The summer of 2020 was pivotal for Decentralized Finance (DeFi), a subset of the digital asset industry. This period, known as ‘DeFi Summer,’ saw a surge in growth and innovation.
DeFi aims to establish semi-autonomous lending and trading systems on decentralized networks, primarily the Ethereum blockchain. It aims to offer various financial services without intermediaries, providing alternatives to traditional financial institutions.
The DeFi Summer was kicked off by Compound’s launch of token farming protocols in May 2020. This innovative method allowed lenders to earn interest and receive COMP tokens when they deposited their assets. It revitalized the DeFi protocol, encouraging users to provide liquidity and setting the stage for the DeFi Summer.
Following Compound, projects like Yearn.Finance, AAVE, Curve, and Uniswap contributed to the emerging field of “yield farming.”
Also known as liquidity mining, yield farming is a strategy used in the decentralized finance sector that allows cryptocurrency holders to earn rewards. It involves depositing tokens into a liquidity pool on a decentralized finance protocol.
These tokens are then used to provide liquidity for the protocol, earning the providers a specific annual percentage yield (APY), usually paid out in real time.
The rewards for yield farming are often higher than traditional investments, but they also come with higher risks, especially in such a volatile market.
The uptake of liquidity mining led to a significant shift from traditional finance to decentralized finance, culminating in the DeFi Summer of 2020. Over that year, the total value locked (TVL) in DeFi platforms skyrocketed from around $600 million to $19 billion.
Another key factor contributing to the rise of decentralized finance was the global pandemic. The widespread economic disruption that came with it led many people to question the stability of the conventional financial system.
DeFi protocols seemed to offer a safe and decentralized alternative, attracting users looking for more control over their funds.
In conclusion, the DeFi Summer of 2020 was the culmination of a decade-long journey that began with Satoshi Nakamoto’s creation of Bitcoin. It highlighted the potential of blockchain technology and smart contracts, unlocking possibilities for cutting-edge businesses.
That period continues to influence the trajectory of the digital asset industry, shaping the future of finance.