake, others believe it is cross-chain/full-chain DeFi, while others think it is Farming as a Service. This reflects the fact that in the 3.0 phase, DeFi has had innovations and advancements in multiple aspects. Overall, the development trend of DeFi in this phase mainly reflects the expansion of composability.
In the 1.0 era, the term DeFi Lego was already well mentioned and discussed, but its combinability, comparable to Lego, was fully realized in the 3.0 era.
Image Source: Internet
Since the Shanghai upgrade, 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 developing 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, based on the yield characteristics of LSD, offer users interest rate swap products and diversified arbitrage strategies, such as Pendle.
With the improvement of infrastructure, the cost of creating chains is increasing, leading to a surge of various L2s and new public chains, which has brought diversification but also fragmentation. Some DeFi protocols, empowered by underlying cross-chain protocols, attempt to create composability across different chains, allowing users to access funds, exchange assets, and participate in staking and lending across chains. Representative projects include the full-chain DEX Stargate, full-chain lending protocol Radiant, and full-chain LSD protocol Bifrost.
Due to the improvement in DeFi's composability, various 'one fish, multiple meals' strategies have emerged, and some protocols have begun to offer FaaS (Farming as a Service) to users. They provide automated strategies through smart contracts, offering multiple high-yield strategies while simplifying user operations, providing users with a 'hands-free' earning 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 need to talk about DeFi 4.0. Due to the performance limitations of Ethereum, DeFi protocols on Ethereum could not provide independent agent computing power for each user, hence adopting a single contract management model. Whether it is Uniswap, Compound, or MakerDAO, and indeed the vast majority of Ethereum DeFi protocols, they require users to authorize their funds to contracts and manage configurations uniformly within the contracts.
However, with the emergence of various L2s and high-performance new public chains, these performance limitations have effectively ceased to exist. Nevertheless, for a long time, the powerful inertia of past paradigms of thought continues to exert influence. In fact, for high-performance new public chains, DeFi can be constructed as a higher-order form.
In this new form of DeFi, each user can deploy their own smart contract agent to interact with protocols in a customized manner, independently carrying out personalized financial operations.
There is no unified naming for this new form in the industry yet. New lending protocols like Morpho, Ajna, and Euler Finance have created a new term called 'modular lending'. Extending this, we can arrive at a new concept — 'modular DeFi'; the Arweave/AO ecosystem popularizes the term AgentFi, meaning 'agency finance'. One term I personally prefer is SovFi (Sovereign Finance). This was first seen in a tweet by outprog, the initiator of EverVision, and the Permaswap developed by EverVision is the leading DEX in the Arweave/AO ecosystem. The tweet mentioned that sovereign finance emphasizes 'individuals providing financial services' and 'financial independence of individuals'. To put it simply, it allows everyone to establish their own exchange, build their own bank, and create any financial service.
Image Source: https://x.com/outprog_ar/status/1853102029620805912
Regardless, as the industry develops and narratives arise, consensus will surely coalesce around a certain 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 three:
First, autonomous control. Users do not need to authorize their assets to a unified contract but can manage their funds and participate in financial operations through an agent contract they control.
Secondly, personalization and customization. Users can set the content and parameters of financial operations according to their needs.
Third, peer-to-peer. The trading model is no longer pool-to-point, but point-to-point, or point-to-network.
For example, Permaswap allows LPs to autonomously set market-making curves and ranges, transacting with traders through a peer-to-peer matching mechanism. Users of the so-called 'modular lending' protocols can create their own lending pools, autonomously set over-collateralization rates and lending rates, and transact with borrowers through a peer-to-peer matching mechanism. Notably, to avoid future interoperability issues with differently developed agent contracts, Permaswap has proactively created a standard protocol — FusionFi Protocol. All agent contracts built according to this standard can communicate with each other, enabling mutual matching, transforming Permaswap from a mere DEX into a liquidity aggregator, and even a super aggregator that integrates various financial forms.
Summary
New problems give rise to new solutions, but these new solutions may contain new problems. As with the development of most things, DeFi is also continuously evolving through this process of constant negation. Looking back at the journey from DeFi 1.0 to DeFi 3.0, we can see that the DeFi space has always been filled with vibrant creativity, with some innovations visibly bringing change, while others, though less noticed, may also have a profound impact.
As 2024 begins, we vaguely discover new trends in the DeFi space — autonomy and personalization. We can faintly see a new decentralized financial paradigm — DeFi 4.0. It seems that it is still not widely promoted and lacks momentum, but 0xmiddle believes it will eventually become a powerful narrative.
The era of sovereign finance is about to arrive!
Additional Questionnaire:
Which term do you think better describes DeFi 4.0?
A. Modular DeFi
B. AgentFi (Agency Finance)
C. SovFi (Sovereign Finance)
D. SelFi (Self Finance?)
E. Others (Please share your thoughts)
