Introduction
Now, over three years have passed since the explosive growth of DeFi Summer, and more than half a year has passed since the compliance benchmark ETF was approved. Has the situation changed?
Looking back, Ethereum's smart contracts have enhanced blockchain programmability, expanding it from a mere bookkeeping function to an infrastructure supporting various applications. Undoubtedly, decentralizing traditional finance into a more practical application scenario is the most viable.
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 Ethereum L1's space. However, on the Ethereum platform alone, it still steadily locks in more than half of the total DeFi assets.
Image source: defillama.com/chains
The original ambition of DeFi was to disrupt traditional financial systems' business models for lending, payments, insurance, etc., allowing users to complete these operations without relying on banks and other traditional financial institutions. However, the TVL of DeFi has, in fact, stagnated for a long time without making significant breakthroughs.
Most opinions believe that DeFi is limited by the performance and cost issues of the Ethereum network, making it difficult to achieve large-scale applications and complex financial scenarios. However, the DeFi ecosystems on various L2 and high-performance new public chains have not led to breakthroughs in DeFi scale; instead, they have brought issues such as fragmented liquidity and decreased interoperability. Ethereum still retains the most complete DeFi ecosystem and the most sufficient interoperability, making it the preferred platform for deploying DeFi projects.
Today, a new trend is emerging: a new DeFi paradigm based on AO — AgentFi. This innovation is breaking the limitations of traditional DeFi.
AO, based on Arweave's storage layer, has built a computing layer supporting parallel running processes, solving scalability issues and achieving nearly infinite scalability. The combination of AO and Arweave is an implementation based on the SCP (Storage-based Consensus Paradigm).
On AO, smart contracts exist in the form of processes. With the removal of performance limitations, everyone can run their own processes to act on their financial behavior, 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, which both users and applications must compete for. During network congestion, people need to pay more to secure block space, which is the fundamental reason for performance limitations. Ethereum's performance limitations have become evident, with only about 30 TPS, which is quite limited. During peak periods, gas fees often surge dozens of times, and people have become accustomed to this. In fact, L2 and most high-performance public chains also face performance ceilings; while their ceilings may be higher, accommodating the scale of traditional financial operations remains difficult.
To save performance usage and reduce gas costs for users, traditional DeFi is designed to use a single smart contract to manage business assets and run financial operations. Since both funds and business logic are managed by a unified contract, it becomes difficult to achieve genuine 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, making it challenging to meet the increasingly diverse user needs.
For developers, writing contracts must consider gas calling fees and avoid writing complex contract code. On Ethereum, the gas limit for an ETH transfer is 21,000 gwei, and for an ERC 20 token transfer, it is 65,000 gwei. For slightly more complex scenarios, such as swaps, NFT transactions, or lending, at least 300,000 gwei is needed; if the business becomes even more complex, gas consumption will become even more burdensome for users. This greatly limits developers' creative space and restricts the richness and innovation of DeFi.
To fundamentally solve the above issues, the market needs a more powerful infrastructure and a supporting financial system.
AO was thus born, and AgentFi is a brand new exploration of the next generation of DeFi within the AO ecosystem.
AO: An infrastructure with almost infinite scalability
AO stands 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. The author understands AO as a super computing layer, with the core goal of achieving trustlessness and collaborative computing services without scalability limitations.
Let's 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 creating messages. These messages must comply with the specifications set by the AO protocol to be correctly transmitted and processed in the network.
Messenger Unit (MU) Relay: The Messenger Unit (MU) is responsible for receiving user-generated messages, acting as a router that forwards messages to the appropriate SU nodes in the network. During this process, the MU will sign the messages to ensure data integrity.
Scheduling Unit (SU) Processing: When a message arrives 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.
Computation Unit (CU) Calculation: After receiving the message, the Computation Unit (CU) performs the corresponding calculation tasks based on the message. After computation, the CU generates a signature with the calculation result and returns it to the SU. This signature certifies the correctness and verifiability of the calculation result.
So, where does consensus come from?
On AO, storage is equivalent to consensus. During the operation of processes, messages are transmitted, and these messages are written to Arweave, creating a 'holographic state'. This means that the running state of the processes can be verified. In other words, Arweave's immutable storage guarantees verifiability. This may seem counterintuitive, but if you fully understand the SCP paradigm, you will instantly understand. If you still don't grasp it, you can think of it like inscriptions.
In addition to verifiability, we also need to address who will perform the verification. With verifiability, anyone can provide verification services. On AO, applications can choose their verification services flexibly based on their business nature, ensuring their security. Combined with the economic game of optimistic challenges, the reliability of the verification can be guaranteed.
On the computer built on AO, applications are constructed from any number of communication processes.
Processes on AO are not allowed to share memory but can communicate through native message-passing standards.
Since message transmission is asynchronous, by focusing on message passing, AO achieves a scalability mechanism similar to traditional Web2 distributed systems.
This means that theoretically, AO does not have performance limitations.
For developers, they can choose public nodes but can also run their own nodes for their services. In this case, if they encounter performance bottlenecks, they can directly scale their nodes, just like running Web2 services.
Additionally, this working model also brings extra benefits — computation nodes can provide computing power support for AI scenarios. We will have the opportunity to discuss this in detail later.
What are the differences of AgentFi?
Unlike traditional DeFi, which relies on unified smart contracts to manage funds and run financial operations, the concept of AgentFi is that everyone can run processes on the AO computer and manage their funds, acting on their own financial behavior. What does this look like? We will use the leading DEX Permaswap on AO as an example for explanation.
In traditional DeFi, if Alice wants to exchange Token A for Token B, a liquidity pool must first be established on the DEX, with funds managed by a smart contract to provide the exchange function for A/B tokens. The exchange rate for the transaction is determined by the market-making curve employed by that smart contract (e.g., x*y=k). In Permaswap, it takes this form, where each LP manages their own market-making funds through their agent processes and customizes market-making curves and strategies. Of course, LPs can also adopt an 'extreme market-making strategy' — 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 matching and helping them complete the transaction could be AMM, a limit order, or even both.
Overall, AgentFi has three characteristics:
1. Self-hosting: Users self-host their funds through controlled agent processes and execute their trading strategies rather than delegating to a unified contract.
2. Personalization: Users can flexibly set their financial business parameters through self-controlled agent processes. In other words, this is akin to users starting their own exchanges, customizing trading strategies and fees; if extended to lending, it can be understood as users running their own banks, customizing interest rates. Furthermore, users can fully use self-hosted processes to run customized financial strategy programs, which can even integrate AI for intelligent strategies.
3. Peer-to-Peer: Matching between supply and demand, no longer in the traditional DeFi model of point-to-pool, but returning to a peer-to-peer model.
On Ethereum, there is a distinction between contract accounts (CA) and external accounts (EOA), with different financial scenario functions implemented through different contract codes, requiring active human participation in financial actions. On AO, it represents another concept oriented towards Agents, where different Agents can perform different functions, and financial actions can be acted upon by Agents. The author believes that the concept of AgentFi is more like building blocks, allowing for a richer decentralized financial ecosystem.
With a large number of self-hosted processes, how can they communicate with each other and achieve 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 notes, and the FusionFi Protocol defines a set of note format standards. With such a standard, complex and diverse financial forms can be integrated. Developers can implement various financial operations such as exchanges, lending, futures, and even stablecoins based on the FusionFi standard. In the future, the FusionFi Protocol can refer to industry standardization proposal mechanisms like BIP, EIP, and NIP, allowing more people to participate in setting the standards for the protocol, promoting the sustainable development of the ecosystem.
A detailed explanation of the FusionFi Protocol will be provided separately by the author.
Summary
The performance and cost issues of Ethereum have limited the current pace of DeFi development. Although L2 and new public chains have made some progress in scalability, there is still an invisible ceiling restricting the development of financial operations.
To completely break the ceiling, a network different from traditional blockchain paradigms — AO super parallel computer — has emerged. Due to AO's infinitely scalable performance, AgentFi has become a possibility. Users can run their own processes, manage funds themselves, and customize financial operations.
The financial model oriented towards Agents has a broader application scenario compared to traditional DeFi.
Data Source:
1. Ethereum TPS Interpretation
https://www.chaincatcher.com/zh-tw/article/2102262
2. Ethereum Transaction Gas Consumption Statistics
https://etherscan.io/gastracker
References:
1. Technical Explanation of 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
This article was first published on PermaDAO. Original link: https://mp.weixin.qq.com/s/YUIwqIAn8X-wMF0cruvMyg
