New Forms of DeFi: Self-Custody, Personalization, Point-to-Point.

Author: Eason Jiang

Reviewer: Jomosis

Source: Content Guild Research

Front cover image source: unsplash.com

Originally published at: @perma_daoCN

Original link: https://x.com/perma_daoCN/status/1854029449882431720

In recent years, there has been no shortage of complaints in Web3, with no more phenomenal innovations in the industry and no new breakout effects; talent is returning to Web2 or switching to AI. VC coins are facing a crisis, and Meme coins have become the main focus. We have long missed the excitement, shock, and anticipation we felt during the DeFi Summer and NFT Summer.

However, innovation is actually happening quietly all the time. At least in the DeFi space, I see something special emerging - DeFi 4.0.

To understand what DeFi 4.0 is, let's first briefly walk through the history of DeFi.

DeFi 1.0: Decentralization of Basic Financial Products

Time: Around 2018~2020

During this stage, the initial DeFi protocols, such as MakerDAO, Compound, Uniswap, and Aave, were born, achieving the decentralization of basic financial services such as trading, lending, and asset management. The invention of AMM, in particular, created an unprecedented paradigm. It sparked a democratization movement of "everyone can be a market maker" and also created a wave of “Get-Rich-Quick” stories related to liquidity mining.

DeFi 2.0: Improving Capital Efficiency

Time: Around 2021-2022

During this period, a new batch of DeFi protocols emerged. Overall, these protocols lacked the elegant simplicity of first-generation DeFi protocols and had more complex mechanisms. However, their goals primarily focused on improving capital efficiency, especially liquidity efficiency, while also attempting to address the issues of liquidity availability and sustainability.

Typical examples include lending protocols and stablecoin protocols like Abracadabra, Alchemix, and Frax Finance, which attempt to bypass over-collateralization through various mechanisms; LaaS (Liquidity as a Service) protocols like Tokemak, which aim to help newly launched DeFi projects gain liquidity; and protocols like OlympusDAO, which address liquidity sustainability issues through protocol-owned liquidity.

It is worth mentioning that Uniswap V3 was also born during this period, and its range market-making algorithm significantly improved the capital efficiency of LPs compared to the previous full price range market-making.

Another significant innovation is the Curve protocol's Gauge Voting, which is the veToken governance mechanism. This token governance solution effectively achieves liquidity sustainability. It was later widely adopted by many protocols in the DeFi industry.

DeFi 3.0: Expansion of Composability

Time: Starting around 2022

There is still a lack of consensus in the industry on the definition of DeFi 3.0. Some believe it is LSDFi and Restake, some think it is cross-chain/all-chain DeFi, and others consider it Farming as a service. This reflects that in the 3.0 phase, DeFi has innovations and progress in multiple aspects. However, overall, the development trend of DeFi in this stage is mainly reflected in the expansion of composability.

In the 1.0 era, DeFi Lego was already a term that was fully mentioned and discussed, but its Lego-like composability was only fully demonstrated in the 3.0 era.

Source: From Internet

Starting with the Shanghai upgrade, Ethereum officially transitioned from PoW to PoS, and ETH LSD became a fixed-income product similar to US dollar bonds in the DeFi space. In this context, many protocols began developing Restake scenarios based on ETH LSD to provide users with compounded yields, with representative projects like Eigenlayer and Puffer. Some protocols also offer interest rate swap products and diversified arbitrage strategies based on the interest-bearing characteristics of LSD, such as Pendle.

With the improvement of Infra, the cost of building chains is getting lower. Numerous L2s and new public chains are emerging, bringing diversification as well as fragmentation. Some DeFi protocols, empowered by underlying cross-chain protocols, attempt to create composability between different chains. It allows users to perform cross-chain fund deposits and withdrawals, cross-chain asset exchanges, cross-chain staking, lending, and other operations. Representative projects include the omni-chain DEX Stargate, omni-chain lending protocol Radiant, and omni-chain LSD protocol Bifrost.

Due to the enhancement of DeFi composability, various profit strategies have emerged. Some protocols have started offering FaaS (Farming as a Service) services to users. They provide automated strategies through smart contracts, offering users multiple high-yield strategies while simplifying user operations. Basically, they provide users with a "passive income" service. Representative projects include the Rari Protocol, Harvest Protocol, and Yearn Finance, which has survived from the 1.0 era.

DeFi 4.0: Self-custody and Personalized Finance

Finally, let's talk about DeFi 4.0. Due to Ethereum's performance limitations, DeFi protocols on Ethereum cannot provide independent agent’s computing capabilities for each user. Therefore, they adopt a single contract management model. Whether it's Uniswap, Compound, MakerDAO, or most Ethereum DeFi protocols, users need to authorize funds to the contract and perform unified configuration and management within the contract.

However, with the emergence of various L2s and new public chains with high performance, this performance limitation no longer exists. However, the powerful inertia of past thinking patterns continues to play a role. In fact, DeFi can be built in a more advanced form for high-performance new public chains.

In this new form of DeFi, each user can deploy their own smart contract agent to interact with the protocol in a customized way and independently conduct personalized financial business.

There is no unified name in the industry for this new form. New lending protocols like Morpho, Ajna, and Euler Finance created a new term called "modular lending," which can be extended to a new concept - "modular DeFi" or "modular finance". In the Arweave/AO ecosystem, the term AgentFi is popular, which means "agent finance." A term I personally like is Sovereign Finance. It was first seen in a tweet by EverVision’s founder Outprog. 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 "financial independence for individuals". Simply put, it means allowing everyone to establish their own exchange, their own bank, and any financial service.

Source: https://x.com/outprog_ar/status/1853102029620805912

In any case, as the industry develops and narratives emerge, consensus will inevitably converge on a certain name, so let's set aside the naming issue for now and call it DeFi 4.0.

DeFi 4.0 has three core features:

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

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

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

For example, Permaswap allows LPs to independently set market-making curves and ranges, and matches with traders through a point-to-point matching mechanism. Users of the so-called "modular lending" protocol can create their own lending pools, independently set over-collateralization rates and lending rates, and trade with borrowers through a point-to-point matching mechanism. It is worth mentioning that to avoid future incompatibility of agents developed in different ways, Permaswap has proactively created a standard protocol — the FusionFi Protocol. All agents built according to this standard can communicate with each other and match with one another, effectively making Permaswap potentially surpass a simple DEX to become a liquidity aggregator, and even a super aggregator that integrates various financial forms.

Summary

New problems give birth to new solutions, and new solutions may contain new problems. Like the development of most things, DeFi continues to advance through this constant cycle of doubt and hesitation. Looking back at the journey from DeFi 1.0 to DeFi 3.0, we can see that the DeFi field has always been full of vigorous creativity. Some innovations have brought visible changes, while others, though less noticed, may have equally profound impacts.

At the beginning of 2024, we vaguely discovered new trends in the DeFi field - autonomy and personalization. And we glimpsed a new decentralized financial paradigm - DeFi 4.0. It currently seems to have little hype and hasn't gained momentum, but I believe it will eventually form a powerful narrative.

The era of sovereign finance is coming!

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Disclaimer: This article does not represent the views of PermaDAO. PermaDAO does not provide investment advice or endorse any projects. Readers should comply with their country's laws when engaging in Web3 activities.

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