Decentralized finance, often referred to as DeFi, is a movement in the cryptocurrency and blockchain spaces that can be difficult to pin down exactly. It is both a large-scale vision for a new way of conducting financial transactions—free from intermediaries, central authorities, and done exclusively in a peer-to-peer modality—as well as an umbrella term for scores of non-custodial financial products and services known as protocols.

DeFi is inextricably linked to the rise of cryptocurrencies, but it is not solely about crypto tokens. Below, we take a closer look at the history of DeFi and how it got to where it is today.

2015: Launch of Ethereum

Yes, one could point to the launch of Bitcoin in 2009 as the beginning of the DeFi movement. This is true insofar as Bitcoin was responsible for the rise of cryptocurrencies more broadly as an industry. 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 was of course also indebted to Bitcoin for its own existence).

One of the key developments of Ethereum was the use of smart contracts which allow developers to create a wide variety of decentralized apps, including those related to DeFi. To this day, most DeFi protocols exist in the Ethereum ecosystem.

Notably, the concepts of some of the most well-known DeFi protocols, such as MakerDAO, predate the launch of Ethereum. Maker is a lending protocol that allows users to borrow cryptocurrencies instantaneously, or to earn interest from lending out crypto tokens, and it also provides its own stablecoin. Maker was created in 2014, though it officially launched in 2017.

2017: MakerDAO and Decentralized Exchanges

Besides MakerDAO, a number of other popular DeFi protocols launched in 2017. Among them were some of the earliest decentralized exchanges, automated market makers that utilize liquidity pools to provide users access to trades with any ERC-20 token.

EtherDelta was one of the first decentralized exchanges and a pioneer in allowing traders to exchange tokens without the use of a centralized authority. It remained significantly popular through the initial coin offerings of 2017 and beyond, but ran into difficulties when it suffered a major hack in 2017 and when its founder Zachary Coburn was charged with operating an unlicenced exchange in 2018.

2017: ICOs

Speaking of ICOs, these offerings surged in popularity in 2017 and represent another step in the development of DeFi. ICOs allow non-institutional organizations and even individuals to participate in the funding of a new financial project. In this sense, they are a textbook example of the goals of DeFi. Again, Ethereum was key to the launch of many ICOs, as new token projects typically exchanged their crypto offerings for ETH. As with many popular and lucrative ventures in the cryptocurrency space, however, ICOs quickly began to draw bad actors and others searching for a quick payday without delivering much by way of useful tokens or developments.

Still, the ICO era led to the launch of some DeFi protocols which remain popular to this day, including lending and borrowing system Aave and peer-to-peer asset exchange network 0x.

2017 and beyond: Shift toward pooled funds

At the same time that the ICO craze took off, 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.

One of the most popular protocols to utilize this approach was Uniswap, which launched in 2018. It utilizes liquidity pools and automated market makers to facilitate the exchange of any ERC-20 token and to offer users an incentive reward by adding liquidity to the market for those tokens. Uniswap remains one of the major DeFi protocols today.

Compound was another protocol to emerge in 2018 and which helped to build the lending protocol space. However, it could be argued that Compound became most influential for the broader DeFi movement only in 2020, as we’ll see below.

2020: Market crash

Early in the COVID pandemic in March 2020, the price of ETH crashed, plunging by about a third in just a day. The dramatic price volatility led to a rapid increase in gas fees and liquidations, which in turn led to shortfalls for Maker. Maker created and auctioned additional native tokens in response.

2020: Rapid growth

Later in 2020, a number of factors led to the rapid growth of the DeFi space. First, Compound launched COMP tokens mid-year, providing an additional incentive for users to borrow and lend through this system and helping to bring about the controversial but popular practice of yield farming, in which users rapidly borrow and lend different tokens in an effort to achieve the best yields.

COMP also allowed users the ability to participate in governance of the Compound protocol, further decentralizing authority and inspiring many subsequent protocols to adopt similar rules.

Other crucial developments for DeFi in 2020 include the advent of Yearn, which switches between different DeFi lending protocols to achieve gains, and SushiSwap, which attempts to gain liquidity from other protocols by incentivizing providers of liquidity with its own native tokens.

After 2020: Rising and falling

Since 2020, new protocols have continued to launch, and the DeFi space has seen interest and values rise and fall along with the larger crypto industry. More and more DeFi protocols are launching on non-Ethereum blockchains, attempting to take advantage of improvements that have been made to the preexisting smart contracts format. While it remains to be seen how successful DeFi will be going forward, interest in this movement has climbed rapidly in just a few short years.

Cheat Sheet

• DeFi owes its existence to the launch of the Ethereum blockchain in 2015 and the rise of smart contracts.
• Some DeFi protocols, such as MakerDAO, were in development as early as 2014.
• Decentralized exchanges like EtherDelta emerged in 2017 alongside ICOs.
• Compound launched in 2018, setting the stage for new approaches to protocol governance and new incentive systems with the release of the COMP token in 2020.
• DeFi saw some of its earliest stress tests with the start of the pandemic in 2020, as values plunged.
• In the last two to three years, new protocols have continued to launch, particularly on non-Ethereum blockchains.