A Look Back at DeFi Summer 2020
Degens and frens, we all have heard about DeFi Summer. Let’s dive into what happened and how it evolved into the present days. This will be written in history books.
First of all, if you are here I would probably suggest you already know the concepts I’m going to talk about. And by that I mean the basic concepts about blockchain, cryptocurrency, web3, DeFi and all that stuff. This article comes to explain where DeFi starts its liftoff and how it fuels the so-called “bull-run” this industry has experienced in the last couple of years.
As an introduction, DeFi, or decentralized finance, is an open, permissionless financial system based on blockchain technology, in our case for today is Ethereum, that enables users to access financial products without barriers and with transparency in a decentralized manner. Let’s see how this chapter unfolded.
It’s 2020, COVID-19 is proving to be longer than we thought it would be and people are locked in their homes. Meanwhile, something is boiling in the magic internet world, also known as crypto industry. This is a place where it seems that random coins running on the internet are trading with extreme volatility, but that is far from what it really is.
DEFI SPRING 2020
Back to 2020 the pandemic started and many people were forced to stay at home. That seemed to create an opportunity for the ones that didn’t want to stay trapped and inactive: start researching online about things to do, such as side hustles. Amongst them, there was cryptocurrency.
Bitcoin had crashed from around 14k to 4k. From one perspective it was a huge impact to its credibility as an investment, but from another point of view it was a perfect entry to the market to many newcomers. That point in time became the introduction for many users (including myself) to this industry.
Hopping onto the blockchain, the landscape was quite sophisticated, but it was still simpler than the current one. Ethereum was the major and most used blockchain (practically the only one) for dApps and projects, alongside Bitcoin of course, and some other tiny projects.
We are going to focus on Ethereum and the projects running on them as it was where most of DeFi started and happened at that time.
So Ethereum is the major smart-contract blockchain running and the best projects are working on top of it. At that time, we already had some blue-chip protocols such as Synthetix, Uniswap, Compound, Balancer, MakerDAO, Curve or Aave going on that enabled many use-cases for cryptocurrency. This scenario wasn’t as we know it today. Many protocols didn’t have all the functionalities or updates we can see now and many didn’t even have their own token. But something would happen that would kick off the craze this industry saw, and it wasn’t a new and revolutionary protocol launch. It was about tokenomics and its issuing mechanisms.
DEFI SUMMER 2020
The rise of Yield Farming
Having all the previous ingredients boiling, June 2020 arrived and something was introduced: Compound, one of the leading lending and borrowing protocols launched its governance token $COMP, but it was done in a particular way. Users were able to receive them by using the protocol through incentives.
That concept became “yield farming”, or “liquidity mining” — introduced by Synthetix before. It basically rewarded users with their own token if they deposited or interacted with the protocol, yielding a percentage return. That fact skyrocketed the protocol’s Total Value Locked (TVL).
That attracted a lot of capital to the industry while kicking off the DeFi movement: Decentralized Finance was shaping its way into reality. TVL across all Ethereum protocols also rised, with MakerDAO, which issues the decentralized stablecoin $DAI through collateralization, also joining the top of the list. A series of events took place after Compound move, making other protocols launch their tokens with the same mechanisms and kick-starting yield farming as a thing to keep an eye on.
TVL Skyrocketing
With all the capital inflows, strong financial structure had to be available. That was supported by major players such as previously mentioned MakerDAO, Compound, Aave which is another Money Market, and Uniswap, the pioneer AMM that enabled trading many tokens on Ethereum which saw a massive surge on its volume traded. The role of these protocols are essential for a robust decentralized financial system, providing the basis in which a whole advanced structure can be built on. The rise of these also affected positively to their own TVL and Market Cap.
TVL became an important metric to assess a protocol’s success, as it showed the commitment of users to deposit their funds. That creates trust and is used for investors to get convinced to ape or not. Important to keep in mind: TVL has been commonly used for research but it doesn’t necessarily mean it is a good investment. It is in no way a certain truth.
To give a perspective, 2020 started with a $700 million TVL and ended up with around $15 billion EoY. That is nearly a 20x increase.
Following the Yield
After the success of the previous events, many protocols launched their projects and tokens through yield farming and started attracting more and more capital looking for their share of the pie. Along with that, token prices increased exponentially due to its demand and speculation from investors, causing the bull-run.
An example of that is Yearn Finance, created by Andrej Cronje, a protocol which enabled users to look for the most efficient strategies to the yield offered in DeFi. The protocol launched their token $YFI exclusively by yield farming with no allocation to founders or team, and quickly spiked in price exponentially, topping at 43k in only 2 months. Keep in mind, $YFI tokens were essentially given for free to Yearn Finance users.
Degeneracy
The stage belonged to DeFi and that’s where the fun part came in. The term “degen” was coined and the users were aping into many tokens and yield farms. Meme coins surged and they became a sub-culture, lead by Dogecoin and many other tokens with food names. We have to keep in mind that the majority of the projects in this category lost almost all their value, only leaving the ones that really had traction.
This was the time when gains were mind-blowing and many degens threw their money into the first random meme named coin that they found. Many of the went viral and that created a lot of volatility, both for up and downside in price.
The bad part of that: scams and rug-pulls. At some point, almost every new launch was copy-pasta with messed up tokenomics: huge inflation on their token and sketchy allocation to team, founders and advisors. Sadly, many investors were harmed.
All in all, the degen lifestyle is still present today. The culture is what remains overtime. You know, in the end WAGMI, right? ;)
Other important events
The rush for yield and gains caused some memorable events that will take a place on the books of DeFi history. Some of the most remarkable ones are the AMM war between Uniswap and SushiSwap. At that time, Uniswap didn’t have a token. SushiSwap, which was a fork of the previous one, launched its token $SUSHI with vampire attack to attract some of Uniswap’s liquidity to their pools. That was followed by a rugpull from the main dev at SushiSwap, “Chef Nomi”, who eventually returned the funds. The move from SushiSwap forced Uniswap to launch their own governance token $UNI through an airdrop to eligible users of the platform. And that in its way started a separate trend: airdropping it to users who met certain criteria. Airdrops were frequent and even people started trying to “farm” airdrops by trying out projects without tokens.
DEFI FALL 2020
Eventually, innovation from DeFi protocols started to decrease as the space had experienced huge advancements in the previous months. On October 2020, many DeFi protocols on Ethereum had already exploded and were now moving downwards due to lack of stickiness of capital and huge token supply inflation. Although, the price of the main coins had already absorbed the huge upside: $BTC and $ETH rallied hard, alongside bluechip protocol tokens. The total crypto Market Cap also increased exponentially.
But then, Ethereum gas fees were increasing exponentially due to saturation on the network and lack of ability to scale. That made it really difficult for average joes to interact with its dApps. Although, the DeFi wave was far from over due to the solution to the gas problem: second layers and other smart-contract blockchains which could help in scalability and, most important for average users, lower fees.
WRAP UP
A few takeaways from the first episode of DeFi Summer and its explosion can be summed up as follows: crypto got adoption after COVID-19 hit our lifes (was it correlated? idk), that was followed by a series of events that triggered the mania for investors to ape into new tokens and protocols, powering the DeFi wheel and growing the ecosystems. Much wealth was created and also much was lost, but we can say that it triggered a wave that benefitted the crypto space till the current days.
This article is already taking too long, so the next chapter on how the DeFi craze continued is coming: The Layer Wars. Will it be even more degen than this one?
We will find out.
Thanks for reading until the end! If you enjoyed it and want more content, share it with your frens!
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Disclaimer: This article does not represent financial advice. Also, it describes the past events from a personal point of view and it takes only into account some factors to explain how things evolved at that time. We acknowledge that there were many more inputs affecting the results of the events.
