Introduction
It has been more than 3 years since the DeFi Summer boom, and it has been over half a year since the landmark approval of compliant ETFs. Has the situation changed?
Looking back, Ethereum's smart contracts have enhanced the programmability of the blockchain, allowing the blockchain to evolve from a single accounting function to an infrastructure that supports a variety of applications. Among the many tracks, the decentralization of traditional finance is undoubtedly the most practical application scenario.
Let's take a look at the overall picture from the DeFi TVL data on DeFiLlama. Currently, the TVL of DeFi applications has exceeded $80 billion. In recent years, many public chains have emerged, and even Ethereum's L2 is diverting space from Ethereum L1, but Ethereum's single platform still stably locks in more than half of the total DeFi assets.
Source: defillama.com/chains
The initial ambition of DeFi was to disrupt the business models of traditional finance, such as lending, payment, and insurance, allowing users to complete these operations without relying on traditional financial institutions like banks. However, the TVL of DeFi has actually stagnated for a long time, without a breakthrough in orders of magnitude.
Most opinions believe that DeFi is limited by the performance and cost issues of the Ethereum network, so it is unable to achieve large-scale applications and implement complex financial scenarios. However, the DeFi ecosystems on various L2s and high-performance new public chains have not brought a breakthrough in the scale of DeFi, but have instead brought problems such as liquidity fragmentation and decreased interoperability. Ethereum still has the most complete DeFi ecosystem and the most extensive interoperability, and remains the preferred platform for DeFi project deployment.
A new trend is now 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, constructing a computing layer that supports parallel running processes, solving the scalability problem and achieving almost unlimited scalability. The combination of AO and Arweave is an implementation based on the Storage-based Consensus Paradigm (SCP).
On AO, smart contracts exist in the form of processes. Due to the removal of performance constraints, everyone can run their own processes to proxy their financial behavior, and the consensus is handled by the storage layer of Arweave. This is the foundation of AgentFi.
Will this new form of DeFi, AgentFi, replace traditional DeFi and become the new mainstream DeFi form? Let me elaborate.
Limitations of Traditional DeFi
In the traditional blockchain architecture, block space is designed as a scarce resource, and users or applications need to compete to obtain this resource. When the network is congested, people need to pay more costs to compete for block space, which is the fundamental reason for the performance constraints. The performance limitations of Ethereum are already evident, with only around 30 TPS[1], which is quite tight. During peak periods, gas fees often soar dozens of times, which people have already become accustomed to. In fact, L2 and most high-performance public chains also have performance ceilings, and their ceilings may be higher, but it is still difficult to accommodate the business scale of traditional finance.
To save performance usage and save gas for users to improve the user experience, traditional DeFi is designed to use a single smart contract to host business assets and run financial business. Due to the fact that both funds and business logic are managed by a unified contract, it is difficult to achieve true diversification and personalized business operations. Although this design can simplify the management process and ensure consistency, it also deprives users of autonomy in business logic and financial operations, making it difficult to meet the increasingly diversified user needs.
For developers, when writing contracts, they must consider the gas call fee and try to 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, Non-Fungible Token transactions, and lending, it requires at least 300,000 gwei[2]. If the business is even more complex, the gas consumption will make it even more difficult for users to bear. This greatly limits the space for developers to play and also limits the richness and innovation of DeFi.
To fundamentally solve the above problems, the market needs a more powerful infrastructure and a supporting financial system.
AO was born for this purpose, and AgentFi is a brand new exploration of the next generation of DeFi in the AO ecosystem.
AO: An Infrastructure with Almost Unlimited Scalability
AO stands for Actor Oriented, which means it is a decentralized computing protocol based on the actor model.
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 trustless and collaborative computing services without scale limitations.
Let's take a look at the workflow of the super-parallel computer built based on AO:
Source: AO Whitepaper
Message Generation: Users or processes initiate requests by creating messages. These messages must conform to the specifications stipulated by the AO protocol in order to be correctly transmitted and processed in the network.
Messenger Unit (MU) Forwarding: The Messenger Unit (MU) is responsible for receiving user-generated messages, acting as a router to route the messages to the appropriate SU node in the network. In this process, the MU will sign the message to ensure the integrity of the data.
Scheduler Unit (SU) Processing: When the message reaches the SU node, the SU will assign a nonce to the message to ensure its order within the same process, and upload the message and nonce to the Arweave consensus layer for permanent storage.
Compute Unit (CU) Computation: The Compute Unit (CU) receives the message and executes the corresponding computation task. After the computation, the CU will generate a signed result, and return it to the SU. This signed result ensures the correctness and verifiability of the computation result.
So where does the consensus come from?
On AO, storage is equivalent to consensus. During the execution of a process, the message passing will generate the "holistic state", which means that the running state of the process can be verified. Arweave's immutable storage guarantees verifiability. This may seem counterintuitive, but if you fully understand the SCP paradigm, you'll understand it instantly. If you still can't understand it, you can analogize it to inscriptions.
In addition to verifiability, we also need to solve the problem of who will verify. With verifiability, anyone can provide verification services. On AO, applications can choose their own verification services based on their business nature, and the reliability of verification can be guaranteed by the economic game of optimistic challenges.
On the computer built by AO, applications are constructed by any number of communicating processes.
AO does not allow processes to share memory, but allows them to communicate through the standard of local message passing.
Since message passing is asynchronous, by focusing on message passing, AO has achieved a scalability mechanism similar to the traditional Web2 distributed system environment.
This means that in theory, AO does not have performance limitations.
For developers, they can choose to use public nodes, but they can also run their own services on their own nodes. In this case, if they encounter performance bottlenecks, they can simply scale up their own nodes, just like running a Web2 service.
In addition, this working mode also brings additional benefits - the computing nodes can provide computing power support for AI scenarios. We may have the opportunity to explore this in the future.
How is AgentFi Different?
Unlike traditional DeFi, which is based on a unified smart contract to host funds and run financial business, the concept of AgentFi is that everyone can run processes on the AO computer and host their own funds to proxy their own financial behavior. To illustrate this, let's use the example of Permaswap, the leading DEX on AO.
In traditional DeFi, suppose Alice wants to exchange Token A for Token B, she first needs a liquidity pool on a DEX, where the smart contract manages the funds to provide the A/B token exchange function. The exchange rate is determined by the market-making curve adopted by the smart contract (e.g., x*y=k). In Permaswap, each LP manages its own market-making funds through its own proxy process and customizes the market-making curve and strategy. Of course, LPs can also adopt an "extreme market-making strategy" - just placing a limit order.
In fact, we find that Permaswap can integrate both AMM and order book trading forms. From the user's perspective, when TA initiates a trade, the counterparty that helps complete the trade may be an AMM, a limit order, or both.
Overall, AgentFi has three characteristics:
1. Self-custody: Users host their own funds and execute their own trading strategies through their own proxy processes, rather than entrusting them to a unified contract.
2. Personalization: Users can flexibly set their own financial business parameters through their own proxy processes. In other words, this is equivalent to users opening their own exchange, where they can customize their trading strategies and fees. If extended to lending and borrowing, it can be understood as users opening their own bank and customizing interest rates. Furthermore, users can fully utilize their self-hosted processes to run customized financial strategy programs, even incorporating AI-powered intelligent strategy programs.
3. Peer-to-peer: The matching of supply and demand is no longer the traditional DeFi model of point-to-pool, but returns to a peer-to-peer model.
On Ethereum, there is a distinction between contract accounts (CA) and externally owned accounts (EOA), and different financial scenarios are implemented through different contract codes, requiring human participation in financial activities. On AO, it is a different concept oriented towards Agents, where different Agents can implement different functions, and financial activities can be delegated to Agents. The author believes that the concept of AgentFi is more like building blocks that can be combined to create a richer decentralized finance ecosystem.
When there are a large number of self-hosted processes, how can they communicate with each other and have composability? This is where the FusionFi Protocol comes in, which is a development standard and communication specification for Agents on AO. Almost all financial businesses can be abstracted as the circulation and processing of vouchers, and the FusionFi Protocol defines a set of voucher format standards. With such a standard, complex and diverse financial forms can be integrated. Developers can build exchanges, lending, futures, and even stablecoins based on the FusionFi standard. In the future, the FusionFi Protocol can refer to the industry standardization proposal mechanisms of BIP, EIP, and NIP, allowing more people to participate in formulating the protocol standards and promoting the sustainable development of the ecosystem.
A detailed explanation of the FusionFi Protocol will be covered in a separate article by the author.
Summary
The performance and cost issues of Ethereum have limited the development of DeFi, and while L2 and new public chains have had some success in scaling, there are still hidden ceilings that restrict the development of financial businesses.
To break through the ceiling completely, a network different from the traditional blockchain paradigm - the AO superparallel computer - has emerged. Due to the infinitely scalable performance of AO, AgentFi has become possible. Users can run their own processes, manage their own funds, and customize their financial businesses.
The Agent-oriented financial model has a wider range of application scenarios compared to traditional DeFi.
Data Sources:
1. Interpretation of Ethereum TPS
https://www.chaincatcher.com/zh-tw/article/2102262
2. Ethereum Transaction Gas Usage Statistics
https://etherscan.io/gastracker
References:
1. Technical Explanation of AO Superparallel 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
