The fabled “DeFi Summer” was a major event within the industry that led to massive liquidity and infrastructure growth that led to the transformation of DeFi that we now know of today. Propelled to popularity by its innovative Dapps, this event allowed many investors to gain abrupt wealth and has presented the space a form of inclusive finance that’s possible with blockchain technology.
“DeFi Summer” was an event that has its place etched in crypto history books. It’s one of the catalyst events that led to bullish developments within DeFi(Decentralized Finance) and huge expansions in terms of technological infrastructure.
Occurring in the same year as the COVID-19 global pandemic, it propelled DeFi’s TVL(Total Value Locked) from millions to billions. Shocking investors who witnessed the massive growth amassed by an entire industry in just a few months.
The DeFi industry was by no means a newly built industry in 2020. However, it was the season that the industry reached new heights. Let’s take a dive into what exactly is the DeFi summer and the challenges it has faced in the crypto space.
What is DeFi Summer
DeFi Summer refers to the season of summer 2020. This period resulted in the emergence of viable alternatives to traditional centralized finance called decentralized apps that offered an array of inclusive financial services such as yield farming, lending and borrowing, and insurance.
DeFi Summer primarily stars “DeFi”, a type of financial service that uses blockchain technology, smart contracts, and Decentralized apps to offer financial services without relying on middlemen such as banks or governments. DeFi platforms such as Compound, Aave and Curve introduced its governance token that enabled users to earn rewards called “liquidity mining”.
Liquidity Mining allowed users to earn yields, participate in governance, and exchange it for fiat on Decentralized exchanges. Certain investors would even develop DeFi farming strategies by hopping between exchanges in hopes of getting the best APY.
The attractive prospect of earning passive income led to massive amounts of money flowing into the DeFi space. Early on, DeFi encountered a “chicken or egg” problem that was soon solved during the influx of capital and users in DeFi summer. The problem of liquidity was finally solved and it felt like it was going to be smooth sailing from now on.
The DeFi industry had to face many challenges as the months went on. The space experienced numerous protocol hacks and a plethora of lazy copy-paste projects that sought to emulate the success of its predecessors. Harvest Finance, was hacked for $24 million while $7 million was stolen from Origin protocol within the same year.
In a decentralized space such as crypto, a lack of governing authority to verify legitimate from non-legitimate resulted in many of these challenges. The generation of many copy-paste DeFi farms also resulted in many naive DeFi investors who were looking for the next big protocol. An attitude of DYOR(Do Your Own Research) echoed throughout various social media spaces, suggesting to newer investors in crypto to watch out before pouring money into random protocols.
A fact that stands throughout the test of time are that markets are cyclical. The hype generated during the summer definitely wouldn’t last long and would soon deflate as time went on. Certainly, DeFi summer was a definite jaw-dropping experience that led to thousands of users gaining abrupt generational wealth. The success of DeFi in 2020 challenged everyone’s preconceptions about finance and may as well have laid both the psychological and technical foundations for better and more inclusive finance for all.
Frequently Asked Questions (FAQ)
Q: What were the main features of DeFi Summer?
A: The DeFi Summer became known for the introduction of yield farming, where investors could generate income by providing liquidity to DeFi platforms. Popular DeFi platforms such as Compound, Aave and Curve Gaines a significant increase in Total Value Locked (TVL) from millions at the beginning of the summer to billions at the end.
Q: What challenges did DeFi face during DeFi Summer?
A: The DeFi industry faced many challenges during the DeFi summer. These challenges include: scalability issues, high transaction fees (i.e Ethereum) and security concerns, highlighted by several protocol hacks. Furthermore, there were hundreds if not thousands of low quality copy cat projects, flooding the DeFi market, making the DeFi space less reliable to investors.
Q: How did DeFi Summer affect traditional finance?
A: The DeFi summer had a considerable effect on traditional finance by proofing that DeFi has indeed much to offer. Although DeFi has not replaced traditional finance by any means, it challenged traditional financial institutions to rethink their strategies. Furthermore, it made many financial institutions consider adding blockchain features to their products. Lastly, the spike in DeFi attracted policy makers and regulators to the space, who now saw the need for setting new regulations for decentralized finance.