The concept of decentralised finance can be traced all the way back to our primordial ancestors, who used to trade shiny rocks for sharp shells. It’s often very easy to forget that finance wasn’t created centralised, and all the central banks and governing bodies are relatively recent inventions. When bitcoin was released in 2009, it simply brought the concept of permissionless money back.

However, it struggled to expand and build a complete finance ecosystem, mainly due to the limitations of the bitcoin network itself - it wasn’t designed to be anything besides money. This didn’t stop developers from building different instruments on top of Bitcoin. For example, the Mastercoin protocol aimed to become layer 2 for Bitcoin that anyone could use to build their own currencies and applications (e.g., decentralised exchanges).

The project received a lot of interest, was later rebranded as Omni Layer and eventually became a home for the first successful stablecoin - Tether. Mastercoin laid a lot of groundwork for the future of DeFi. Among other things, it conducted the first “ICO”, which years later became a popular way to issue coins to the public. Vitalik Buterin himself covered the Mastecoin launch in detail in this article from 2013.

Speaking of Vitalik Buterin, if Bitcoin made money decentralised, Ethereum made decentralised money programmable. Smart Contract allowed blockchains to perform general-purpose computations. In practice, that meant that anything possible on an ordinary computer was possible on the Ethereum network. Developers could issue their own fungible and non-fungible tokens and create decentralised lending platforms and derivatives. DeFi as we know it today finally became possible with Ethereum.

The honour of being the first DeFi application probably belongs to MakerDAO, who proposed the creation of “the ultimate stablecoin built on Ethereum” in a humble post on Reddit in March 2015. Maker’s Ethereum-backed eDollar was released under the name SAI (Single-Collateral DAI) in December 2017.

While details have changed over the years, the core principle of Maker remained the same - using CDP (Collateral Debt Positions) to ensure the peg/repayment. The most significant change to date came in 2019 when SAI became multi-collateral, turning into DAI we know today. To date, MakerDAO remains the biggest protocol on Ethereum, with DAI as DeFi’s biggest stablecoin. In August 2022 proposal by the Maker’s founder was published to prepare for DAI to become free-floating rather than hard-pegged to USD.

MakerDAO gave the new DeFi decentralised and stable money, but the economy can’t function without exchanges. Everyone knows Uniswap, but very few know what came before it, as the history of early DEXes is mainly lost to the tide of time.

EtherEx was the first Ethereum DEX already building a platform for the permissionless exchange of ERC20 tokens in 2015, 3 years before Uniswap. Many projects similar to EtherEx were released/being developed around that time - EtherDelta, Oasis, IDEX.

They all, however, had one big issue - the Order Book model. CLOBs work for CeFi because there is a limited amount of assets traded and professional liquidity providers, which isn’t always the case in DeFI.

In a Reddit post from 2016, Vitalik Buterin proposed a model that ended up becoming the famous x*y=k that underlies all first-generational Decentralised Exchanges with Automated Market Makers (AMMs). Compared to traditional CLOBs, these DEXes don’t have to rely on a second party always being there to take an opposite side of a trade. Instead, users are trading against liquidity pools managed by smart contracts.

Even though Bitcoin launched in 2009, Mastercoin - in 2013, MakerDAO - in 2017, and Uniswap - in 2018, the real DeFi boom happened only in 2020 when multiple factors combined to make decentralised finance a major usecase for cryptocurrencies.

At the start of 2020, the Total Value Locked (TVL) in DeFi had just crossed the 500m mark. By the end of 2022, it was an industry worth almost 200 billion dollars. While external factors certainly played their part, there were a few major internal catalysts for that growth.

Compound - lending a borrowing protocol similar to MakerdDAO but not just for stablecoins, was the first to introduce the concept of Liquidity Mining. Instead of simply re-distributing fees, it started rewarding protocol users with its native token - $COMP. As the yield increased, so did the adoption, and soon almost every protocol was attracting users with token emissions.

In late May 2021, another lending protocol Aave, which previously rebranded from ETHLend, also launched its liquidity mining campaign and quickly became one of the most dominant protocols in DeFi to this day.

SushiSwap took the concept of liquidity mining further and launched a Vampiric Attack against Uniswap in September 2020. LPs were incentivised to migrate their liquidity over to a new dex with a $SUSHI token that promised to reward stakers with a share of platform fees.

Sushiswap’s “attack” resulted in Uniswap launching its own $UNI token and distributing it in the retroactive airdrop. Everyone who has ever interacted with Uniswap got 400 tokens for free. At an ATH, they would have been worth $18,000.

Compound, Sushi, Uniswap, and Aave weren’t the only protocol that rose during the 2020 “DeFi Summer”. There were many others - Yearn, Balancer, Bancor, Sythetix, dYdX, Augur etc. It very quickly became very hard to keep track of everything. It also became increasingly hard and expensive to use the Ethereum network as gas prices soared and many users were priced out of DeFI.

The end of the DeFi summer coincided with the boom in “Alt-L1 chains”. They offered the same functionality as Ethereum but lower costs and higher speeds. By the second half of 2021, chains like Avalanche, Solana, and BSC were able to get massive adoption thanks partly to ecosystem funds and grants.

Many originally Ethereum projects like AAVE and SushiSwap embraced the multi-chain future and deployed on these emerging chains, while others like Compound and MakerDAO chose not to participate and focused on Ethereum-centric vision.

Besides the protocols that expanded to other chains, there were even more projects that copied someone else’s code and deployed it themselves. In the same way SushiSwap forked Uniswap, everyone was now forking SushiSwap. The scenario similar to the original DeFi Summer was then repeated on new chains with liquidity mining campaigns and high APRs, which often resulted in bursts of activity but were rarely sustainable.

The majority of the forks now faded into obscurity, but some have survived and built their own unique offerings. TraderJoe, for example, started as a SushiSwap fork but has now deployed a completely unique AMM that can rival the best tech in space. That’s not a unique example, and alt-L1s like Avalanche, which were once dominated by copy-paste projects, have now become home to many unique and innovative protocols.