Introduction
When the dust of the ICO bubble settled, the crypto world did not fall silent. On the contrary, upon the ruins of the 2018 bear market, a group of developers began a new, more substantive wave of construction. They were no longer satisfied with creating new "tokens," but were committed to using smart contracts to rebuild an open, transparent, permissionless financial infrastructure on blockchain. This movement was called "DeFi" (Decentralized Finance). Simultaneously, another revolution about "ownership" was quietly brewing, as artists, creators, and collectors began using a unique type of token called "NFT" to mark and trade unique items in the digital world. These two forces together pushed blockchain applications to unprecedented depth and breadth.
7.1 DeFi: Rebuilding Wall Street on Blockchain
DeFi's core idea is to implement all services from the traditional financial world—lending, trading, insurance, derivatives, etc.—using open-source smart contracts and run them on open blockchains (primarily Ethereum). This means anyone, anywhere, can participate in a global financial market without permission and without trusting any intermediaries.
Core DeFi Applications (Lego Blocks) DeFi applications are like freely combinable "Lego blocks," where developers can combine different protocols to create entirely new financial products.
- Decentralized Exchanges (DEX): Represented by Uniswap. It completely overturned the traditional order book exchange model, adopting an algorithm called "Automated Market Maker" (AMM). Users no longer trade with counterparties, but with a "liquidity pool" managed by smart contracts. Anyone can deposit their tokens into the liquidity pool, become a liquidity provider, and earn trading fees.
- Lending Protocols: Represented by Aave and Compound. Users can deposit their crypto assets into protocols to earn interest income, or over-collateralize their assets to borrow other crypto assets from the protocol. All lending behavior is automatically executed by smart contracts, with interest rates dynamically determined by market supply and demand.
- Stablecoins: Represented by DAI issued by MakerDAO. Stablecoins are the "holy grail" of the DeFi world, aiming to create crypto assets whose value is 1:1 pegged to fiat currencies like the US dollar, solving the problem of excessive price volatility in other cryptocurrencies. MakerDAO allows users to "mint" DAI stablecoin pegged to the dollar by over-collateralizing mainstream assets like Ethereum.
7.2 "DeFi Summer" and Liquidity Mining
The summer of 2020 was called "DeFi Summer." The catalyst was an innovative mechanism called "Liquidity Mining" launched by the lending protocol Compound.
Event Review: DeFi Summer
Compound decided that in addition to paying interest, it would also "reward" users who deposited and borrowed on the platform with newly issued governance token COMP. This token represented voting rights in the future development of the Compound protocol. Once this model was launched, it immediately ignited the market. Users frantically deposited assets into Compound to get COMP token rewards. COMP token prices also soared, creating enormous wealth effects.
For a time, almost all DeFi protocols began imitating this model, launching their own "liquidity mining" programs. Users became diligent "digital farmers," moving their funds between different protocols to pursue the highest returns, a behavior vividly called "Yield Farming."
"DeFi Summer" caused DeFi's Total Value Locked (TVL, the core metric measuring DeFi ecosystem size) to skyrocket from less than $1 billion to over $15 billion in just a few months. DeFi was no longer an experiment by a few geeks; it demonstrated for the first time its enormous potential as a new type of capital market.
7.3 NFT: When Art Meets Blockchain
While DeFi was developing vigorously, another Ethereum-based technology—Non-Fungible Tokens (NFTs)—also began entering public view.
Unlike "fungible tokens" like Bitcoin or Ethereum (where each coin is identical), each NFT is unique and indivisible. It's like a unique, untamperable digital ownership certificate carved on the blockchain. This characteristic makes it naturally suitable for representing unique items in the digital world, such as artworks, collectibles, and game items.
Milestones in NFT Development History
- CryptoKitties: In late 2017, a blockchain game called "CryptoKitties" ignited the market. This was a game for collecting and breeding virtual cats, where each cat was a unique NFT. The game once caused severe Ethereum network congestion due to excessive trading volume, marking NFT's first large-scale demonstration of its potential to break into mainstream consciousness.
- Beeple's "Everydays": In March 2021, digital artist Beeple's NFT of his work "Everydays: The First 5000 Days" sold for an astounding $69.3 million at Christie's auction house. This event marked NFT's official entry onto the mainstream art world stage, triggering global attention and discussion.
The rise of NFTs provided digital content creators with a completely new monetization method. For the first time, they could sell ownership of their digital works just like traditional artists selling physical paintings, and through smart contracts, automatically receive a certain percentage of royalties from each subsequent resale of their work. This is considered a profound revolution in the "Creator Economy."
7.4 Institutional Entry and Regulatory Re-examination
The explosion of DeFi and NFTs also attracted the attention of traditional financial institutions and large enterprises. Listed companies like Tesla and MicroStrategy began using Bitcoin as reserve assets; Wall Street giants like JPMorgan and Goldman Sachs began establishing dedicated cryptocurrency research and trading departments. The entry of institutional investors brought unprecedented capital and compliance demands to the market.
At the same time, DeFi's rapid development again drew regulatory attention. Regulators acknowledged its potential for improving financial efficiency while expressing concerns about possible financial risks, money laundering issues, and investor protection problems it might bring. How to bring these "decentralized" protocols operating outside traditional regulatory frameworks into effective regulatory scope became a new challenge for governments worldwide. Additionally, central banks accelerated research and development of Central Bank Digital Currencies (CBDCs), hoping to provide a state-credit-backed alternative in future digital currency competition.
Summary
From 2019 to 2021 was a critical period for blockchain technology to move from theory to application and generate real economic value. DeFi built a substantial open financial system on blockchain, demonstrating its enormous potential to disrupt traditional finance. NFTs solved the problem of ownership confirmation and circulation in the digital world, opening new imagination space for digital content and the creator economy. These two major waves not only drove another bull market in cryptocurrencies, but more importantly, they made blockchain technology's value propositions unprecedentedly clear and concrete. A grander and more mainstream Web3 narrative was about to unfold.