It is practically indisputable that decentralized funding is the “killer use case” of the blockchain. The total value locked in DeFi increased over 3,000% in the year ended January 2021. In the DApp Radar ranking, eight of the ten best DApps are on Ethereum DeFi. Uniswap sees more users than any other application and is expected to hit an average of $ 1 billion per day in trading in January.
Given the challenges we see in a centralized exchange, the move towards DeFi is hardly surprising. Centralized platforms offer limited lending and participation opportunities. The platforms in place depend on users’ trust in the exchange. They are also subject to region blocking and trade censorship, suffer from fragmented liquidity due to disparate product offerings, and have a limited choice of instruments.
In comparison, DeFi users now have access to a range of lending and staking options in the chain. DeFi is also censorship-resistant, with composable apps that many have dubbed “Money Lego,” and almost limitless options for different types of financial instruments.
However, DeFi’s biggest Achilles heel is Ethereum. The more apps stack up on the platform, the more Ethereum shows its wear and tear as outdated technology that urgently needs updating. Ethereum 2.0 looks promising, but the timeline is a long way off. Scalability is not expected until 2022 or later.
Connected: DeFi users shouldn’t wait idly for Eth2 to make its move
In the meantime, users have to put up with slow confirmation times and, most importantly, exorbitant fees that limit DeFi participation to large funders and whales. In January, the average transaction fee was over $ 10. When DeFi transactions are based on more complex intelligent contract interactions or users are doing multi-protocol deals, these costs can become prohibitive for many people.
Interest in multi-chain DeFi is growing
Partly driven by the problems of Ethereum, interoperability and second-layer platforms became a major focus for many platform developers in 2020, which has recently borne fruit with several notable examples.
For example, Aave’s plan to buy non-fungible tokens, Aavegotchi recently decided to migrate from Ethereum to Matic Network, citing high transaction fees as a driver. At the end of last year, Sam Bankman-Fried, founder of FTX, decided to build his DeFi project Serum on the Solana blockchain after the platform launched an interoperability bridge with the Ethereum blockchain. Elsewhere, Ethereum-based company 1inch announced that it is expanding to include the near blockchain, which also operates its own bridge connected to Ethereum.
The reason is clear. DeFi projects want to retain the ability to collaborate with Ethereum, and the platforms that bridge the Ethereum ecosystem provide that opportunity. However, this approach still has some critical limitations. Ultimately, it promotes a scenario where multiple blockchains are connected to Ethereum but not to each other. It’s not a truly interoperable blockchain ecosystem.
In addition, there will always be an inherent lack of compositional skills as the bridge model depends on two separate platforms running its own blockchain. A bridge transaction must still exist between two token transactions on both sides.
Omni-Chain is DeFi’s only sustainable future
There are currently only two competitors with a live mainnet – Cosmos and Polkadot. Polkadot is showing great promise and is being significantly developed by the DeFi community. Projects like Acala, Equilibrium and Akropolis have ambitious goals to create multifunctional DeFi platforms based on Polkadot.
However, the Polkadot approach to interoperability between the parachutes connected to the central relay chain involves a technically complex technology called inter-chain messaging between parachutes. While this offers great potential for a wide variety of transaction types, the simpler yet elegant communication protocol between blockchain used by Cosmos focuses on asset transfer between chains. This allows each Cosmos SDK chain to connect to another.
For this reason, Cosmos is the ideal platform for DeFi developers. Cosmos SDK chains are 100 times more efficient than Ethereum in terms of TPS and block space. In addition, the Cosmos network is reaching a turning point in its growth. Several notable apps are now up and running.
These applications include successful DeFi components such as the cross-chain DEX from Thorchain, the CDP from Kava, the token-fiat currency platform from E-Money or the over 100 million US dollar stablecoin from Terra. They each use their own blockchain with their own tokenomics model that supports a token with a market cap of $ 10 million to $ 100 million.
The Cosmos network also supports non-DeFi projects with their own token models, e.g. B. the mesh network of Internet routers from Althea or the blockchain product from Persistence.
From development to takeover to liquidity
As transactions between Cosmos Network tokens increase, the demand for liquidity increases. The Cosmos Network can support an exponentially larger economic volume than Ethereum while attracting a wider customer base with lower transaction fees. This makes it an optimal base for handling a large part of the cross-chain trade.
Cosmos can support DEXs for the exchange of assets, but also derivatives such as short positions, futures, leverage, perpetual swaps, tokenized interest, liquidity pools, identity management, automated market making and other core aspects of a highly developed centralized market.
After all, banks and other financial institutions are already showing signs of readiness to adopt blockchain, but they almost certainly will not use Ethereum. It is more likely that they will introduce bespoke solutions. An omni-chain platform that can interact with a wide variety of corporate networks is therefore a must in order to prepare for the time when it is necessary to trade traditional financial instruments with decentralized digital assets.
2020 was the year DeFi cemented its place as the killer use case for blockchain, but 2021 will be the year interoperability becomes the norm rather than the exception.
This article does not contain any investment recommendations or recommendations. Every step of investing and trading involves risk and readers should conduct their own research in making their decision.
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Luke KimBerkeley Blockchain Xcelerator, originally from Tokyo and Seoul, is the co-founder of two blockchain-based public finance models in collaboration with an office of the US mayor and is now shaping the future of trading with Sifchain.finance.