Roundup of Decentralized Finance Sagas of 2020

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In Brief
  • 2020 has had its fair share of DeFi scandals, sagas, and soap operas.

  • Decentralized finance has come a long way in a short time in 2020.

  • 2021 is likely to see a lot more novel and "smarter" protocols emerging.

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Decentralized finance (DeFi) has been the catalyst for crypto market momentum in 2020, but not all has been smooth sailing for the embryonic industry. With countless new product and token launches, and largely untested smart contracts and code being unleashed, there have been a few ups and downs, to say the least.

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From flash loan exploits to rug pulls to scams, hacks, and crypto tribalism, 2020 has had its fair share of DeFi scandals, sagas, and soap operas. We’ll recap the biggest ones here and take a look into what may be in store for the sector in 2021.

DeFi’s early beginnings

At the beginning of 2020, the total value locked (TVL) across all DeFi protocols was a mere $680 million, according to DeFi Pulse. By the end of the year, there were nine individual protocols with more than that amount of collateral locked up, five of which exceeded a billion dollars in TVL.

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The total amount of collateral locked reached $15 billion in 2020, a monumental increase of 2,100 per cent, since the beginning of January. DeFi-related tokens have been the best performing of this year, though many have corrected heavily over the past couple of months.

As with the altcoin boom of 2017 — 2018, some will survive and keep growing, while the majority will sink and fade into obscurity. After all, there are only so many food-flavored farming pools that are needed.

The first major hiccup for DeFi came in February, when lending and margin trading protocol bZx became the first serious victim of 2020, with two flash loan exploits that resulted in the loss of nearly $1 million in user funds.

The exploits generated a crescendo of criticism from DeFi detractors and bitcoin (BTC) maximalists, at the time, who claimed the entire ecosystem was a scam and centralized.

March market mayhem

The DeFi ecosystem suffered badly in March, when global financial markets melted down in the wake of the covid-19 pandemic. Cryptocurrencies plummeted, and DeFi collateral dumped 50 per cent as investors panicked, liquidated their loans, and sold off their holdings.

Leading protocol at the time, Maker, suffered badly in the Black Swan event which resulted in the mass liquidation of the vast majority of its vaults, resulting in around $4 million in DAI being under-collateralized and many investors losing their funds.

A few more hacks followed in April and May, when imBTC and dForce were attacked, and, in June, Bancor suffered a smart contract exploit.

The food-farming frenzy commences

DeFi market momentum was catalyzed by Compound Finance, which was the first protocol to kick off the liquidity farming frenzy that would dominate the next three months and lead to much craziness and a number of sagas in the fledgling industry.

On its first day of trading, the protocol’s COMP token became the most valuable DeFi asset, making it a market cap “unicorn,” as it reached a billion dollars. Accusations of market manipulation, involving one of the world’s largest centralized exchanges, were bandied about as exchanges scrambled to list the hottest token in DeFi. Coinbase, having invested in Compound Finance in 2018, had quite a large influence on price direction, at the time.

By the end of the year, however, the token had dumped over 50 per cent, as other flavors had usurped it and the protocol fell down the TVL list.

The cloning wars were about to begin, and anonymous coders began duplicating open source smart contracts to launch their own DeFi farming protocols, with mixed success.

Yam Finance kicked off the DeFi doppelganger food-farming frenzy that would result in billions of dollars in crypto collateral being shifted from protocol to protocol, as degenerate farmers (or degens as they became known) hunted down the next quick buck.

The entire scene became a bit of a playground in the third quarter of the year, as dedicated bitcoiners and industry stalwarts took a step back to watch the crypto carnage unfold.

A few days after degens piled millions of dollars into the Yam protocol, a code bug was found in its unaudited smart contracts, resulting in the team behind the platform appealing to whales to save it by pledging governance tokens to vote on a “reboot” of the system.

This of course caused another outpouring of angst from industry experts, with some of whom such as ShapeShift CEO Erik Voorhees labelling Yam as a scam.

Vampire mining and the Sushi saga

Yam Finance was just the beginning as the real fun was yet to come. The term “vampire mining” was coined at the end of August, when a protocol called SushiSwap forked from Uniswap to offer better rewards and its own SUSHI tokens. Leading decentralized exchange Uniswap did not have its own token, at the time, and only offered a cut of the trading fees to liquidity providers.  

Naturally, within a few days, over a billion dollars flowed through Uniswap into SushiSwap, and SUSHI token prices surged. The saga happened on Sept. 6, when the anonymous founder known only as Chef Nomi sold $8 million worth of SUSHI tokens causing the token price to collapse. The crypto community had a riot with this, and decentralized finance was thrown into the mud yet again.

The cloned protocol was eventually taken over by FTX derivatives exchange CEO, Sam Bankman-Fried (SBF), who took the reins with a consortium of DeFi whales through a multi-signature smart contract preventing one person selling out. By then the damage was done and SUSHI prices dumped 94 per cent from almost $9 to below $0.50 over the next two months.

A slew of DeFi doppelgangers followed with the aim of replicating SushiSwap’s overnight success, and most of them failed to do so as investors started to wise up. There were still some notable pumps and dumps though, as degens piled into various early stage offerings before yield hopping to the next one leaving the late comers out of pocket.

New food-related protocol clones appeared almost daily, including Pizza, Hotdog, Kimchi, Pancake, Bakery, Pickle, Burger, Cream, and Harvest. Some were blatant pump and dump schemes, or rug pulls as they became known in the industry, and some are still running today.

Automated market maker Uniswap saw it was time to fight back, so launched its own governance token, UNI, which could be farmed in four liquidity pools for two months. The DEX also airdropped a ton of them to previous users of the platform. Between September and November, Uniswap collateral surged to top $3 billion making it the world’s largest DeFi protocol, at the time.

The gas price soap opera

The detriment of all of these DeFi food farms and degen yield hopping was an increase in demand on the Ethereum (ETH) network, which caused gas prices to surge to record levels. Early September saw average ethereum prices skyrocket to all-time highs of over $15 per transaction (much more for those that didn’t want to wait).

This unfortunate side effect was music to the ears of the maximalists, who took the opportunity to bash ethereum and extol the virtues of their beloved bitcoin. The crypto tribalism was in full effect again, as BTC vs ETH battles raged on social media and the same old characters bleated on with the same old arguments.

The gas crunch also resulted in the spawning of a number of “ethereum killers” such as Binance’s Smart Chain, NEO’s Flamingo Finance, Solana, and Polkadot, though none have lived up to the task yet. Transaction prices returned to normal, and ETH 2.0 Phase 0 launch was fast approaching, though scaling would be another year away.

Smart contract exploits continue  

Yearn Finance founder Andre Cronje caused a bit of brouhaha, when he posted a few teasers regarding a project he was developing for a “gaming multiverse” economy called Eminence Finance. The unaudited EMN smart contract was live and degens FOMO’d into it, with $15 million that was subsequently pilfered by a hacker.

Further DeFi hacks and smart contract exploits occurred later in the year with Harvest Finance, Pickle Finance, and a near miss for SushiSwap.

A spoof FEW token drop intended to be a joke by one of the DeFi community’s prominent members turned sour, attracting a great deal of backlash on social media in September.

Uniswap caused a commotion in October, with its first governance vote when two whale accounts owned by Dharma and Gauntlet attempted to dilute the protocol’s decentralization properties by giving themselves more control over it.

Similarly, a Maker governance vote was almost passed when the proposer took out a flash loan to increase their token and vote count. Again, crypto social media erupted with cries of centralization and the entire DeFi governance model came under the spotlight.  

Ending a turbulent year

Sagas and soap operas aside, there will always be misanthropists and detractors to new technologies and methods. There are those, who prefer to focus on its weaknesses and those willing to work on making DeFi stronger and more resilient to such exploits.

Decentralized finance has come a long way in a short time in 2020, and things are only just beginning for this emerging new financial landscape of the future. 2021 is likely to see a lot more novel and “smarter” protocols emerging as the DeFi sagas from this year fade into distant memory.

NOTE: The views expressed here are those of the author’s and do not necessarily represent or reflect the views of BeInCrypto.

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Martin has been covering the latest developments on cyber security and infotech for two decades. He has previous trading experience and has been actively covering the blockchain and crypto industry since 2017.

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