It is now practically undisputed that DeFi is the “most conspicuous use case” of the blockchain. The total value locked in DeFi increased more than 3,000% in the year prior to January 2021. In the DApp Radar ranking, eight of the ten best DApps are on Ethereum DeFi. Uniswap sees more users than any other app and has an average trading volume of $ 1 billion per day in January.
Given the challenges we see with a centralized exchange, the move towards DeFi is not surprising. Centralized platforms offer few borrowing and staking options, and those that exist depend on users trusting the exchange. They are also subject to regional lockdown and censorship of operations, 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 credit and staking options in the chain. DeFi is also resistant to censorship, with composable apps that many have dubbed the “Lego of Money,” and with near-limitless possibilities 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 The more apps stack up on the platform, the more Ethereum is gradually showing its wear and tear as an outdated technology that urgently needs updating. Ethereum 2.0 looks promising, but the roadmap looks a long way off as scalability is not expected until 2022 or later.
Related: DeFi users shouldn’t be ready for Eth2 to bear fruit
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 commission per transaction was over $ 10. When DeFi transactions are based on more complex intelligent contract interactions or users participate in multi-protocol operations, these costs can be prohibitive for many people.
Interest in multi-chain DeFi is growing
Partly driven by Ethereum problems, Interoperability and second layer platforms became a major focus for many platform developers in 2020, which has recently paid off 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 the reason. At the end of last year, Sam Bankman-Fried, founder of the central switching office FTX, decided to build his DeFi project Serum on the Solana blockchain after the platform for an interoperability bridge with the Ethereum blockchain had been launched. On the other hand, based on Ethereum, 1inch announced its expansion to the near blockchain, which also operates its own bridge connected to Ethereum.
The reason to be is clear. DeFi projects want to maintain the ability to work with Ethereum, and 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 a lack of compatibility as the bridge model is based on two separate platforms that run their own blockchain. There still has to be a bridge transaction between two token transactions on each side.
Omni-Chain is DeFi’s only sustainable future
Currently there are only two participants with a mainet running: Cosmos and Polkadot. Polkadot is very promising and is being developed significantly by the DeFi community. Projects like Acala, Equilibrium and Akropolis have ambitious goals to create multifunctional DeFi platforms based on Polkadot.
However, Polkadot’s approach to interoperability between parachutes attached to the central relay chain involves a technically complex technology called inter-parachain messaging. 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 cross-chain asset transfers. Allows each chain in the Cosmos SDK 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 tipping point in its growth with several notable applications already 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 more than 100 million US dollar stable coin from Terra. Each of them use their own blockchain with their own tokenome model that supports a token with a market capitalization between $ 10 million and $ 100 million.
The Cosmos Network also supports non-DeFi projects with their own token models such as the Internet Router Mesh Network from Althea or the Enterprise Blockchain product from Persistence.
From development to takeover and liquidity
As transactions between Cosmos Network tokens increase, the need 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 processing much of the in-chain and between-chain trades.
Cosmos can support DEXs for trading assets, but also derivatives such as short positions, futures, leverage, perpetual swaps, token interests, liquidity pools, identity management, automated market creation, and other core aspects of a sophisticated 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. You will most likely adopt custom solutions. Therefore, an omnichannel platform that can be connected to a wide variety of corporate networks is essential to prepare for the moment when traditional financial instruments trading with decentralized digital assets is in demand.
2020 was the year DeFi established itself as the main use case for blockchain, but 2021 will be the year interoperability becomes the norm rather than the exception.
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