In recent years, there have been no shortage of complaints about Web3, with the industry no longer seeing phenomenon-level innovations or new breakout effects; talent is flowing back to Web2 or switching to AI; VC coins are facing crises, and MEME has become the protagonist. We have long missed the excitement, shock, and anticipation we felt during the DeFi Summer and Non-Fungible Token Summer.
However, innovation is actually happening quietly all the time. At least in the DeFi field, I see the waves below the surface - the emerging DeFi 4.0.
To understand what DeFi 4.0 is, let's first do a periodization of DeFi.
DeFi 1.0: Decentralization of Basic Financial Products
Time: Approximately 2018~2020
In this stage, the pioneering DeFi protocols such as MakerDAO, Compound, Uniswap, and Aave were born, realizing the decentralization of basic financial services such as trading, lending, and asset management. Especially the invention of Automated Market Maker (AMM), which created an unprecedented paradigm, ignited an equality movement where "everyone can be a market maker", and also created a wealth myth related to liquidity mining.
DeFi 2.0: Improving Capital Efficiency
Time: Approximately 2021~2022
During this period, a batch of new DeFi protocols emerged, and overall, these protocols lack the simple beauty of the pioneering DeFi protocols, with more complex mechanisms, but their goals are basically focused on improving capital efficiency, especially the efficiency of liquidity, and also trying to solve the availability and sustainability of liquidity.
Typical representatives include: Abracadabra, Alchemix, and Frax Finance, which try to bypass over-collateralized lending protocols and stablecoin protocols through various mechanisms; Tokemak, a Liquidity as a Service (LaaS) protocol that tries to help new DeFi projects obtain liquidity; and OlympusDAO, a protocol that solves the sustainability of liquidity through protocol-owned liquidity.
Worth mentioning is that Uniswap V3 was also born during this period, with the range market-making algorithm significantly improving the capital efficiency of LPs compared to the previous full-price-range market-making.
Another major innovation is the Curve protocol's Gauge Voting, i.e., the veToken governance mechanism, which is a token governance solution that effectively achieves the sustainability of liquidity. This mechanism has since been widely adopted by many DeFi protocols.
DeFi 3.0: Expansion of Composability
Time: Approximately starting in 2022
There is still no consensus in the industry on the definition of DeFi 3.0, with some believing it is LSDFi and Restake, some believing it is cross-chain/full-chain DeFi, and some believing it is Farming as a Service. This reflects that in the 3.0 stage, DeFi has innovations and progress in multiple aspects. But overall, the development trend of DeFi in this stage is mainly reflected in the expansion of composability.
In the 1.0 era, the concept of DeFi Lego has already been widely mentioned and discussed, but its Lego-like composability is fully manifested in the 3.0 era.
Source: Internet
Starting with the Shanghai upgrade, Ethereum has officially completed the transition from PoW to PoS, and ETH LSD has become a fixed-income product similar to a US dollar bond in the DeFi field. Against this backdrop, many protocols have started to develop Restake scenarios based on ETH LSD, providing users with stacked yields, with representative projects such as Eigenlayer and Puffer; there are also some protocols that provide users with interest rate swap products and diversified arbitrage strategies based on the yield characteristics of LSD, such as Pendle.
With the improvement of infrastructure, the cost of building chains is becoming lower and lower, and many L2s and new public chains have emerged, which has brought diversification but also fragmentation. Some DeFi protocols, empowered by cross-chain protocols, are trying to create composability across different chains, allowing users to perform cross-chain fund deposits and withdrawals, cross-chain asset exchanges, cross-chain staking and lending, etc. Representative projects include the full-chain DEX Stargate, the full-chain lending protocol Radiant, and the full-chain LSD protocol Bifrost.
Due to the improvement of DeFi composability, various "one fish, multiple eats" strategies have emerged, and some protocols have started to provide users with Farming as a Service (FaaS) services, where they use smart contracts to provide users with automated strategies, offering users multiple high-yield strategies while simplifying user operations and providing "lying-down earning" services. Representative projects include Rari Protocol, Harvest Protocol, and Yearn Finance, which has carried over from the 1.0 era.
DeFi 4.0: Self-Custody and Personalized Finance
Time: Starting in 2023
Finally, let's talk about DeFi 4.0. Due to the performance limitations of Ethereum, DeFi protocols on Ethereum cannot provide independent proxy computing capabilities for each user, so they have adopted a single contract management model. Whether it's Uniswap, Compound, or MakerDAO, or the vast majority of Ethereum DeFi protocols, users need to authorize their assets to the contract and perform unified configuration and management within the contract.
But with the emergence of various L2s and high-performance new public chains, this performance limitation actually no longer exists. However, the strong inertia of past conceptual paradigms is still at work. In fact, for high-performance new public chains, DeFi can be built into an even higher form.
In this new form of DeFi, each user can deploy their own smart contract proxy and interact with the protocols in a customized way to independently engage in personalized financial business.
The industry has not yet reached a unified naming for this new form. Protocols like Morpho, Ajna, and Euler Finance have created a new vocabulary called "modular lending", and extending this, we can get a new concept - "modular DeFi" or "modular finance"; the Arweave/AO ecosystem is popular with the term "AgentFi", that is, "agent finance"; a term I personally prefer is "Sovereign Finance", which first appeared in a tweet by the initiator of EverVision, outprog. EverVision's Permaswap 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". In simple terms, it's about allowing everyone to establish their own exchange, their own bank, and any financial service they want.
Anyway, as the industry develops and narratives emerge, consensus will eventually coalesce around a name, so let's just call it DeFi 4.0 for now.
The core features of DeFi 4.0 are three:
First, self-control. Users do not need to authorize their assets to a unified contract, but can manage their funds and participate in financial business through a proxy contract controlled by themselves;
Second, personalization and customization. Users can set the content and parameters of financial business according to their own needs;
Third, peer-to-peer. The transaction mode is no longer pool-to-point, but point-to-point, or point-to-network.
For example, Permaswap allows LPs to autonomously set the market-making curve and market-making range, and complete transactions with traders through a point-to-point matching mechanism. The users of the so-called "modular lending" protocols can create their own lending pools, autonomously set the over-collateralization ratio and lending interest rate, and complete transactions with borrowers through a point-to-point matching mechanism. It is worth mentioning that in order to avoid the future incompatibility of proxy contracts developed in different ways, Permaswap has taken precautions and created a standard protocol - FusionFi Protocol. All proxy contracts (Agents) established according to this standard can communicate with each other, and then match with each other, which makes Permaswap potentially go beyond a simple DEX and become a liquidity aggregator, or even a super aggregator that integrates multiple financial forms.
Summary
New problems give rise to new solutions, and new solutions may contain new problems. Like the development of most things, DeFi is also constantly evolving through this dialectic of negation. Looking back on the process from DeFi 1.0 to DeFi 3.0, we can see that the DeFi field has always been full of vigorous creativity, with some innovations visibly bringing about changes, and others, though less noticed, may have equally far-reaching impacts.
At the beginning of 2024, we vaguely discern new trends in the DeFi field - autonomy and personalization, and we dimly see a new decentralized finance paradigm - DeFi 4.0. It currently appears to be little-touted and not yet mainstream, but 0xmiddle believes that it will eventually form a surging narrative.
The era of sovereign finance is coming!
