The DeFi Wars and the Golden Age: The Birth of Decentralized Exchanges
1. Why Did the First Bitcoin Exchanges Fail?
When Bitcoin first appeared in January 2009, it sparked excitement around the world.
Could this be the first truly decentralized currency, one that worked without central banks or governments?
However, early supporters and skeptics were deeply divided.
Critics pointed out that Bitcoin’s price was too volatile and that no real-world businesses accepted it — making it more of a speculative asset than a usable currency.
About a year later, the first Bitcoin exchange, called Bitcoin Market, launched.
It worked almost like a peer-to-peer classifieds site, where users exchanged bank details and manually sent coins and money to each other.
But just like unregulated online marketplaces, fraud was rampant.
Buyers never received coins, sellers never got paid — and trust collapsed.
Within months, Bitcoin Market shut down.
This failure raised a key realization among early crypto believers:
“If Bitcoin itself is decentralized, then the exchange where it’s traded should be decentralized too.”
That’s where the idea of the DEX (Decentralized Exchange) was born.
2. Ethereum’s First DEX: Why EtherDelta Couldn’t Last
After Bitcoin exchanges failed, developers began experimenting with decentralized trading on Ethereum.
In late 2017, EtherDelta became the first on-chain decentralized exchange.
EtherDelta tried to mimic traditional platforms like Binance or Coinbase using an order book system — matching buyers and sellers by price and volume.
However, on Ethereum, this approach hit a major problem: gas fees.
Every time someone placed, modified, or canceled an order, they had to pay a network fee.
At peak times, transaction costs reached $40–$50 per trade, making market-making impossible.
Liquidity providers (market makers) soon realized they were losing money due to high gas costs.
As they left, the order book emptied, and trading ground to a halt.
Then, in 2018, the U.S. SEC accused EtherDelta of operating as an unregistered securities exchange.
The platform paid fines and shut down.
EtherDelta’s fall taught the community a key lesson:
On-chain order books were too expensive and inefficient for decentralized trading.
A new model was needed.
3. How Uniswap’s AMM Model Changed Everything
In the winter of 2018, Vitalik Buterin, the founder of Ethereum, proposed a radical new idea —
instead of an order book, why not use a liquidity pool?
Soon after, Uniswap launched this concept under a new mechanism:
the Automated Market Maker (AMM) model.
Here’s how it worked:
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Users could deposit two tokens (say ETH and DAI) into a liquidity pool.
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The smart contract automatically calculated prices using a simple formula (
x * y = k). -
Traders could swap tokens directly with the pool — no counterparties, no order book.
Liquidity providers earned fees from each swap, turning every user into a potential market maker.
This model was revolutionary.
Even new crypto projects, which previously needed permission from centralized exchanges, could now list and trade their tokens freely.
The AMM system democratized access to liquidity — and Uniswap’s success became the blueprint for nearly all DEXs that followed.
4. The “DeFi Summer”: How It All Began
After Uniswap’s breakthrough, the DeFi (Decentralized Finance) ecosystem was ready to explode.
In June 2020, the lending protocol Compound triggered a financial revolution by introducing the COMP token airdrop.
Compound allowed users to lend and borrow crypto assets.
But when users began receiving free COMP tokens simply for using the platform, excitement spread like wildfire.
It felt like earning shares in a digital bank just for making a deposit.
This event marked the start of “DeFi Summer” — the first golden age of decentralized finance.
As users realized they could earn governance tokens through participation, DeFi activity surged.
Other projects like Uniswap and SushiSwap quickly followed, launching their own airdrops and reward programs.
The “airdrop meta” had begun.
5. The Vampire Attack and the Rise of Yield Farming
In late 2020, DeFi entered its first major war.
A new project called SushiSwap launched a daring move known as the “Vampire Attack.”
Here’s what happened:
SushiSwap invited Uniswap users to stake their Uniswap LP (Liquidity Provider) tokens on SushiSwap.
In exchange, they would receive SUSHI tokens — free governance tokens with potential value.
For liquidity providers, this was an irresistible deal:
“Do the same thing as before — but now earn an extra token.”
Liquidity rapidly drained from Uniswap and flowed into SushiSwap.
By effectively “sucking” liquidity from a rival protocol, SushiSwap grew overnight — hence the name Vampire Attack.
Uniswap soon retaliated by launching its own UNI token airdrop, rewarding loyal users.
This back-and-forth created a competitive arms race for liquidity, giving birth to the era of yield farming —
the practice of moving funds across protocols to earn the highest possible token rewards.
The DeFi wars had officially begun.
6. From Competition to Explosion: DeFi’s $60 Billion Boom
As yield farming heated up, dozens of new DeFi protocols emerged on Ethereum — each with its own strategy to attract users and liquidity.
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Yearn Finance (YFI): An “aggregator” that automatically found the best yield opportunities for users.
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Balancer: Allowed customizable portfolios that automatically rebalanced and earned fees.
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Curve Finance: Focused on stablecoin liquidity, offering low-risk, consistent returns.
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1inch: Became a popular DEX aggregator, finding the best prices across multiple exchanges.
At first, users joined these protocols for convenience and innovation.
But soon, they realized that airdrop incentives and yield farming rewards could generate massive profits.
By the end of 2020, total assets locked in DeFi (TVL) skyrocketed from under $1 billion to over $60 billion (₩80 trillion).
Competition among protocols led to rapid innovation — and together, they defined what we now remember as “DeFi Summer.”
In Retrospect
The DeFi wars — from SushiSwap’s vampire attack to Uniswap’s dominance — transformed Ethereum into a living, breathing financial ecosystem.
They proved that finance could exist without banks, governed instead by code, incentives, and open participation.
The DeFi revolution didn’t just build new apps — it redefined what money and markets could be.
And while the summer heat of 2020 has cooled, its legacy still burns bright across every decentralized exchange and liquidity pool that powers Web3 today.