By Ankitt Gaur, Founder & CEO of EasyFi.Network
This past year, Decentralized Finance, or DeFi, has been hitting the headlines regularly and for all the right reasons. Amidst futile buzzwords like ‘meme coins’, ‘rug pulls’, and ‘to the moon’, DeFi has proven its utility by providing robust solutions for several bottlenecks across industries. By elevating the use of digital assets in financial services, DeFi solutions are championing transparency and financial inclusiveness.
Today, the majority of DeFi platforms and dApps (decentralized applications) run on the Ethereum blockchain. Released in 2015, they have capitalized on the first-mover advantage to dominate the DeFi world.
Ethereum’s DeFi Domination — A Number’s Game
The Ethereum blockchain is not a mere public ledger that records transactions. It is a wholesome laboratory where developers can churn out magic potions and innovate groundbreaking solutions that push the limits of what is technologically possible.
With its smart contracts and unparalleled flexibility, the Ethereum blockchain allows the development of DeFi solutions and products of unimaginable utility. According to reports, developers have built more than 3000 dApps on Ethereum. This has propelled the rise of DeFi usage amongst the general population.
Today, the total value of assets locked in DeFi has scaled to more than $80 billion. And to put into perspective the domination of the Ethereum blockchain, the network alone contributes to more than $53.3 billion of the total DeFi value. As it prepares for the Eth 2.0 release, the domination is bound to grow.
Market Leader to Bottleneck: Ethereum Limiting DeFi Growth
The exponential increase in usage of Ethereum based dApps and DeFi products has provided opposing dividends. To begin with, there exists an ecosystem of quality products providing diverse solutions to several industries. It has also bolstered the growth of Ether (ETH) which at the time of writing is trading at around $2100. This is nearly an 800% rise in price in less than 15 months depicting the astronomical growth of the network.
However, Ethereum’s popularity and growing usage have ensured increased congestion in the network. This has adversely impacted the fees and time required to conduct a transaction. With 13 of the 15 largest dApps based out of the Ethereum blockchain, the increasing gas fees and transaction time are turning into a severe bottleneck.
From being an inclusive network for developers to engage and create solutions, Ethereum seems to have somewhat become an exclusive platform for the rich to build their products upon. While Ethereum may always have its fair share of dApps, and it should, the concerns related to the network is driving developers away from it.
While Ethereum is the major reason for DeFi growth and development, the future looks bleak if the juggernaut does not move on. For further adoption, growth, and solutions, DeFi needs to move beyond Ethereum. And this is a great incentive for competing protocols to leverage the shift in user base and parallelly generate more utility.
The Growing Need for More DeFi Blockchains
The rising gas fees, waiting time, and congestion in the network have resulted in developers and users alike yearning for blockchains that can perform better than Ethereum, if not replace it. ‘Ethereum-killer’ is a phrase used by several blockchains. But, there’s no doubt that Ethereum will remain in the picture for the long term. However, to want better blockchains seems obvious given the circumstances.
In the past year, Binance Smart Chain (BNC), Polygon, Tezos are some protocols that are facilitating native DeFi growth. While they also significantly complement Ethereum and the dApps based on it, they are undoubtedly soft competitors of Etheruem due to their ability to offer higher throughput at a lower cost.
These networks provide enough incentives for developers and users to shift from the Ethereum blockchain to these competing ones. Today, there are a substantial number of projects built on BSC and the Polygon network that are thriving. Both these blockchains have committed themselves to foster innovation by incentivizing developers to build DeFi solutions.
Similarly, with different blockchains facilitating the launch and use of DeFi projects, Ethereum’s dream of being the DeFi’s network of choice may be slowly dying. Unless the most awaited Eth 2.0 update is concludes and solves the scalability concerns, a downfall is somehwat imperative for Ethereum.
To further reduce the dependency on Ethereum, the concept of interoperability is being championed by several networks. Using bridges and cross-chains, protocols like Aave and Polkadot are enabling blockchains to interact with each other. Leveraging these, users can spend their bitcoins on a DeFi gambling app built on the Ethereum blockchain.
The Path Forward for DeFi
The potential of DeFi products and solutions is unparalleled. The past year has indicated the need for DeFi with users and institutions alike adopting them, at scale. However, the next phase of growth relies on how accessible DeFi solutions are made. For the famous concept of ‘banking for the unbanked’ to be truly realized, the barriers for entry must be minimal if not zero.
Right now, the network effect and the robustness of the Ethereum blockchain slightly outweigh the scalability concerns. But with alternatives popping up, the future of DeFi innovation and adoption shall not have one particular residence. With interoperability initiatives gaining traction, the driving force for DeFi shall be the collaboration of blockchains, rather than their competition.
The massive influx of users and capital into the DeFi space is a testament to its potential. Both retail and institutional participants are finding value in this space with yet-to-mature solutions solving teething issues, at scale. So, keeping in mind the brief past, it is a no-brainer to envision the DeFi juggernaut reaching its destination of financial inclusivity and freedom for all. The only hitch is which platform shall the juggernaut thrive on.
About the author: Ankitt Gaur is the Founder & CEO of EasyFi.Network, a Layer 2 DeFi Lending protocol for digital assets powered by Polygon Network.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.