A new era after Uniswap

The Uniswap v1 protocol, which launched in November 2018, heralded a new era for DeFi. Shortly after its launch, the total value locked (TVL) reached $20 million.

Compared to the previous Bancor protocol, Uniswap v1 introduced several key innovations:

Adoption of a bidirectional Automated Market Maker (AMM) mechanism instead of Bancor’s unidirectional liquidity pools. This bidirectional market enables more flexibility in trading, providing greater effective liquidity and reducing slippage under similar conditions. It utilizes the Constant Product Market Maker (CPMM) pricing model, which balances buy and sell orders automatically, resulting in higher transaction success rates. Additionally, Uniswap provides open-source code and interfaces, making the protocol easier to audit and extend. Compared to Bancor’s prototype nature, Uniswap v1 realized a more mature decentralized trading experience.

Overall, Uniswap v1’s main innovation lies in its superior AMM mechanism, reducing transaction costs, enhancing liquidity support, and significantly impacting the subsequent development of DeFi.

Regarding Uniswap’s founder, Hayden Adams, there is an interesting story. Before developing Uniswap, Hayden worked as a mechanical engineer at Siemens. However, he was laid off in June 2017. Subsequently, he was recommended by his friend Karl Floersch at the Ethereum Foundation to start researching smart contracts and embarked on developing Uniswap. This tells us that sometimes being laid off can be an indirect decision-making push, as if the company is pushing you to start a business. If you have been thinking about it all along, have some accumulation, and a bit of luck, perhaps you will succeed. Therefore, don’t worry about being laid off; just worry about losing your ambition.

Synthetix, the synthetic asset protocol established after Uniswap, launched on December 7, 2018, with the following main innovations:

Synthetic assets: Synthetix introduced synthetic assets, also known as Synths, which anchor and track the value of real-world assets such as currencies, stocks, and commodities. Users can obtain pricing related to real-world assets on the blockchain using synthetic assets.

Decentralized collateral: The Synthetix protocol allows users to issue and trade synthetic assets by locking SNX tokens as collateral. This decentralized collateral mechanism enables users to issue and trade synthetic assets without traditional centralized institutions.

Decentralized liquidity providers: Synthetix created a liquidity pool to support the exchange and trading of synthetic assets by introducing decentralized liquidity providers (LPs). LPs provide funds to the liquidity pool and receive corresponding rewards as incentives.

Decentralized governance: Synthetix adopted a decentralized governance model, allowing SNX token holders to vote on protocol development and decisions. SNX token holders can participate in proposals, voting, and governance processes, influencing protocol upgrades and adjustments.

The well-known “Stablecoin-focused DEX” protocol Curve was launched in September 2019 and peaked in the DeFi space in 2021, reaching a TVL of $5 billion. Curve’s main innovations include utilizing an AMM model to provide efficient price execution and low slippage rates, supporting multiple asset pools to facilitate cross-asset transactions, decreasing gas consumption through the use of monolithic contracts, and offering hook architecture to support custom pools and application access. Curve also employs an internal oracle to dynamically adjust asset price ranges, reducing LP impermanent loss. LPs do not need to actively manage liquidity as it automatically consolidates according to the algorithm, lowering barriers to entry. Introducing the CRV bribe mechanism, ve Tokenomics changes the liquidity mining game model, offering high annualized returns to compensate for inflation. Curve also introduced the crypto stablecoin crvUSD to expand its business and promote ecosystem symbiosis, supporting associated projects such as Convex and Conic Finance. In summary, Curve’s innovation primarily lies in its unique reward mechanism, CRV token governance, cost optimization, and depth provided through Convex and low-slippage AMMs.

The renowned lending protocol AAVE was launched in October 2019 and ranked first in TVL in 2020, exceeding $200 million. AAVE’s main innovations include:

Deriving from ETH Lend’s decentralized lending but introducing shared liquidity pools instead of ETH Lend’s peer-to-peer model.

Flash Loans: Aave was the first DeFi platform to implement flash loans. Flash loans are uncollateralized loans where borrowers only need to set up borrowing-profit-return logic within one transaction, enabling borrowing of large sums with almost no cost. This allows developers to create new financial scenarios without risk.

Tokenized Debt (aTokens): When users deposit funds on the Aave platform, they receive corresponding aTokens, which automatically accumulate interest. Users can redeem these aTokens at any time to retrieve their principal and interest.

Interest Rate Switching: Aave users can freely switch between stable and variable interest rates, providing greater flexibility.

Cool-Off Period: Aave introduced a “cool-off period” mechanism in its governance model, meaning all proposals have a waiting period. This prevents malicious governance proposals from being quickly passed, limits “governance attacks,” and gives community members enough time to review proposals.

Balancer, once hailed as one of the “Big Three DEX Protocols,” was launched in January 2020, with TVL ranking third that year, reaching approximately $250 million. Balancer’s main innovations lie in its technical architecture, product design, and ecosystem development, as follows:

It utilizes a Vault architecture, separating token accounting functions from pool logic to improve efficiency.

Additionally, it supports various types of pools, such as weighted pools and customizable stable pools, enhancing asset allocation efficiency. Balancer introduced the Core Pool mechanism to incentivize governance holders.

It also designed the Rate Provider and Core Pool mechanisms to redirect some of the revenue back into the pools as incentives, providing continuous rewards for governance token holders. The protocol is suitable for LSD governance and incentives, becoming an LSD liquidity hub. Balancer also established the 80/20 program to promote the adoption of governance tokens and liquidity, while also supporting Layer2 scalability to improve transaction efficiency. Its flexible governance model also responds to industry changes.

Yearn Finance, the yield aggregator protocol, was launched in February 2020 and ranked first in the DeFi space in the first quarter of 2021, with TVL reaching as high as $3 billion. Yearn’s main innovations can be summarized as follows: It provides yield aggregation functionality, automating asset allocation to provide users with up to 10x yield enhancement. It also supports the emerging DeFi ecosystem based on LSD assets, such as Aura Finance. Furthermore, Yearn introduced the veYFI model, incorporating a voting lock mechanism to enhance governance weight. Yearn plans to launch new products based on LSD assets, such as yETH, and continuously upgrade and iterate its products, such as introducing new token mechanisms and strategies in Yearn V3. Yearn also introduced the Vault Management mechanism to automate the management of various asset allocations. Additionally, it explores the application of technologies like ZK proof to improve efficiency and decentralization.

Uniswap V2 was launched in May 2020 and once led the DeFi TVL rankings with a peak of $10 billion. Compared to V1, Uniswap V2 introduced several key innovations and addressed issues as follows: It supports direct ERC-20 token-to-token swaps without the need for ETH as an intermediary token, thus saving transaction costs. V2 introduced a price oracle mechanism, reducing the impact of price fluctuations through time-weighted average prices. Additionally, V2 supports flash swaps, allowing temporary borrowing of tokens from Uniswap pools for trading, with gas fees reduced by repaying in the same transaction. V2 also supports tokens that do not fully comply with the ERC20 standard and implements contracts using Solidity, which is more efficient than Vyper, saving gas consumption. Uniswap V2 also provides a switchable 0.05% protocol fee income, which is currently inactive and requires governance approval to enable.

SushiSwap, launched in August 2020, briefly held the top TVL ranking in January 2021. It was one of the first projects to fork Uniswap and gained notoriety due to its vampire attack. Its innovation lies in introducing the SUSHI token as a reward for liquidity mining. The vampire attack process is as follows: In the incentive phase, SushiSwap rewarded users providing liquidity in specific Uniswap pools with SUSHI tokens as an incentive. This provided dual rewards as these users could earn trading fees from Uniswap and SUSHI tokens from SushiSwap. In the migration phase, after the incentive phase ended, SushiSwap conducted a migration event known as the “Great Migration,” transferring funds providing liquidity in Uniswap to the SushiSwap platform all at once. Due to the SUSHI rewards offered by SushiSwap, many users chose to migrate to SushiSwap. The founder of SushiSwap, an anonymous developer known as “Chef Nomi,” sparked a controversy in the early days of the project. Shortly after the launch of SushiSwap in late August 2020, Chef Nomi, without any warning, converted all SUSHI tokens held by the development team into ETH (approximately 27,000 ETH, valued at about $13 million at the time), causing a sharp drop in the price of SUSHI tokens. This action triggered strong community backlash, with many criticizing Chef Nomi’s behavior as akin to “rug pulling,” damaging the project’s reputation and community trust. Despite Chef Nomi initially claiming he needed the funds to continue developing the project, community anger did not subside. Under community pressure, Chef Nomi returned all the funds to the SushiSwap development fund a few days later and publicly apologized on Twitter, admitting his actions were wrong. He also announced he would step down from the project and transfer control to the SushiSwap community. While the issue was eventually resolved, it sparked in-depth discussions about governance and transparency in decentralized finance (DeFi) projects and had a lasting impact on the reputation of the SushiSwap project.

PancakeSwap was launched in September 2020 by users of BakerySwap, and the project was developed by improving upon Uniswap V1. It is the first AMM (Automated Market Maker) product in the Binance Smart Chain (BSC) ecosystem and experienced rapid growth after its launch, with a peak TVL of $3 billion. PancakeSwap utilizes CAKE as its governance token, distributed through liquidity mining and Initial Coin Offerings (ICOs), taking full advantage of the low gas fees on the BSC chain to lower the barrier of entry for users.

Uniswap V3 was launched on May 5, 2021, with a peak TVL of $5 billion. Compared to V2, V3 introduced the following key innovations and addressed issues:

Introduction of concentrated liquidity mechanism, allowing LPs to concentrate funds within specified price ranges to address the issue of low capital efficiency in V2.

Introduction of the concept of price ranges (Ticks) to support concentrated liquidity, resulting in improved computational and storage efficiency.

Use of NFTs to represent individual positions, enabling customized liquidity provision strategies.

Provision of three-tiered customizable fee structures to attract LPs with different risk preferences.

Adoption of an improved price oracle mechanism to reduce query costs.

Support for range orders, enriching the types of trades, and upgrading underlying contracts by rewriting them in Solidity.

Possibility of triggering more derivative applications and ecosystem building through protocol aggregation.

Decentralized contract trading platformGMX was launched on September 1, 2021, with a maximum TVL of over US$700 million. The main innovations and problems solved by GMX are as follows:

Providing decentralized leverage trading: This solves the risks and fund custody problems of centralized exchanges.

Endogenized mobility. GMX achieves endogenous liquidity by allowing users to trade against the GLP pool. GLP holders can earn trading fees by providing liquidity. This mechanism avoids dependence on external market makers.

Trader profit and loss sharing mechanism. GMX realizes the sharing of traders’ profits and losses with liquidity providers. Traders’ profits and losses will be included in the price of GLP, thereby realizing risk sharing. GMX V2 introduces a funding rate system, which can reduce the risks faced by liquidity providers and avoid arbitrage.

Composability and ecological construction. GMX is highly composable and supports the construction of Layer 2 applications. As many as 30 projects have been built on the GMX ecosystem. Subsequent versions of GMX will support the trading of more synthetic assets, including multiple asset classes such as stocks and foreign exchange. GMX itself can provide frictionless transactions. GMX enables frictionless transaction execution through a quotation mechanism.

Common features of current mainstream protocols in DeFi

Let’s now review some of the well-known or commonly used DeFi protocols and identify some commonalities from their current status and upgrade paths.

Uniswap: Uniswap is one of the earliest and largest decentralized exchange platforms, introducing the Automated Market Maker (AMM) model. Its advantages lie in its simplicity, transparency, and the vast network effect within the Ethereum ecosystem. However, it also has some drawbacks such as potential temporary imbalances and higher slippage.

1inch: 1inch is a decentralized trading aggregator that searches for the best trading routes and prices across multiple DEXs. Its advantage is in helping users achieve the best trading prices, but its complexity and computational requirements are higher compared to a single DEX.

Balancer: Balancer is a general-purpose AMM that allows users to create liquidity pools with multiple tokens and freely set the weights of each token. Its advantage lies in its flexibility and customizability, but this also increases the difficulty in usage and understanding.

Curve: Curve is a decentralized exchange platform focused on stablecoin trading, using a special algorithm to reduce slippage and provide efficient trading experience. Its advantage lies in its high capital efficiency and user-friendliness, making it a dominant player in stablecoin trading in the DeFi market.

dYdX: dYdX is a decentralized derivatives trading platform offering futures and margin trading. Its advantage lies in providing complex financial instruments, but it comes with higher complexity in usage and understanding, as well as greater risks.

0x: 0x is a decentralized exchange protocol providing an open and scalable infrastructure for developers to build their own decentralized applications. Its advantage lies in its flexibility and scalability, but it requires other developers to build user interfaces and applications on top of it.

Bancor: Bancor is a decentralized exchange platform that introduces a new liquidity mechanism to address significant losses that traditional AMMs may encounter. Its advantage lies in its innovation, but it is complex and hard to understand.

DODO: DODO is a decentralized exchange platform based on the Proactive Market Maker (PMM) model. Its advantage lies in providing better prices and lower slippage, but its market share and visibility are relatively small.

SushiSwap: SushiSwap is a decentralized exchange platform based on Uniswap, introducing a community-driven development and governance model. Its advantage lies in community participation, but it faced controversies and trust issues in its early days.

PancakeSwap: PancakeSwap is a decentralized exchange platform on the Binance Smart Chain, introducing new features such as lotteries and NFTs. Its advantage lies in its low transaction fees and innovation, but it relies on the Binance Smart Chain, which may raise some centralization concerns.

Aave and Compound: These are both decentralized lending platforms that allow users to borrow and lend crypto assets. Their advantages lie in their robustness, user-friendliness, and strong network effects within the Ethereum DeFi ecosystem. However, they also face risks such as potential liquidity and market risks.

MakerDAO: MakerDAO is a decentralized stablecoin project on Ethereum, allowing users to collateralize crypto assets to generate DAI, a stablecoin pegged to the US dollar. Its advantages lie in its robustness, user-friendliness, and strong network effects within the Ethereum DeFi ecosystem. However, it also faces risks such as potential liquidity and market risks.

KyberDMM: KyberDMM (Dynamic Market Maker) is a new product of KyberNetwork, optimizing the AMM model to provide lower slippage and higher capital efficiency. Its advantage lies in its innovation and user-friendliness, but its market share and visibility are relatively small.

Synthetix: Synthetix is a decentralized synthetic asset platform that allows users to create and trade various synthetic assets such as stocks, forex, and commodities. Its advantage lies in its flexibility and innovation, but it is hard to use and understand.

Nexus Mutual: Nexus Mutual is a decentralized insurance platform that allows users to purchase and provide various insurance products. Its advantage lies in addressing the important need for risk management in the DeFi market. However, it also faces risks such as potential liquidity and market risks.

Frax: Frax is a decentralized stablecoin project that introduces a new algorithmic stablecoin mechanism. Its advantage lies in its innovation, but it is complex and hard to understand.

Ribbon Finance: Ribbon Finance is a decentralized structured product platform that offers various options strategies. Its advantage lies in addressing the important need for structured products in the DeFi market. However, it also faces risks such as potential liquidity and market risks.

Opyn: Opyn is a decentralized options trading platform that allows users to buy and sell various options. Its advantage lies in its flexibility and user-friendliness, but it is complex and hard to use.

Gnosis Protocol: Gnosis Protocol is a decentralized prediction market platform that allows users to create and trade various prediction markets. Its advantage lies in its flexibility and innovation, but it is hard to use and understand.

TraderJoe: TraderJoe is a decentralized exchange platform on the Avalanche network, offering liquidity provision, lending, and trading services. Its advantage lies in its user-friendliness and early advantage on the Avalanche network, but its market share and visibility are relatively small, and it may face liquidity and market risks.

General Analysis of the DeFi Landscape:

From the perspective of DeFi service types, they are divided into spot trading, options trading, futures trading, synthetic assets, insurance, structured finance, lending, ETFs, lotteries, prediction markets, yield farming (fixed rate), dollar-cost averaging robots, grid robots, etc. In terms of DeFi forms, there are basic AMM types, variant AMM models, order book models, RFQ models. The advantages of AMM lie in its simplicity and ease of use, without the need for professional market makers or order books. However, its disadvantages include price deviation from the actual market price, slippage, low capital utilization, forced exposure to multiple currencies, and impermanent loss. The advantages of the order book model lie in its familiarity to people, prices closer to the market price, and lower slippage. However, its disadvantages include the need for sufficient liquidity and market makers to maintain the order book. The advantages of the RFQ model lie in the absence of deposits or liquidity, and trades are executed directly between buyers and sellers. However, its disadvantages include a lack of transparency, uncertainty in request for quotes and final execution prices, as sellers only decide whether to accept the quote upon receiving it. In terms of the entire DeFi ecosystem, some peripheral service providers are also thriving, such as oracles, data aggregators, payment systems, dashboards, and cross-chain bridges.

Future Competition/Optimization Directions in the DeFi Space:

Some protocols mainly compete in trading volume and liquidity (such as Uniswap and SushiSwap); some protocols focus more on competing in technology and features (such as dYdX and 0x); some protocols compete in acquiring users and assets (such as Aave and Compound). From an upgrade perspective, Uniswap is more like reforming itself, with super-strong research and innovation capabilities, and each upgrade is a targeted optimization of existing challenges. Curve achieves a multi-party game situation through cleverly designed economic models, thereby promoting each other and ultimately forming a positive flywheel.

Future trends in the DeFi world

Better product experience

From the historical development of DeFi, we can observe that people want to control their own assets, so they are eager to escape from centralized exchanges. However, because the performance of the public chain at that time was not good, it could not meet the requirements of the order book model. Therefore, people thought of the AMM model and settled for the next best thing and temporarily accepted this approach. However, it can be seen that EtherDelta, IDEX, dYdX and other products have been trying to give users a more familiar and intuitive order book mode experience. However, when EtherDelta and IDEX were developed, the technology of the entire environment was not ready yet and was decentralized. The number of users and funds in global finance is still very small, and dYdX relied on StarkWare’s technology ZKRollup to turn around and win a place for itself. In the future, DEX will bring simpler and more intuitive interface operations to users, such as apps based on mobile terminals. In terms of interaction design, we pursue a user experience that is no different from that of first-line Web2 apps. Products will consider more meticulous details, for example, order book interface design, order process optimization, transaction prompts, etc.

Higher liquidity

Since DeFi Summer, tens of thousands of users have been drawn into this decentralized trading feast. In just 2 years, a hundred times of funds have poured into DeFi, and now many established traditional finance companies have also seen this. The potential of the market, many institutions are also applying for BTC spot ETFs, and it can be foreseen that there will be more liquidity on the chain in the near future. In the future, not only will institutional inflows increase, but we can also see the emergence of some liquidity tool products. For example, VAULT, veTOKEN, etc. generate integrated liquidity. At the same time, with multi-chain ecological interaction and liquidity sharing, cross-chain DEX will further improve fund utilization.

Higher efficiency

With the further maturity of Layer2 and ZK technologies, as well as efforts made by other public chains to enhance performance, the pattern of centralized trading followed by on-chain settlement will bring higher efficiency for users. Decentralized exchanges (DEXs) will be able to achieve low-latency instant transactions similar to traditional trading platforms. Not only will transaction speeds increase, but transaction throughput can also be greatly enhanced.

Greater security

Innovation often brings with it some bugs, but when certain products have been validated over several years and proven to be safer, their code becomes a template for the industry, gradually forming the modularization of the DeFi industry.

Vertical and Horizontal Layering of UX

The frontend features simplicity and aesthetics, not exposing too many details, only enhancing user interaction experience, perhaps with just a ChatGPT input box, the so-called “Intent”; the backend features security, customizability, support for multi-level parameter configurations, strong liquidity, and high aggregation. Horizontally, modules are separated, liquidity pools are isolated in advance to prevent risks, and emergency plans are introduced. When the types of bugs in the industry are more or less sorted out, emergency plans can be prepared before upgrades. Perhaps five years from now, when you’re responsible for upgrading a DeFi product, you’ll have a 10-page emergency manual on hand.

Incident Downgrading: When accidents occur, the impact of the incident is minimized.

Incident Review: When the entire industry is contributing to a template, DeFi version order flow services and an overall trading code framework will be perfected.

More Use Cases

Gradually, everyone will find that, just like NFT thumbnails, once the technology matures and the bonuses it brings become smaller, the technologies used between different products will tend to homogenize. For example, they all use on-chain data for transparency, off-chain transactions for efficiency, and AMM or market makers to provide early liquidity. At this point, the competition between different products may be differentiated services, such as different incentive mechanisms or different main services. Even many traditional financial products will be made into on-chain versions, such as unified margin accounts, balance treasure, wealth management channels, limit orders, and inheritance trusts. At the same time, with the popularization of Web3 applications, there will be comprehensive DeFi entry platforms similar to Binance, integrating various DeFi products, such as mixed lending and insurance.

Summary

In conclusion, with so many talented builders working on it, as an ordinary user, just believe: Crypto trading volume will increase, DEX trading volume will surpass CEX, there will be more choices for DEX, but the experience will get better. The future is yours!

Disclaimer：

1. This article is reprinted from [Geek Web3], All copyrights belong to the original author [0xKooKoo, Geek Web3 & MoleDAO technical consultant, former Bybit technical director]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.