The summer of 2020 was unlike anything crypto had seen before. From June through September, Ethereum-based DeFi protocols experienced explosive growth. Total value locked in DeFi went from $1 billion in June to over $10 billion by September — a 10x increase in three months. New protocols launched almost daily. Yield farmers earned annualized returns of 100%, 1000%, even 10,000% on some protocols. It was chaotic, exciting, and completely unprecedented.
The yield farming craze was sparked by Compound’s launch of its COMP governance token in June 2020. Compound distributed COMP tokens to users who supplied or borrowed assets on the protocol. Users quickly realized they could “farm” COMP tokens by doing the biggest loans and deposits possible. Sophisticated traders built elaborate loops: deposit DAI, borrow USDC, swap to DAI, deposit again — cycling through multiple times to maximize COMP rewards.
Other protocols launched similar token distribution programs. Balancer distributed BAL tokens. Curve distributed CRV tokens. Yearn.finance distributed YFI. Aave distributed AAVE. Each new token launch caused a surge of activity as farmers rushed to maximize their rewards. Total value locked in DeFi protocols exploded to serve this farming activity.
The atmosphere was reminiscent of the 2017 ICO boom, but different in one crucial way: the underlying products actually worked. DeFi protocols were real financial infrastructure being used by real users. Uniswap was processing billions in trades. Compound and Aave were facilitating billions in loans. The yields were high because the protocols were distributing their tokens generously, not because they were Ponzi schemes. Yield farming was, in essence, a clever bootstrapping mechanism for growing DeFi protocols.
Of course, the excesses of DeFi Summer eventually led to problems. Poor code led to exploits and rug pulls. Yield farmers chased returns into increasingly risky protocols. Gas fees on Ethereum skyrocketed due to congestion, making smaller transactions uneconomical. By early 2021, the peak yield farming frenzy had passed. But the foundations laid during DeFi Summer were real. By 2024, DeFi would have hundreds of billions of dollars in TVL, with mature protocols serving millions of users. The summer of 2020 was when DeFi went from an interesting experiment to a legitimate alternative financial system.
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