Are Multi-chain DeFi Protocols The Way Forward?

Decentralized finance (DeFi) paved the way for building secure, transparent, and ultra-inclusive financial services platforms.

However, with so much going on within the space in terms of adoption, innovation, and overall growth, the timing is right to begin the conversation of why DeFi protocols must be enabled for cross-chain communications.

The design consideration is of critical importance if it is to be ensured that DeFi's revolution of the financial sector will not miss out on solving one of the key structural deficiencies of the legacy institutions it seeks to replace, which is the danger of an isolated system.

Yet, one of the less prioritized areas of concern in the DeFi space presently is the need to integrate chain-to-chain interaction capabilities among DeFi networks.

Where Has Legacy Finance Failed?

Of the many embargoes that have trailed the history of modern-day financial services providers, their inevitable tendency to rely on siloed systems stands out the most.

Digitization has indeed had a significant impact on how financial transactions are processed. And today, all that is required to carry out money exchange is the movement of electronic data from one location to another.

However, within the framework provided by financial institutions and regulators, the power of digitization in simplifying legacy methods is minimal.

For example, the settlement process for a typical cross-border transaction will require the direct inputs of 6 or more parties.

That is, the sending and receiving banks, the apex financial bodies of both locations, and the main entities involved in the transaction. The resulting to-and-fro verifications mean that it is impossible to finalize the exchange in real-time.

Even the emergence of borderless solutions like PayPal, Western Union, MoneyGram, etc., have done little to circumvent the problem.

Why Present DeFi chains are not yet an ideal replacement for traditional finance!

From the foregoing, the only way out is to have an open, distributed, and digitally connected network that can securely facilitate swift data transfers without the need for a human interface.

That is where DeFi steps in.

Today, yield farming, staking, NFT minting, borrowing, and leveraged lending are just some of a host of financial products and services built on top of DeFi.

They were designed as blockchain alternatives to treasury bills, bonds, interest-paying savings accounts, etc.

More activities and innovation are expected in the space as it is widely believed that the full potential of DeFi technology is yet to be achieved. That is, even though the present total value locked in DeFi protocols is above the $70bn mark, around 250x the value recorded in February 2019.

However, there are flashing signals indicating that DeFi chains in their current configurations cannot accommodate the projected future levels of growth.

Empirical confirmation of that fear might appear sooner than anticipated as many businesses ramp up plans to add cryptocurrencies to their assets portfolio.

Moreover, a good number of them will certainly want to plug those assets into liquidity pools to earn reasonable shares of the rewards.

DeFi story on the Ethereum network and the heartbreaking experiences.

Bitcoin and Ethereum are the two leading blockchain-powered digital assets.

Recently, however, Ethereum has received more praise as it offers a simple solution for

programming smart contracts, the core component that powers DeFi platforms.

Nevertheless, as more and more DeFi projects developers turn to Ethereum compatibility and resourcefulness in helping them build their systems, Ethereum's design flaws are also beginning to become more conspicuous.

The problem of Gas fees.

Of course, one of the significant shortcomings is the all-too-familiar issue of high transaction fees. It would be recalled that as of February this year, Ethereum gas fees skyrocketed to about $1000, with the average cost of a transaction sitting around $18.

On decentralized exchanges like Uniswap and Sushiswap, the figure hovered around the $40-$80 range.

Thus, left with no choice, many retail investors began to switch to layer-one blockchains like

Avalanche, Polkadot, and the exchanged-owned BSC network in particular.

The second issue of poor transaction speeds.

Next comes the issue of slow transaction speed, which can inflict extraordinary congestion on the Ethereum network in extreme cases.

That, however, didn't stop some DeFi projects from sticking with Ethereum as they were already firmly established. Others were just content to wait for the proposed Eth 2.0 and EIP-1559 upgrades.

Nonetheless, the situation worsens. That eventually broke the camel's back, triggering a mass migration of DeFi projects to more efficient options like BSC. Solana also gained some admiration as a super-fast blockchain.

The DeFi ecosystem also saw the emergence of the Ethereum layer-two solution, Matic, which resembles a fork of the Ethereum network in that it is compatible with the same.

Ethereum's slow retaliation in the face of defeats.

Building a complex digital infrastructure such as Ethereum is, is a difficult enterprise for any tech team. But, it doesn't matter their level of experience.

Therefore, while the highlighted issues became the topics of discussion among the crypto community, custodians of the Ethereum Virtual Machine (EVM) commenced a long-term plan to alleviate the situation.

The problem, however, was that the prolonged timeline required. Even the upcoming upgrade expected on the 4th of this month (August) is designed to specifically address the energy wasted problem of running EVM (from PoW to PoS).

The outcome now is that the delay has allowed ample time for a myriad of desperate intervention blockchain projects, all seeking to capitalize on Ethereum deficiencies as competitive advantages.

Side-chains or alternative chains are not any better.

Polkadot, BSC, Avalanche, Solana, and Matic (to name a few) have all risen at the back of Ethereum's failure. However, each of these has its peculiar drawbacks.

Shortly after it was launched, the BSC network has attracted countless scam projects who discovered that it is a fitting place to stage rug pulls.

Experts have also observed a lot of wash trading on the BSC-powered DEXs like Pancakeswap and Baby swap.

Aside from BSC, other blockchains like Solana require the use of a whole different programming language like Rholang, thus presenting a problem to the average blockchain developer.

Similar faults can also be drawn for all other blockchain networks.

Cross-chain DeFi protocols are the future.

However, such platforms usually offer a higher level of security, execution speed, and a gateway to discover other laudable initiatives within the space.

In addition, introducing a different suite of programming languages to the blockchain ecosystem will make way for continuous experimentations leading to more discoveries and potential use-cases.

On the other hand, the BSC blockchain, riding on the waves of Binance as the largest crypto exchange brand, has succeeded in attracting a great pool of users.

Also, a sizable number of projects prefer the network over Ethereum as it is more scalable, customer-friendly, and fast.

That's to say, while each blockchain has its downsides, they all have their unique strengths.

Thus, no single blockchain can be purported to have it all from scalability, adaptability, usability, functionality, security, and speed.

However, a future of monolithic blockchain infrastructures goes against the original goal of building a financial system that is open, transparent, and widely distributed.

Thus for the progress and adoption of DeFi products and services, cross-chain functionality must be enabled across space.

Conclusion

Cross-chain is mainly due to Ethereum's failure to cater adequately to the needs of DeFi platforms at the first time of asking.

However, in the near and distant future, cross-chain solutions will make it possible to harness the power of DeFi protocols as the structural foundations for creating a robust and effective financial system.