It is now almost indisputable that the decentralized financing of the blockchain “uses a kill case”. DeFi’s overall value increased by more than 3,000% in the year through January 2021. In the DApp Radar ranking, eight of the top 10 DApps on Ethereum are DeFi. Uniswap sees more users than any other app and had a turnover of $ 1 billion per day in January.
Given the challenges we face with centralized exchanges, the trend towards DeFi is not surprising. The central platforms provide limited options for lending and games, and the ones that do exist depend on users’ trust in the exchange. It is also subject to regional closings and trade oversight, suffers from liquidity fragmentation due to inconsistent product offerings, and has a limited set of tools.
In comparison, DeFi users now have access to a number of options for lending and storing in the chain. DeFi is also censorship-resistant, with compatible applications that many have called “money lego” and offer unlimited possibilities for different types of financial instruments.
However, DeFi’s Achilles’ biggest heel is Ethereum. The more applications accumulate on the platform, the more Ethereum begins to introduce its old technology that needs updating. Ethereum 2.0 looks promising, but the timing is very distant, and scalability is not expected until 2022 or later.
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Meanwhile, users are left to endure slow confirmation times and, most importantly, exorbitant fees that limit DeFi’s participation in major sponsors and whales. In January, the average transaction fee was over $ 10. When DeFi transactions rely on more complex smart contract interactions or user participation in multi-protocol transactions, these costs can become prohibitive for many people.
Interest in multi-chain DeFi is growing
Partly due to Ethereum’s concerns, interoperability and level 2 platforms have become an important focus area for many platform developers by 2020, which has recently started to bear fruit with many notable examples.
For example, Aavegotchi venture Aavegotchi, Aave’s non-financial token project, recently decided to move to Matic Network from Ethereum, citing rising transaction fees as a driving force. Late last year, Sam Bankman-Fried, founder of FTX Central Exchange, decided to build his own DeFi project, Serum, on the Solana blockchain after launching an interaction bridge platform with the Ethereum blockchain. Elsewhere, Ethereum-based company announced a 1-inch extension to the nearby blockchain, which also operates its own bridge to Ethereum.
The reason is clear. DeFi projects want to maintain interoperability with Ethereum, and platforms connected to the Ethereum ecosystem provide this opportunity. However, this approach still has some critical limitations. Finally, it promotes a scenario where several blockchains are linked to Ethereum, but not to each other. It is not a fully interoperable ecosystem.
Moreover, there will always be a lack of layout options because the bridge model relies on two separate platforms on which their blockchain operates. There should still be a bridge transaction between two token deals on either side.
Omnichain is DeFi’s only sustainable future
Currently there are only two contenders with a major live network – Cosmos and Polkadot. Polkadot shows great promise and attracts huge development from the DeFi community. Projects like Acala, Equilibrium, and Akropolis have ambitious goals to build feature-rich DeFi platforms powered by Polkadot.
However, Polkadot’s approach to parachute interoperability linked to its central relay chain includes a technically advanced technology called interparachain chain messaging. While this offers great potential for a wide range of transaction types, the simpler and elegant blockchain communication protocol used by Cosmos focuses on the transfer of assets between chains. This allows any Cosmos SDK series to communicate with others.
For this reason, Cosmos is the ideal platform for DeFi developers. The Cosmos SDK chains are 100 times more efficient than Ethereum in terms of transactions per second and block size. Additionally, Cosmos Network is nearing a turning point in growth, with several well-known applications currently in operation.
These apps include successful DeFi components such as Thorchain’s DEX cross-chain, Kava’s CDP, fiat e-money platform or Terra stablecoin valued at over $ 100 million.