From traditional Decentralized Finance to AgentFi: Exploring the future of Decentralization finance - ChainCatcher

Author: Fourteen Jun

Review: 0xmiddle

Source: Content Guild - Investment Research

Introduction

Now, more than three years have passed since the explosion of Decentralized Finance Summer, and has the situation changed since the benchmark ETF of Compliance passed more than half a year ago?

Looking back, the Smart Contract of Ethereum has enhanced the programmability of blockchain, transforming it from a single accounting function to an infrastructure that supports multiple applications. Among many possibilities, there is no doubt that the decentralized migration of TradFi is the most practical application scenario.

Let's take a look at the total value locked (TVL) data on Decentralized FinanceLlama from Decentralized Finance. Currently, the TVL of Decentralized Finance applications has exceeded 800 billion US dollars. In recent years, numerous public chains have emerged, with even Ethereum's L2 diverting some of the space from Ethereum's L1. However, on the current Ethereum platform alone, more than half of the total Decentralized Finance assets are still stably locked.

Image source: defillama.com/chains

The initial ambition of Decentralized Finance (DeFi) was to disrupt the business models of lending, payment, insurance, and other services in the TradFi system, allowing users to complete these operations without relying on traditional Financial Institutions such as banks. However, the Total Value Locked (TVL) of DeFi has been stagnant for a long time without a breakthrough in terms of magnitude.

Most opinions believe that Decentralized Finance is limited by issues such as the performance and cost of the Ethereum network, so it cannot achieve large-scale applications or complex financial scenarios. However, the Decentralized Finance ecosystems on various L2 and high-performance new public chains have not brought about a breakthrough in the scale of Decentralized Finance, but have instead resulted in liquidity fragmentation and decreased interoperability. Ethereum still maintains the most complete Decentralized Finance ecosystem and the most abundant interoperability, making it the preferred platform for deploying Decentralized Finance projects.

A new trend is emerging: AgentFi, a new Decentralized Finance paradigm based on AO. This innovation is breaking the limitations of traditional Decentralized Finance.

Based on the Arweave storage layer, AO constructs a computing layer that supports parallel process execution, solving the scalability problem and achieving almost unlimited scalability. The combination of AO and Arweave is an implementation based on SCP (Storage-based Consensus Paradigm), which is a consensus paradigm based on storage.

On AO, Smart Contracts exist as processes. By breaking free from performance limitations, anyone can run their own processes to proxy their financial actions, with Consensus handled by Arweave's storage layer. This is the foundation of AgentFi.

Will this new form of Decentralized Finance, namely AgentFi, replace traditional Decentralized Finance and become the new mainstream form of Decentralized Finance? Let me elaborate.

Limitations of Traditional Decentralized Finance

In the traditional Block chain architecture, Block space is designed as a scarce resource. Whether it's users or applications, they need to compete to obtain this resource. When the network is congested, people need to pay more costs to compete for Block space. This is the fundamental reason for performance limitations. The performance limitation of ETH has become apparent, with only about 30 TPS.[1], it seems to be at the end of one's tether. During peak hours, gas fees often skyrocket by tens of times, which people have long been accustomed to. In fact, L2 and most high-performance public chains also have performance ceilings, which may be higher, but it is also very difficult to accommodate the scale of traditional financial business.

To save performance usage and Gas for users, and to enhance user experience, traditional Decentralized Finance is designed to use a single Smart Contract to manage business assets and operate financial transactions. As both funds and business logic are managed by a unified contract, it is difficult to achieve true diversification and personalized business operations. While this design can simplify management processes and ensure consistency, it also deprives users of autonomy in business logic and financial operations, making it difficult to meet increasingly diverse user needs.

For developers, when writing contracts, they must consider Gas call fees, and they must try to avoid writing complex contract code. On the ETH platform, the Gas Limit for an ETH transfer is 21000 gwei, and the transfer of an ERC20 Token is 65000 gwei. For slightly more complex scenarios, such as Swap, Non-fungible Token transactions, and lending, at least 300,000 gwei is required.[2]If the business becomes more complex, the gas consumption will make it even more difficult for users to bear. This greatly limits the developer's room for maneuver and also limits the richness and innovation of DeFi.

To fundamentally address the above issues, the market needs a more robust infrastructure and a supporting financial system.

AO was born, and AgentFi is a brand new exploration of the next generation of Decentralized Finance in the AO ecosystem.

AO: Infinitely Scalable Infrastructure

AO is short for Actor Oriented, as the name suggests, it is a role-based Decentralization computing protocol.

In fact, compared to Ethereum, AO is closer to the concept of a world computer. I understand AO as a supercomputing layer, with the core goal of realizing trustless and collaborative computing services without scale limitations.

Let's take a look at the workflow diagram of the super parallel computer based on AO:

Image Source: AO White Paper

• Message Generation: Users or processes initiate requests by creating messages. These messages must comply with the specifications defined by the AO protocol in order to be correctly transmitted and processed in the network.
• Messenger Unit (MU) Relay: The Messenger Unit (MU) is responsible for receiving messages generated by users, serving as a routing role to relay messages to the appropriate SU Node in the network. During this process, the MU will sign the message to ensure data integrity.
• Scheduler Unit (SU) Processing: When a message reaches the SU Node, the SU assigns a nonce to the message to ensure its ordering within the same process, and uploads the message and nonce to the Arweave Consensus layer for permanent storage.
• Compute Unit (CU) Calculation: When the compute unit (CU) receives a message, it will perform the corresponding computing task according to the message. After the computation, the CU will generate a signature with the calculation result and return it to the SU. This signature ensures the correctness and verifiability of the computation result.

So, where does Consensus come from?

On AO, storage is equivalent to Consensus. Messages are generated and written to arweave during the process, resulting in a "holographic state". This means that the running state of the process can be verified. In other words, the immutable storage of arweave ensures verifiability. This may seem counterintuitive, but if you fully understand the SCP paradigm, you will instantly understand. If you still don't understand, you can analogize it to inscription.

In addition to verifiability, we also need to address the issue of who will perform the verification. With verifiability, anyone can provide verification services. On AO, applications can choose verification services based on their own business nature and flexibly determine their security. Combined with the economic game of optimistic challenges, the reliability of verification can be guaranteed.

On a computer built by AO, applications are built from an arbitrary number of communication processes.

AO does not allow processes to share memory, but it allows them to communicate through the native message passing standard.

Because messaging is asynchronous, AO achieves an extension mechanism similar to traditional Web2 distributed system environment by focusing on messaging.

In theory, this means that AO does not actually have performance limitations.

For developers, you can choose a public Node, but you can also run your own services with your own Node. In this case, if you encounter performance bottlenecks, you can simply scale your own Node, just like running a Web2 service.

In addition, this working mode also brings additional benefits - the computing Node can provide Computing Power support for AI scenarios. We will have the opportunity to discuss this later.

What makes AgentFi different?

Unlike traditional Decentralized Finance, which relies on unified Smart Contracts to manage funds and conduct financial transactions, the concept of AgentFi is that everyone can run processes on AO computers and host their own funds, acting as their own financial agents. What does it look like in practice? Let's take the leading DEX Permaswap on AO as an example to explain.

In traditional Decentralized Finance, suppose Alice wants to exchange Token A for Token B. On a DEX, a liquidity pool is first needed, which is hosted by a Smart Contract to provide the exchange function for A/B tokens. The Exchange Rate of the transaction is determined by the market curve adopted by the Smart Contract (e.g., x*y=k). In Permaswap, each LP manages their own liquidity through their own proxy process and customizes market curves and market-making strategies. Of course, LPs can also adopt an 'extreme market-making strategy' - just place a limit order.

In fact, we found that Permaswap can integrate both AMM and order book trading forms. For users, when TA initiates a transaction, what matches it and helps complete the transaction may be AMM, a limit order, or even both.

Overall, AgentFi has three features:

1. Self-custody: Users host their own funds through a self-controlled proxy process, execute their own trading strategies, rather than entrusting them to a unified contract.

2. Personalization: Users can set their own financial business parameters flexibly through their controlled proxy process. In other words, this is equivalent to the user opening an exchange, where they can customize their trading strategies and fees. If it is extended to lending business, it can be understood as the user opening their own bank, where they can customize their Interest Rate. Furthermore, users can completely use self-hosted processes to run customized financial strategy programs, even integrating AI intelligent strategy programs.

3. Point-to-point: The matching of supply and demand no longer follows the traditional point-to-pool model of Decentralized Finance, but returns to the point-to-point model.

On the ETH network, there is a distinction between contract account (CA) and external account (EOA). Different financial scenario functionalities are implemented through different contract codes, and financial behaviors require active human participation. On AO, there is another concept oriented towards Agent, where different Agents can achieve different functionalities, and financial behaviors can rely on Agents for representation. The concept of AgentFi seems more like building blocks, which can be combined to create a more diverse Decentralization financial ecosystem.

When there are a large number of self-hosted processes, how can they communicate with each other and have composability? This is where FusionFi Protocol comes in, which is a development standard and communication specification for agents on AO. Almost all financial transactions can be abstracted as the circulation and processing of bills, and FusionFi Protocol defines a trap bill format standard. With such a standard, complex and diverse financial forms can be integrated. Developers can implement various financial transactions such as exchanges, lending, futures, and even stablecoins based on FusionFi's standard. In the future, FusionFi Protocol can refer to the models of industry standardization proposal mechanisms such as BIP, EIP, and NIP, allowing more people to participate in the formulation of protocol standards and promote the sustainable development of the ecosystem.

As for the detailed explanation of FusionFi Protocol, the author will write a separate article to elaborate.

Summary

The performance and cost issues of Ethereum have limited the development of Decentralized Finance. Although the scaling of L2 and new public chains has been effective, there is still an invisible ceiling that restricts the development of financial business.

In order to completely break through the ceiling, a network different from the traditional Block paradigm - the AO super-parallel computer - has emerged. Due to AO's infinitely scalable performance, AgentFi has become possible. Users can run their own processes, manage funds on their own, and customize financial transactions.

Agent-oriented financial models have a wider range of applications compared to traditional Decentralized Finance.

Data Source:

1. Interpretation of Ethereum TPS

2. Ethereum Transaction Gas Usage Statistics

Reference:

1 Technical Explanation ao Supercomputing

2. AO protocol: Decentralization, permissionless Supercomputer

3. Intelligent Finance: From AgentFi to FusionFi