- Assignment – Where did the term DeFi originate? Be as detailed in your explanation as you’d like
Open finance—or decentralized finance—refers to the paradigm shift from today’s closed financial system towards an open financial economy based on open protocols that are interoperable, programmable, and composable.
One could point to the launch of Bitcoin in 2009 as the beginning of the DeFi movement.
Bitcoin popularized the idea of decentralized tokens and related services like exchanges. However, the Bitcoin ecosystem is not built to enable DeFi protocols. Those rely instead on Ethereum (which is of course also indebted to Bitcoin for its own existence).
Therefor DeFi (which is defined as an eco-system compromised of decentral applications called dapps on top of blockchain systems) owes its existence to the launch of the Ethereum blockchain in 2015 and the rise of smart contracts.
A well-known DeFi protocol, such as MakerDAO was in development as early as 2014 however required the Ethereum blockchain to launch first to allow it to function correctly.
Decentralized exchanges like EtherDelta emerged in 2017 alongside ICOs. In contrast to EtherDelta. Uniswap was published to the Ethereum main net in 2018 and is one of the most important projects in the DeFi space to have been launched to date, Uniswap was built on the concept of liquidity pools and automated market makers.
Protocol developers began to adapt the peer-to-peer focus of the DeFi movement to one relying more on pooled funds. This might be thought of as a “user-to-contract” approach, since users would no longer directly interact with other users but rather would engage with smart contracts themselves.
In July 2019, another important event happened. Synthetix launched the first liquidity incentive program – a mechanism that later became one of the key catalysts for the DeFi Summer of 2020.
Compound launched setting the stage for new approaches to protocol governance and new incentive systems with the release of the COMP token in 2020 and ever since DeFi 2020 summer and subsequent winter that ensued, new protocols have continued to launch, particularly on non-Ethereum blockchains.
- Forum Task – Find an important event or protocol that I didn’t mention, but you think is important to be recorded in the history of DeFi. Then explain why it should be included and check out what other community members have added. None of us are as smart as all of us so let’s work together on this.
DeFi Hacks
The majority of DeFi projects are open-source, meaning that code is easily accessible via GitHub for inspection both by well-intentioned and malicious users. If wrongdoers find bugs first, they can steal other users’ funds.
Besides bugs in code, DeFi applications are vulnerable to external exploits as well. DeFi’s efficiency mostly depends on composability, meaning that the more projects that are interconnected, the more value they can provide. Hence, exploiters can game the system and cause protocols to behave in ways not intended by developers.
The irreversibility of blockchain transactions exacerbates the situation. If hacks occur, funds are likely lost for good, though some projects will reimburse users from their pockets.
There are over a dozen hacks and exploits within the DeFi space ever since the DeFi summer of 2020 and beyond. A very notable hack as of very recent in 2022 is the; Binance-linked blockchain hack which was hit by a $570 million crypto hack
The tokens were stolen from a blockchain “bridge” used in the BNB Chain, known as the Binance Smart Chain.
Blockchain bridges are tools used to transfer cryptocurrencies between different applications. Criminals have increasingly targeted them, with over $2 billion stolen in more than 13 different hacks, since 2022.
BNB Chain supports BNB Coin, which is the world’s fourth-largest token with a market value of over $32 billion.
The hacker had minted 2 million new BNB tokens before transferring most of the funds to other cryptocurrencies including Tether and USD Coin.
BNB Chain suspended its blockchain for several hours and was “able to stop the incident from spreading” by contacting the blockchain’s “validators,” – whom are entities or individuals who verify blockchain transactions. Binance stated there were 44 validators across several different time zones.
BNB Chain, described by Binance as a “community-driven, open-sourced and decentralized ecosystem,” said it would introduce a new “governance mechanism” to counter future hacks, as well as expand the number of validators.
In March 2022, hackers stole around $615 million from a blockchain bridge called Ronin Bridge, in one of the largest crypto heists on record, linked by the United States to North Korean hackers.
I believe these hack-events amongst other well-known hacks such as the Harvest-Hack where the attacker used flash loans to manipulate stable coin prices. Should be included and be well known about within the DeFi space in order to not only learn from present mistakes already made, but also to ensure these new protocols launched go through various rigorous auditing of their code; even though, security audits don’t guarantee that a project is infallible, rather instead, they are utilized to guarantee that the security of the given codebase is of high standard. Along with increased auditing requirements with the knowledge of these hacks, new “governance mechanisms” can also be created to counter future hacks,