Decentralized finance has been the biggest success story in crypto throughout 2020. The year opened with $675 million worth of assets locked in DeFi applications, which quickly surpassed $1 billion by early February. Propelled by the success of Uniswap’s V2 release and the launch of tokens, including Compound’s COMP and yEarn’s YFI, funds have poured into the space. According to DeFi Pulse, the current total value locked is around $15 billion, over 22 times than in January.
However, even a cursory glance down the list of leading applications shows that Ethereum-based applications still dominate the DeFi segment. Developers who choose to base their DeFi applications on Ethereum can take advantage of the ready-made user base and the platform’s composability – the feature that allows dApps to interact with one another, enabling functionality such as flash loans.
However, DeFi’s reliance on Ethereum is also a critical limiting factor. The platform remains slow and clunky, topping out at 15 transactions per second. During times of high congestion, which are becoming more frequent, smart contract transaction fees can top $50, significantly eating into profit potential.
A Beacon of Hope?
The launch of the Ethereum 2.0 beacon chain will be seen as a glimmer of light at the end of the tunnel by many Ethereum users. However, based on the current road map, it’s not worth getting too excited just yet. The next phase of the roadmap will introduce sharding, but in their first iteration, shards won’t be used for executing code, meaning they’ll be of no value to DeFi users.
The next phase, called the “docking,” will see the current Ethereum blockchain connected to the beacon chain and move to a proof-of-stake consensus. Even once this happens, it will only bring incremental benefits until sharding becomes a reality.
Ethereum’s core development team also doesn’t appear to be putting much hope into the 2.0 implementation to solve all of platform’s existing problems. The focus is now on a layer 2 solution called rollups. However, even the least cynically-minded person would be forgiven for pointing to other failed scalability solutions, such as Plasma, that were previously heralded as Ethereum’s savior, only to peter out into nothing.
Cross-Chain Transactions Spell a Brighter Future
So it seems that DeFi and Ethereum pose a kind of existential threat to one another. If DeFi becomes too successful and remains tethered to Ethereum, it could ultimately cripple the platform before a working upgrade is ever implemented. If DeFi continues to operate within the constraints of Ethereum, it risks seriously limiting its growth potential.
This conundrum has only one possible solution – cross-chain interoperability. If DeFi can break away from the shackles of Ethereum, it has the potential for unlimited future growth. Thankfully, there are now several genuine beacons of hope on the horizon, enabled by interoperable blockchain platforms such as Cosmos and Polkadot.
One such example is Sifchain Finance, developed using the Cosmos SDK. Sifchain is the world’s first omni-chain decentralized exchange, aiming to support all cryptocurrencies. It launched earlier this year with an Ethereum cross-chain bridge and liquidity pools already live. In a similar way to Bancor, Sifchain uses its own Rowan token as a medium of settlement, enabling users to set up pools that can swap any token for any other token. However, in a way that’s more comparable to apps like Compound and yEarn Finance, Rowan is also the governance token of the Sifchain platform.
The project aims to support 20-25 of the most popular blockchains, including Binance Chain, Polkadot, and EOS, which account for the vast majority of crypto trading volumes. As it’s developed based on the Cosmos infrastructure, it can process a substantially larger number of transactions per second, making it more efficient than other DEXs, and with lower fees. It uses a hybrid approach combining order books and liquidity pools, offering users features including conditions market and limit orders, including stop-loss and take profit.
Cross-Chain Stable Tokens
Sifchain isn’t the only project with form in interoperable DeFi. Kava launched its cross-chain DeFi platform in early 2020 and is on the path to providing stablecoins and decentralized lending against all major assets. The platform launched with two tokens – the KAVA governance token and the USDX stablecoin, the latter of which can be backed by various crypto assets. Currently, users can mint USDX using a Maker-style collateralized debt position, backed by BTC, Binance Coin, Binance USD, XRP, or KAVA.
More recently, Kava launched HARD Protocol, the world’s first cross-chain money market. HARD allows users to supply digital assets to earn interest or use them as collateral for borrowing. Borrowers and lenders can also earn the HARD token as a reward for their efforts.
Like Sifchain, Kava is also developed using the Cosmos SDK.
Cross-chain transactions are the only sustainable path to DeFi’s long-term growth. It will take some time for newer platforms like Cosmos and Polkadot to attract the same level of development that Ethereum currently boasts, with its five years of operating history behind it. However, over the coming years, interoperability will prove to make DeFi greater than the sum of its many platforms.