Author: 0xmiddle

Reviewed by: outprog

Source: Content Guild - Research

Cover background source: unsplash.com

In recent years, there have been many complaints in the Web3 space, with no more phenomenal innovations or new breakout effects; talent has returned to Web2 or shifted to AI; VC coins have faced crises, and memes have surprisingly taken center stage. We have long missed the excitement, shock, and anticipation we felt during the DeFi Summer and NFT Summer.

However, innovation is quietly happening all the time. At least in the DeFi space, I see ripples beneath the surface — the imminent emergence of DeFi 4.0.

To understand what DeFi 4.0 is, let's first conduct a historical analysis of DeFi.

DeFi 1.0: Decentralization of Basic Financial Products

Time: Approximately 2018-2020

During this phase, early DeFi protocols such as MakerDAO, Compound, Uniswap, and Aave were born, achieving the decentralization of basic financial services like trading, lending, and asset management. The invention of AMM, in particular, created an unprecedented paradigm, sparking an egalitarian movement of "anyone can be a market maker," and generating a wave of wealth myths related to liquidity mining.

DeFi 2.0: Enhancing Capital Efficiency

Time: Approximately 2021-2022

During this period, a new batch of DeFi protocols emerged. Overall, these protocols lacked the simplicity and beauty of the first-generation DeFi protocols and had more complex mechanisms, but their goals primarily revolved around enhancing capital efficiency, especially liquidity efficiency, while also attempting to address issues of liquidity accessibility and sustainability.

Typical representatives include: Abracadabra, Alchemix, and Frax Finance, which attempted to bypass over-collateralization in lending and stablecoin protocols through various mechanisms; Tokemak, which aimed to help newly launched DeFi projects gain liquidity as a Liquidity as a Service (LaaS) protocol; and OlympusDAO, which addressed liquidity sustainability through self-sustaining liquidity mechanisms.

It is worth mentioning that Uniswap V3 was also born during this period, with its range-based market-making algorithm significantly improving LP capital efficiency compared to the previous all-price-range market-making.

Another significant innovation was the Gauge Voting mechanism of the Curve protocol, also known as the veToken governance mechanism, which is a token governance scheme that effectively realized liquidity sustainability. This mechanism was later widely adopted by many protocols in the DeFi industry.

DeFi 3.0: Expansion of Composability

Time: Approximately starting in 2022

There is still a lack of consensus in the industry regarding the definition of DeFi 3.0. Some believe it refers to LSDFi and Restake, others think it pertains to cross-chain/full-chain DeFi, and some consider it Farming as a Service. This reflects that during the 3.0 phase, DeFi saw innovations and progress in multiple areas. However, overall, the development trend of DeFi during this phase mainly manifested as an expansion of composability.

In the 1.0 era, the term "DeFi Lego" was already widely mentioned and discussed, but its Lego-like composability was fully realized only in the 3.0 era.

Image source: Internet

Since the Shanghai upgrade, Ethereum has officially completed its transition from PoW to PoS, and ETH LSD has become a fixed-income product similar to dollar bonds in the DeFi space. Against this backdrop, many protocols began developing Restake scenarios based on ETH LSD to provide users with stacked yields, with representative projects including Eigenlayer and Puffer. Some protocols also leveraged the yield-generating characteristics of LSD to offer users interest rate swap products and diversified arbitrage strategies, such as Pendle.

With the improvement of infrastructure, the cost of creating chains has increased, leading to the emergence of numerous L2s and new public chains, which has brought diversification but also fragmentation. Some DeFi protocols, empowered by underlying cross-chain protocols, attempt to create composability across different chains, allowing users to perform cross-chain fund deposits, asset exchanges, and participate in staking and lending operations. Representative projects include the full-chain DEX Stargate, the full-chain lending protocol Radiant, and the full-chain LSD protocol Bifrost.

Due to the enhanced composability of DeFi, various "one fish, multiple meals" strategies have emerged, and some protocols have begun offering users FaaS (Farming as a Service) services. They provide automated strategies through smart contracts, offering users multiple high-yield strategies while simplifying operations, thus providing a "hands-free" service. Representative projects include Rari Protocol, Harvest Protocol, and Yearn Finance, which has traversed from the 1.0 era.

DeFi 4.0: Self-Custody and Personalized Finance

Time: Starting in 2023

Finally, we come to DeFi 4.0. Due to the performance limitations of Ethereum, DeFi protocols on Ethereum cannot provide independent proxy computing capabilities for each user, thus adopting a single contract management model. Whether it is Uniswap, Compound, or MakerDAO, as well as the vast majority of Ethereum DeFi protocols, users need to authorize their funds to the contract and perform unified configuration and management within the contract.

However, with the emergence of various L2s and high-performance new public chains, this performance limitation has effectively disappeared. Yet, for a long time, the strong inertia of past paradigms has still been at play. In fact, for high-performance new public chains, DeFi can be constructed in a higher-order form.

In this new form of DeFi, each user can deploy their own smart contract proxy, interact with protocols in a customized manner, and independently conduct personalized financial activities.

The industry has yet to reach a unified naming for this new form. New lending protocols like Morpho, Ajna, and Euler Finance have created a new term called "modular lending." Extending this, we can derive a new concept — "modular DeFi"; the Arweave/AO ecosystem has popularized the term AgentFi, meaning "agent finance." A term I personally prefer is SovFi (Sovereign Finance), which emphasizes "individuals providing financial services" and "individual financial independence." This was first seen in a tweet by outprog, the founder of EverVision, and the Permaswap developed by EverVision is the leading DEX in the Arweave/AO ecosystem. The tweet mentioned that sovereign finance emphasizes "individuals providing financial services" and "individual financial independence." Intuitively, it means allowing everyone to establish their own exchange, create their own bank, and build any financial service.

Image source: https://x.com/outprog_ar/status/1853102029620805912

Regardless, as the industry develops and narratives arise, consensus will inevitably coalesce around a certain name. So for now, let's set aside the naming issue and refer to it as DeFi 4.0.

The core features of DeFi 4.0 are threefold:

First, self-control. Users do not need to authorize their assets to a unified contract but can manage their funds through a proxy contract they control and participate in financial activities.

Second, personalization and customization. Users can set the content and parameters of financial activities according to their needs.

Third, peer-to-peer. The trading model is no longer pool-to-point but point-to-point, or rather, point-to-network.

For example, Permaswap allows LPs to independently set market-making curves and ranges, executing trades with traders through a peer-to-peer matching mechanism. Users of so-called "modular lending" protocols can create their own lending pools, independently set over-collateralization rates and lending rates, and execute trades with borrowers through a peer-to-peer matching mechanism. It is worth mentioning that to avoid future interoperability issues with differently developed proxy contracts, Permaswap has proactively created a standard protocol — FusionFi Protocol. All proxy contracts (Agents) built according to this standard can communicate with each other, facilitating matching and enabling Permaswap to potentially transcend being a mere DEX, evolving into a liquidity aggregator and even a super aggregator that integrates various financial forms.

Conclusion

New problems give rise to new solutions, and within these new solutions may lie new problems. Like the development of most things, DeFi continues to evolve through this ongoing process of negation of negation. Looking back at the journey from DeFi 1.0 to DeFi 3.0, we can see that the DeFi space has always been filled with vibrant creativity. Some innovations have visibly brought about change, while others, though less noticed, may have equally profound impacts.

As we enter 2024, we vaguely discover new trends in the DeFi space — autonomy and personalization. We sense the emergence of a new decentralized financial paradigm — DeFi 4.0. It may not yet be widely promoted or fully formed, but 0xmiddle believes it will ultimately coalesce into a powerful narrative.

The era of sovereign finance is about to arrive!

Additional Questionnaire:

Which term do you think better describes DeFi 4.0?

A. Modular DeFi

B. AgentFi (Agent Finance)

C. SovFi (Sovereign Finance)

D. SelFi (Self Finance? Personal Finance?)

E. Other (Please share your thoughts)

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