Section 2: Early Utilities & Applications
Some might argue that the mass adoption of blockchain technology won’t come anytime soon. We say it’s never going to happen unless someone tries — to spot the real issues that can only be addressed by blockchain and realize the concept into actual use cases. In this section, we’d like to walk you through the footprints of the early pioneers of blockchain utilities and applications.
2014: DEX and AMM
Additional: the tech side of how DEX evolved.
A Brief History of Decentralized Exchange
DeFi.wtf Osaka Recap Chapter 7.1 | Speaker: Tom Schmidt @0x
NXT Asset Exchange used the NXT digital currency as the fuel for the NXT ecosystem, using it to create assets that represented, for example, bonds or network storage. The term “colored coins” was later applied to this system of creating assets on pre-existing blockchains. However, in this early iteration of a DEX, the assets could only be traded for the NXT coin, and direct asset to asset trading was not yet possible. In addition, colored coins could only be sent to wallets that supported the Open Assets Protocol. But the decentralized crypto space was still young, and 2014 proved to be a year of innovation and evolution with regards to DEX’s.
Around the same time, Counterparty launched their DEX. Once again, trading was limited to Counterparty related assets because Counterparty was built as an asset layer inside the Bitcoin blockchain. This was an improvement on the colored coin approach as unlike colored coins, Counterparty tokens were not tied to the BTC balance of any given address. However, when trading these assets on the Counterparty exchange, all buy and sell orders were automatically escrowed into the Bitcoin blockchain via the Counterparty protocol. Because of this, confirmation of these transactions could take some time.
But the DEX ecosystem continued to grow and change. As 2014 drew to a close, it became obvious that a truly decentralized trading system had yet to be introduced as so far, all solutions relied upon either a time-consuming and complicated escrow system or trading was limited to blockchain-specific assets. This first generation of decentralized exchanges brought the problems still to be solved into focus. As the end of 2014 approached, Blocknet announced its intention to create the first truly decentralized exchange, Block DX.
Various methods of decentralized trading were explored by a number of developers, one of which was an escrow/multisig trading method. This way of trading emphasized the honesty of both parties undertaking a trade: assets were held by an independent third party or system protocol on behalf of the two parties engaged in the exchange. Once both parties had completed their part of the exchange transaction, the asset was released from the escrow/multisig system. However, this was still not an ideal system because during this escrow process, you are no longer in control of your assets because someone/something must decide who those funds ultimately go to. As 2014 turned to 2015, other options continued to be explored, one of which was the Atomic Swap system of trading.
Decentralized exchange 0x, whose first OTC marketplace was launched in 2017, taking the “middleman” role out of the equation.
0x deployed a solution based on on-chain trade settlement — 0x OTC — in July 2017. Because when people trade on an OTC market, they typically face two problems: price discovery only happens between two parties; and there is no guaranteed quote negotiation taking place (one party can withdraw at any time, but in open market, an order placed by one party can be accepted immediately). Instead, 0x launched this solution that allows users to post orders on social media such as Twitter, which are off-chain platforms, and then settle them on-chain through 0x. By 2018, 0x had reached an average daily transaction volume of $4 million.
Immediately after, by August 2018, Bancor came out of nowhere. In a blog post, Bancor mentioned the idea of building an automated market maker designed to completely disrupt the order book style trading market, and they paired all tokens with BNT, a practice that continues to this day. In contrast, we can see a variety of pairs matched to each other on the Uniswap platform.
When the time came in 2019, a whole new financial economy emerged, and Chainlink has grown into a key part of the decentralized financial space. Chainlink first launched the Prophecy Machine (Oracle) in 2017 to securely connect external off-chain data to Ethereum smart contracts. In addition, another prophecy machine service, Tellor, briefly saw a spike in usage in October 2019.
Right after Prophecy Machine, some decentralized financial advanced trading features began to take root, such as the custodial lending trading platform dYdX, which launched a margin trading feature in 2019 with a sleek user interface that enables up to 4x leverage and an almost similar experience to that of a centralized exchange.
In May 2019, Compound V2 launched with a new look. The cryptocurrency market for Compound has remained virtually unchanged over the years, but its stable gas fee throughput (1.5–5%) has proven Compound’s design to be very successful. Not surprisingly, the lending DeFi protocol has consistently generated lower gas fees than decentralized exchanges over the years.
By 2020, more leading decentralized crypto exchanges began to surface. Uniswap first began to dominate the automated market maker (AMM) market. In fact, Uniswap went live back in November 2018, but it wasn’t until February 2019 that its trading volume officially surpassed that of Bancor. While both decentralized exchanges are based on a 50/50 reserve model, Uniswap’s design is more efficient and user-friendly. Not only that, but Uniswap’s design also supports license-free crypto asset uplisting, allowing it to build a massive combinability with the larger DeFi ecosystem.
Immediately afterwards, 1inch began breaking into the decentralized entry market. 1inch primarily offers a decentralized exchange aggregation service that analyzes various liquidity pools to split and route orders to find the most cost-effective transactions. It was perhaps one of the fastest-growing decentralized financial protocols in 2019 but did not close its early seed round until August 2020 and subsequently captured 6% of the gas market in just 3 months. Right at the end of 2020, 1inch made an airdrop to users and captured a 10% share of gas fees in December.
The last one that’s worth mentioning has to be Yearn. Since 2020, Yearn has been at the forefront of the decentralized finance market, and its growth in structure and form has shown the way to other newly created decentralized finance protocols today. The history of Ethereum would not be complete without the colorful YFI airdrop from Yearn Finance. Yearn aggregates multiple DeFi services — lending platforms like dYdX and Compound — to find the platforms and products that offer the best rates.
Additional: How are Maker and DAI similar to 18th century’s Colonial Land Bank?
Maker is a protocol that allows for creating a decentralized stable coin — DAI. The project was formed in 2014 by Rune Christensen, who was inspired by another project, BitShares — a blockchain created by Dan Larimer, the well-known EOS creator.
When launched at the end of 2017, the protocol supported its first iteration — Single Collateral DAI — only accepted ETH as collateral. This was later expanded to Multi Collateral DAI, which was launched at the end of 2019. Although aiming to keep its unit value as close to 1 USD as possible, the system of DAI is nothing like the stablecoins we discussed in Section 1, which are pegged to USD, while for DAI, the USD is rather a benchmark. For fiat-pegged stablecoins, users need to trust the project team of making the USD reserve, but with DAI, algorithms automatically manage the price of DAI according to transparent and predetermined mechanisms.
In this sense, DAI is a pure crypto native. Such significance helps Maker remain one of the most important projects in DeFi and is clearly one of the early pioneers of the whole decentralized finance space.
ERC20 was created by Ethereum developers on behalf of the broader Ethereum community in 2015 and was officially recognized by September 2017. To create a standard of this type for Ethereum, a developer or group of developers must submit what is known as an Ethereum Improvement Proposal (EIP), which describes the new functionality along with its specific protocols and standards. A committee then reviews, approves, amends, and finalizes that EIP — at that point, it becomes an ERC, standing for Ethereum Request for Comments.
Smart contracts and other features within Ethereum are then obligated to conform to one of the approved standards. While ERC20 is perhaps the most important and best known of all of these ERC standards, it is not the only one in existence.
While ERC20 has seen widespread support in the form of new tokens conforming to its standards, many in the development community believe ERC20 is limited or flawed in one or more ways. For this reason, since the development of ERC20, several alternative token standards have also been proposed. These include ERC223, which aims to address a concern with the approval and transfer elements of ERC20.
ERC621 is another alternative, which proposes the same basic functions that ERC20 provides but also adds the capacity to increase or decrease the total token supply. ERC827, on the other hand, allows a holder to approve the spending of tokens by a third party. Each of these new protocol proposals takes ERC20 as its foundation to some degree.
At the beginning of May 2016, a few members of the Ethereum community announced the inception of The DAO, also known as Genesis DAO. It was built as a smart contract on the Ethereum blockchain. The coding framework was developed open source by the Slock.it team but it was deployed under “The DAO” name by members of the Ethereum community. The DAO had a creation period during which anyone could send Ether to a unique wallet address in exchange for DAO tokens on a 1–100 scale. The creation period was an unexpected success as it managed to gather 12.7M Ether (worth around $150M at the time), making it the biggest crowdfund ever. At some point, when Ether was trading at $20, the total Ether from The DAO was worth over $250 million.
In essence, the platform would allow anyone with a project to pitch their idea to the community and potentially receive funding from The DAO. Anyone with DAO tokens could vote on plans and receive rewards if the projects turned a profit. With the financing in place, things were looking up.
However, on June 17, 2016, a hacker found a loophole in the coding that allowed him to drain funds from The DAO. In the first few hours of the attack, 3.6 million ETH were stolen, the equivalent of $70 million at the time. Once the hacker had done the intended damage, he withdrew the attack.
The DAO, although known as the first decentralized autonomous organization, had a quite strong venture capital-like feature. The later surfaced DAOs, applying more functionalities of an autonomous organization, bring the DAO concept to the next level.
The DAO behind DAI is MakerDAO, which was launched in 2015, when Rune Christensen began sharing his ideas for an Ethereum-backed stablecoin. The primary function of MakerDAO is to issue DAI. Users generate DAI by staking Ether in a Maker Vault as collateral.
Decisions regarding the currency are made by the DAO through the Maker Protocol, the set of smart contracts which control it. Within MakerDAO, MKR is the governance token for the Maker Protocol, which grants the holder voting rights. MKR is an ERC-20 token on the Ethereum blockchain. Holding more MKR gives users a larger say in elections they vote in. Governance Polls are used to survey the DAO and Executive Votes to change the state of the system.
Another major crypto project controlled by a DAO is Uniswap, the largest crypto trading protocol built on Ethereum. Uniswap is controlled by Uniswap Governance. Holders of the UNI token may introduce and vote on proposals in the Governance Forum. UNI was launched in September 2020 and initially distributed to past power users of Uniswap. Today, it is given out in proportion to the amount of liquidity users stake on the platform. To vote, DAO members bind their UNI to an address. UNI can be self-delegated if one wishes to vote on their own, or can be delegated to someone else to vote on their behalf. This enables a wide range of participation in the DAO, from the most dedicated members to more passive, low-effort participants.
DeFi aggregator Yearn is also governed by a DAO. Proposals are posted on its forum to be researched and debated. Voting takes place on Snapshot, a service used by many DAOs to simplify governance. YFI is Yearn’s governance token, and YFI can be locked in order to delegate voting power to others.
Curve is a decentralized exchange for stablecoins, which are low-volatility cryptocurrencies like USDC or Dai. Instead of matching specific buyers and sellers, Curve uses liquidity pools (amounts of tokens which it holds at any given time) to facilitate instant, low-fee transactions. Uniswap is one of the liquidity pools which Curve uses, illustrating the connectedness of the DeFi ecosystem and the ubiquity of DAOs in the space.
So, apparently after 5 years of development, DAOs today are shouldering a much wider range of responsibilities. DAOs manage investments, control DApps, and invest in crypto projects and NFTs. And the concept brings itself to the non-crypto universe. For example, some have theorized about how a DAO could be used to manage a rideshare company built on self-driving cars, where decisions could be automatically enacted by the software in the cars themselves.
Even governments are taking note of DAOs and preparing for their mass adoption. In Australia, DAOs have been written into regulatory law, with a special emphasis on the transparency they provide. In the United States, Wyoming became the first state to legally recognize DAOs this summer. DAOs that incorporate in Wyoming as a limited liability company will enjoy the same legal protections and liability restrictions as any other LLC. The former mayor of Cheyenne even launched a Wyoming-based DAO in response to the law. It will be interesting to see if this new law causes a DAO “gold rush” in Wyoming and if similar laws are enacted elsewhere.
The “wrapped” version of cryptocurrencies is now well known, we now understand the necessity of wrapped assets, as the process of wrapping helps use a non-native asset on any blockchain and address the issue of incompatibility — when you want to use BTC on Ethereum’s blockchain. Even within the Ethereum network, such issue exists due to the incompatibility of different token standards, thus it becomes a problem when the demand for direct exchange between Ether and other ERC20 altcoins.
The first proposed canonical WETH contract was released in November of 2017.
Wrapped Ether was first developed and implemented by a group of Ethereum projects led by 0x labs. This coalition of projects established a canonical ERC20-compliant wrapped ether token in order to create standardization and maximize security across applications. WETH was created to allow users to convert ETH to WETH without using a centralized party and then be able to use those WETH tokens on dApps in the Ethereum ecosystem. ETH was the proto-token of the Ethereum Alt tokens, which means it was built before the ERC-20 standard existed. The reason you need wETH is to be able to trade ETH for other ERC-20 tokens on decentralized platforms. Because decentralized platforms running on Ethereum use smart contracts to facilitate trades directly between users, every user needs to have the same standardized format for every token they trade. This ensures tokens don’t get lost in translation.
Although left behind now, Initial Coin Offering (ICO) marked one of the first big use cases for Ethereum in 2017.
New projects, instead of raising money using traditional methods, started offering their own tokens in exchange for ETH. Although the idea of decentralized fundraising was not bad in theory, it resulted in multiple overhyped projects raising way too much money without anything to show besides a few pages of a whitepaper.
Obviously, Ethereum’s open-ended smart contract protocol easily enables new project launch, token issuance and distribution, as well as fundraising, all together facilitated an ICO friendly environment back then. And in return, the ICO boom also significantly helped the growth of the Ethereum ecosystem.
Luckily enough, in the plethora of ICOs, there were also a lot of projects that we’d today classify as leading DeFi projects. To name some: Aave is a famous lending protocol; Synthetix (previously known as Havven) is a liquidity protocol for derivatives; REN (previously Republic Protocol) is a protocol for providing access to inter-blockchain liquidity and is well-established in the wrapped asset vertical; Kyber Network is an on-chain liquidity protocol; 0x is one of the leading decentralized exchange protocols; and Bancor, another on-chain liquidity protocol.
ARPA is a blockchain-based solution for privacy-preserving computation, enabled by Multi-Party Computation (“MPC”). Founded in April 2018, the goal of ARPA is to separate data utility from ownership and enable data renting. ARPA’s MPC protocol creates ways for multiple entities to collaboratively analyze data and extract data synergies while keeping each party’s data input private and secure. ARPA allows secret sharing of private data, and the correctness of computation is verifiable using the information-theoretic Message Authentication Code (MAC).
Developers can build privacy-preserving dApps on blockchains compatible with ARPA. Some immediate use cases include: credit anti-fraud, secure data wallet, precision marketing, joint AI model training, key management systems, etc. For example, banks using the ARPA network can share their credit blacklist for risk management purposes without exposing their customer data or privacy.
Team members have worked at leading institutions such as Google, Amazon, Huawei, Fosun, Tsinghua University, Fidelity Investments. ARPA is currently assisting the China Academy of Information and Communications Technology in setting the national standard for secure multi-party computation. ARPA is a corporate member of MPC Alliance and IEEE and is in partnership with fortune 500 companies to implement proofs-of-concept and MPC products. In 2019, ARPA was named the Top 10 most innovative blockchain companies in China by China Enterprise News and China Software Industry Association.
For more information about ARPA or to join our team, please contact us at firstname.lastname@example.org.
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