What if the DeFi community had named the movement “Open Horizon” , rather than “DeFi”, which resonates deeply with the defiant individuals in the movement?
The Story of DeFi is about a journey: a community of the defiant individuals emerging from isolation in search for a common identity, came up with a great meme “DeFi”, grew into a movement with a life of its own. Felix Feng from Set Protocol, one of the first few who was there from the start of brainstorming session, told a heartfelt story behind the scene.
The second half of the presentation is a comprehensive and up-to-date overview of the state of affairs in DeFi from a true insider in the industry.
Direct link to slides here. WTFdao has edited the abridged transcript below.
I’m really honored to be with you guys here today at Devcon’s headline DeFi event. As someone who cares deeply about the success of DeFi, I’m here to share two things:
- Story of DeFi how it started,
- Major DeFi trends in the past year.
Why did we start the DeFi movement?
It all started about a year and a half ago, when we were a fledgling startup. We worked hard to build a protocol, facing regulatory challenges and finding product market fit. We soon became close with many of the projects in San Francisco, we hung out with the 0x guys, Dharma and DyDx.
What we realized was that we had a lot in common. We love what we did. We imagined that the work that we do would help build a new financial system that was better than what it was: more fair, transparent and equitable. And we realized that what we were working on was much bigger than our individual projects, or what we were doing individually.
But, contrary to what you might think.
Building a DeFi startup was actually very isolated. There was no shared forum to discuss challenges and issues. There was no place to meet and encourage one another. And the irony of all this was that we value open source, we shared our white papers. We wondered why is it so isolating, why can’t we be working more closely together?
And that led to the genesis of what became the DeFi movement, which is an open community for decentralized finance platforms.
The goals were very clear since we were already aligned: we want to spread awareness of the decentralized finance movement. We wanted to help facilitate solving the industry’s most pressing problems. And we value stuff like open source interoperability, collaboration, and transparency. But what wasn’t clear was our name, and our identity.
What would this movement be called? That was when members of the 0x team like Blake, Brendan from Dharma and us came together on a telegram channel, and started brainstorming. We came up with a lot of really terrible names like “Open Horizon”, or “Lattice Network”.
What we landed on was “DeFi”. It had a really cool nature — sounded like “defy”, meant to challenge.
And what transpired in those conversations was the first time that DeFi felt real, that people were engaging, and there was a sense of community around our mission and purpose. With the name and identity settled, we started building a website, we create a Telegram channel and a Reddit channel.
We started hosting meetups in San Francisco. And eventually, we hosted 200 plus conferences that we called “DeFi Summits”. Since then, DeFi has really taken on a life of its own. Today there are different events all over the world, whether it’s in London, Amsterdam, Hong Kong, today in Osaka, and we have press coverage of DeFi from major publications. Our DeFi telegram channel is bustling with activity.
And if there’s a single takeaway from all this is that we’re all in this together. rebuilding the thousand year old financial system is not something that one person or one company can do themselves, it’s something you’re going to something where we faced many challenges and not all of us have all the answers. But what I believe in and convinced of, is that the open source and collaborative nature of his community will allow us to make strides towards changing the world.
Major DeFi Trends in the Past Year
So, that’s the story. The second thing I want to talk about is the major DeFi trends in 2019. So on a really high level what we care about is looking at DeFi Pulse everyday and seeing this number grow. DeFi wasn’t existent two years ago and now it’s a half a billion dollar phenomenon. This is what we mostly look at but if you zoom out a little bit, there are actually other products and other protocols outside of ethereum in DeFi.
For example, there’s actually activity on EOS and there is a surprising amount of ETH locked in Edgeware as well.
You take a look at the DeFi Stack, it’s really taking shape that isn’t morphing as much anymore. Many of these projects have really solidified. Decentralized financial applications being on top are becoming more robust.
We’re seeing the second generation of protocols launch, for example, the v2 of 0x, or the v2 for DyDx or Compound. We are also seeing new primitives go live such as asset management or insurance, which is very exciting to see.
In addition to that, in terms of user count, lets be frank, it’s still in the tens of thousands. But it’s really exciting to see that we have collaboration with the likes of centralized exchanges that you can have a whole bunch of new users, start using DeFi products. For example, that bump in Maker was due to the (Coinbase) Earn campaign.
In DeFi the majority of use cases really is speculation and generating yield. People are margin trading or lending. On Compound, there’s $150 million supplied. There is $270 million of ETH locked in MakerDAO.
There is a non-negligible amount of loans originating in DeFi in the past year, half a billion.
In addition to that, in terms of liquidity models, peer-to-contract has really shown greater adoption versus peer-to-peer. Peer-to-contact is the model where prices are set through governance or some sort of algorithm, and users just essentially set and forget it.
The peer-to-peer model is when you do require a counterparty and requires a notion of a relayer on top.
In terms of compatibility, we’re seeing a lot happen that’s resulting in really new interesting use cases. For example we have a flurry of activity on Maker: the cDai, xDai, rDai, lsDai, pooledDai, SwanDai, who knows what else there will be. Companies like Instadapp are building protocol bridges, that make the transition from having a position in one protocol to another, pretty much seamless at the click of a button. What we built at Set is combining dex, oracles and assets, essentially allow for automated asset management strategies.
One thing in 2019 that we saw was a huge focus on liquidity. Decentralized exchanges like 0x and Kyber have focused on being able to allow for larger amounts to be filled at lower slippage, and we’re seeing that there’s an increase in volume that can be exchanged on-chain as well.
The other thing that’s really interesting is that we’re seeing that there are real profit opportunities and arbitrage opportunities for market makers to start interacting with these platforms. I think the main events that they look for are liquidations and rebalances. For example, there are 11 million dollars of liquidations on Maker and DyDx in the past month, and in the past month we recently did $2 million of balances in our Moving Average Crossover (MACO) Set in a day. Market makers are making between 60 to 150 basis points by participating and 3–5% on liquidations.
In addition, I think one of the key pieces that we really worked a lot on is really the UI/UX reducing the user friction, and it’s being tackled from many sides. One being the smart contract wallets and meta- transactions which allow the abstraction of concept like gas, wrapping ETH and private keys. We’re seeing hosted wallets like Formatic and Torus offering familiar Web 2.0 like experiences. We are also seeing a lot of activity coming in the on-ramp space: MoonPay, Wyre, even Coinbase.
So that said, what is the status of DeFi today? I think the biggest challenges that we have today are some of the following.
- User adoption still is pretty limited. It’s mostly crypto native people using DeFi products and there’s limited success, kind of going beyond that right now.
- The value capture mechanisms across the stack are pretty unclear. There are a lot of non-token protocols that don’t have monetization yet and it’s unclear if you build a user interface how you monetize.
- The path of decentralization is unproven there’s very few examples that companies are doing on-chain governance well. And I think the biggest elephant in the room is really compounding smart contract risk. For me it’s not IF smart contracts will break, it’s WHEN they will. And security audits today still are really expensive and formal verification is very much out of reach for many.
I think this is something that we’re here to discuss and we need to ask the questions such as:
- How do we bring DeFi from 200K to 1 million users and beyond?
- How do we build win-win incentives for all players across the stack,
- How can we safely implement on-chain governance?
- How can we preemptively create standards and monitor smart contract risk before they break.
So I’m really excited for this event today . It really exemplifies what the DeFi movement is about, and I’m excited about the sessions today where we can build an open financial system together. So, thank you so much for your time.
Please contact@tzhen on Twitter for corrections.
DeFi.WTF Osaka was the first of a series of WTF events, traces the emergent DeFi stack and explores its implications through in-depth conversations with the space’s main actors.
About WTF — the Power of Asking: a modern resurrection of the Greek Pnyx, to build a supportive space for open, inclusive, informed, and thoughtful exchanges of ideas, for the practice of the ancient art of asking the right questions to move beyond hype and arrive at knowledge.
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