Five Years In, DeFi Now Defines Ethereum

Ethereum has always been difficult to explain. Even the founders of Ethereum have sometimes struggled to communicate the project’s transformative potential in layperson’s terms. Metaphors such as “world computer” and “gas” tried to translate Ethereum to the world, but looking back it’s clear how little we understood about the platform’s true capabilities. 

By 2017, big promises were being made that Ethereum would “bank the unbanked.” But that promise seemed to go largely unfulfilled in the wake of the initial coin offering (ICO) craze. Nevertheless, the oft-repeated slogan represented the first attempt to describe Ethereum’s potential to transform personal finance. 

While the ICO mania showed Ethereum’s potential as a distributive technology that could emulate, improve upon and democratize the initial stock offering, what was missing then was a simple personal financial use case that could be demonstrated to a friend, such as a mobile app. In those early days, there were many white papers, promises and signs of progress by a few teams (some of which have led to the top DeFi projects such as ChainLink, Kyber, and Set), but most of the benefits had yet to be delivered.

Meanwhile, there were lots of inspiring speakers from the Ethereum community who drew us into believing Ethereum would change the world. It just required a patient newcomer willing to wade through new ideas, intricate foreign concepts and a firehose of new information daily. Nothing was a simple elevator pitch.

When I saw Joe Lubin speak at Ethereal SF 2017, there was an inspiring message to take home. A lot of detail flew over my head at the time, but if you listened carefully it was impossible to not buy the idea that Ethereum could change the world for the better.

It’s worth noting that in 2017, ConsenSys and other early adopters and builders were also educating institutional players and enterprise software companies on how they could benefit from many blockchain use cases on Ethereum. Partnerships with Microsoft, IBM and Hyperledger helped cement Ethereum’s credibility in the enterprise blockchain race.

Fast forward to July 2018, when I started full-time work in Ethereum. We were all recovering from the hangover of 2017, thinking the bull run might return sooner before watching markets unravel and get even bloodier. We were emerging from an era without a coherent elevator pitch to be easily understood, including language that sounded like it had come from a “Big Bang Theory” script.

I recognized that Ethereum had to find any small group of fanatical users. For better or worse, I began drawing on my experience in SaaS, which taught me that startups need loyal users who find so much utility in an application that, if it were taken away, they wouldn’t have an alternative.

DeFi days

By spring 2019, I am working full time on the Ethereal Summit, a series of events celebrating the founders and builders of the decentralized web on Ethereum. It was around then that Ethereum’s narrative began to change. I heard about Compound, where you can lend and borrow – similar to MakerDAO, but with better loan-to-value (LTV) ratios. 

I was astonished – $50 MILLION in an app built on Ethereum! It was exhilarating to learn a second finance application had been built, launched and had been running on Ethereum for more than six months. 

All this activity came to be known as decentralized finance, or DeFi. The term was coined in 2018 by members of the 0x team, but the industry was just getting going. I couldn’t stop thinking about it.

I began researching every project we were hosting at Ethereal – PoolTogether, Kyber Argent and Zerion. And I did something even more radical: I began testing and using the damn products! 

I needed to see my investment make money to realize the power of these DeFi applications. I started lending dai on Compound for over 10% APY and it just clicked. I’m lending dai and others borrow that money, but there’s no bank to collect the middleman fees. So, in turn, I earn better lending interest and borrowers pay smaller fees, and without know your customer (KYC) or anyone’s permission.

What stood in the way of DeFi mass adoption was better storytelling and more visual demonstration of how DeFi can work for anyone

It had long been a talking point in crypto the user experience (UX) had to improve for Ethereum to see adoption, but I found those same people espousing such criticisms often had zero experience with DeFi applications. It seemed like a lie that had stuck around long enough to become a truth, even though I was finding some DeFi UX better than my experience with legacy banking. 

For me, what stood in the way of DeFi mass adoption was better storytelling and more visual demonstration of how DeFi can work for anyone. EthHub.io and Cami Russo’s The Defiant were already doing lots of legwork in this space but there was clearly more to build upon.

In late 2019, the DeFi community was still small compared to today, only a few thousand or possibly even a few hundred users, but it felt like we were on a bustling rocket ship of excitement. We rallied around this term DeFi, the simplest term to describe any peer-to-peer finance app built on Ethereum, requiring a Web 3 wallet like MetaMask, that doesn’t need KYC and has no single point of failure. If ETH is money, DeFi is your bank. 

What started as a concept is now an economy of interlinked applications with more than $4 billion in value invested. But it’s more than just money. DeFi has changed the way people think about Ethereum itself and given rise to new narratives and memes.

A meme is born

Shortly after this spark was really gaining momentum in the fall 2019, DeFi users naturally found a second totem to rally around. That was the concept of Total Value Locked (TLV), coined by the team at DeFi Pulse. 

TVL refers to the sum of all value deposited into a DeFi app’s smart contracts, whether that’s measured in U.S. dollars (USD) or in ETH. TVL reflected a new, un-gameable metric for adoption. It was a way to compare how much trust DeFi users put into an application. It has its flaws, but those flaws are no worse than reducing Bitcoin to its price. 

DeFi also helped solidify the “ETH is money” meme. As co-host of the Bankless Podcast David Hoffman said, ETH is a triple-point asset, because it acts as a store-of-value, a capital asset, and a consumable asset. “ETH is Money” is an intentional pivot from “ETH is gas,” and updates the world on how ETH is actually used on Ethereum.  

Plain and simple: ETH is money. It always has been money and to label it otherwise was a product marketing mistake in the early days of Ethereum.

Yield farming is the latest viral meme in Ethereum. DeFi is a larger all-encompassing category of p2p, self-custody, KYC-less, finance apps built on Ethereum, but yield farming describes a popular incentives program where you often provide liquidity to a DeFi application in exchange for a combination of rewards. 

As Dan Elitzer of IDEO CoLab Ventures put it, yield farming is like aquaponics because it creates a symbiotic relationship between DeFi protocols, meaning DeFi participants can earn three or more forms of yield such as interest, market-making fees and pooled rewards such as a governance token like BAL or COMP. Because of the most composable incentive designs in DeFi, yield farming (aka “liquidity mining”) is like passive income on steroids, with programs delivering anywhere from 10-200% daily APY on average. 

Universal appeal

Five years ago, you could argue Ethereum was attempting to do too much. Even two to three years ago, that was still a valid hypothesis, with stagnant adoption.

Today, the bold experiment of Ethereum is working. Alongside the $4 billion in assets deposited into DeFi, we’ve seen a 227% year-on-year increase in ETH locked in DeFi, and a 20X increase in tokenized BTC on Ethereum (equivalent to ~$220 million) since January 1. 

What was a drawback – doing “too much” – is now a strength and a reason why Ethereum’s daily transaction volume and daily network fees have eclipsed Bitcoin’s. Although Ethereum is less than half Bitcoin’s age, it has accomplished more in the last five years, building the most advanced permissionless p2p finance system in the world while Bitcoin has continued to champion the narrower digital gold meme.

It’s getting easier every day to point to DeFi apps that clearly demonstrate value and utility you cannot find elsewhere. If you’ve managed to ignore these developments, now is as good a time as ever to catch yourself up. The story of DeFi and Ethereum is just getting started.