Can Alternative Blockchains Save the DeFi Market?

The go-to blockchain for decentralized finance is still Ethereum (ETH). It has the great advantage of being a first mover, so plenty of investors are already aware of ETH and its use cases. ETH tokens also played a role in the tokensale bonanza of 2017 and 2018, and are now becoming highly active again in their new role as the backbone of the DeFi market. 

The DeFi market has grown by leaps, increasing the value locked by more than 50 times in the past 12 months. This market, however, is not a single entity but a loose structure of interconnected projects, including lending, algorithmic trading, and yield farming. Projects like Maker and Compound emerged as leaders in the lending market. The Uniswap exchange is the leading hub for automated market making. Yield-farming projects are still competing for a clear leader, but the collection of tokens has grown in value to above $19 billion. 

It is precisely the scale and rapid growth of decentralized token-based projects that add to the hype of DeFi. Not only are active users growing, according to DappRadar statistics, but they are also users highly active on social media. This adds to the visibility of DeFi; its outsized yields for some. The problems also don’t remain hidden, especially when it comes to the high gas fees that come with using ETH or sending tokens. 

Ethereum Rules DeFi

As of 2021, about 90% of transfers on the Ethereum network come from only the top 10 DeFi distributed apps, showing that Ethereum is mostly solely about DeFi in 2021. The Ethereum ecosystem holds roughly 10 times more projects compared to its competitor, EOS.

It must be noted that the DappRadar report notes Ethereum is still the leader in total value locked. One of the reasons for this is the bull market in Q1, which took ETH above $2,000. The value locked is also instrumental, as it is collateral to lending projects and a source of stability for the DAI dollar-pegged asset. 

But as of Q1, there are signs showing that Ethereum has growing competitors in the DeFi space. Most notably, Binance Smart Chain has started hosting DeFi projects and growing both its active users and the value locked. As Binance Coin (BNB) grew in value, so will the value locked on Binance Smart Chain. More projects are joining this alternative blockchain, and Pancake Swap is already becoming a high-publicity trading hub.

DeFi Adoption Still Mostly Retail

Institutional interest is still slow to adopt an approach to DeFi. Trading ETH is well known, and there are already instruments such as Grayscale’s funds or the exchange-traded notes of XBT Provider, which give mainstream buyers exposure to ETH price fluctuations. But so far, there are no indications of large institutions backing collaterals or participating in DeFi projects. 

One of the reasons for this is DeFi’s reputation as a space for almost unlimited gambling. Liquidations and losses are also sources of extreme volatility, outside the range of traditional investors. But the tools being developed on Ethereum are attracting the attention of mainstream investors. The Ethereum ecosystem is converging on the rising interest in fintech, where pocket investment apps are gathering a new cohort of tech-savvy buyers looking for higher returns.

Ethereum Flaws Persist

Despite the indicators of growth, the Ethereum project still has flaws inherent since its inception. The network is designed to raise its fees with more users. What’s worse, a feature of pre-buying gas to pay fees in the future may be disabled in the summer, leaving Ethereum users open to unpredictably high fees. Vitalik Buterin has proposed to remove the SSTORE and SELFDESTRUCT options, thus closing the opportunity to pay for gas in advance and use it to make a transaction when fees are high. 

Because of how gas fees work, Ethereum is not scalable. There may be immense demand from users to dip their toes into DeFi, but it turns out the network is not so democratic, running up fees of hundreds of dollars even for trivial token swaps or transactions. 

Is ETH 2.0 Ever Coming? 

The proposed ETH 2.0 network has been promised for years, and it always seems to be 12-18 months into the future. High fees became a hurdle already in 2017, as mainstream interest in crypto made traders flock to the network. In 2021, the fees remain the elephant in the room. 

But for now, Ethereum has not managed to transform itself into a proof-of-stake network and still relies on mining. One of the reasons is that miners are putting pressure on the developer team, and may stop updates on the path to ETH 2.0. Hypothetically, miners can simply refuse to mine the new network, and there is a campaign to gather hashrate against EIP-1559, the proposal to drastically cut gas fees. The proposal, if implemented, is one of the ways to solve the gas fee problem.

The potential miner revolt is an unresolved issue in Ethereum, which may affect the DeFi market due to uncertainty. In the most catastrophic scenario, the Ethereum network splits again, with one version supported by miners. This will create immense problems of duplication and legitimacy for all DeFi projects and token-based economies. 

 One workaround is the latest proposed roadmap to ETH 2.0. In this scenario, the developer team will launch the Beacon Network, which will, for a while, coexist with the current network. Beacon Chain is live, but it has no effect on the current usage of the Ethereum network. It is mostly used to test out propositions and new technologies. Next, developers will deploy shards, or side chains, which will also carry some of the traffic. The most unclear element of Beacon Chain, however, is the Docking stage, when it will have to synchronize with the mined Ethereum 1.0 chain. The estimated date for this event is some time in 2022.

Are There Alternatives to Ethereum?

Over the past few years, multiple projects launched with the aim of becoming the “Ethereum Killer.” Some of those networks indeed boasted higher speeds and lower fees. The list of projects with a similar idea is long, with a few notable networks. 

NEO, setting out to become “the Ethereum of Asia,” is currently attempting to re-launch for better scalability. Networks like EOS encountered their own problems of scarcity but still managed to become a platform for distributed apps and a nascent DeFi industry. IOST, Stellar, and TRON also line up as widely used networks. All of those networks have dApps that resemble DeFi in some ways, though at a much smaller scale and adoption rate. 

So, What’s Next for Ethereum? 

The Ethereum DeFi ecosystem has proven exceptionally resilient. Despite liquidations, high fees, and outright scams, the network remains attractive. 

But the market has voted with its wallets, as evidenced by the rise of Binance Smart Chain. The approach to DeFi and algorithmic trading is already well known and can be implemented on any other network. Even older projects, like VeChain, Steem, Ontology, and IOTA, are pivoting to build a DeFi component. So while Ethereum is in the lead right now, its competition is thriving. Projects like Binance Smart Chain, purposely built to host DeFi and fast dApps, are even ahead of Ethereum, as they avoided the mining stage and started off with various forms of proof-of-stake. The only element remaining is DeFi investors realizing the same returns can be achieved on alternative networks, so they can abandon Ethereum-based DeFi for newer projects.

Here are some thoughts of the market players who are building alternative solutions:

Matthew Niemerg, Ph.D. - President of the Aleph Zero Foundation and CEO of Cardinal Cryptography 

"Recently, DeFi has seen a shift of users moving away from Ethereum to Binance Smart Chain as a respite from gas fees. Other platforms such as Secret, Avalanche, or Tomochain offer other additional alternatives for DeFi users seeking yields via liquidity mining.

As the distributed ledger space continues to move toward a multi-chain world with the adoption of various interoperability standards like Interblockchain Communication (IBC) spearheaded by the Cosmos ecosystem, when parachain slot auctions become live on Polkadot, and when bridges to other blockchains like Near, Solana, CasperLabs, are built, DeFi users will be able to move assets between different blockchains and choose the ones that satisfy their own preferences—whether this be low fees, fast confirmation times, high yields, a better user experience, or any combination thereof.

DAG-based consensus protocols that use Proof-of-Stake are no different than other hybrid PoS + Byzantine Agreement solutions. The end goal is the same -- reaching agreement on valid transactions and putting them in a linear, or total, order and then having each server apply the state transitions locally -- all while doing so in a secure way.

In this sense, Aleph Zero plays the role of other layer 1 platforms, albeit with a consensus protocol that has been formally proven to be fully leaderless and achieve both optimal communication and latency in a fully asynchronous setting. In other words, no bottleneck exists by having a leader choose the order of transactions which in turn increases efficiency and enables the protocol to be able to handle high transaction throughput without drastically increasing the confirmation time.

Many of the existing protocols use well-understood 20-year-old algorithms that are widely deployed by industry.  Our solution, while newer and not as visible or understood by the industry, is incredibly more efficient and can be adapted for both decentralized or permissioned architectures.

We have been working on the second (and improved!) iteration of the protocol for quite some time. The implementation is written in Rust and will use the Substrate framework for all of the account and smart contract layer logic. Our testnet is coming soon and be on the lookout for news on this!  In the end, we will develop a dedicated high throughput sovereign chain with a parachain bridge to the Polkadot relay chain for developers to deploy dApps with private smart contracts using our MPC technology.” 

Tom Tirman, CEO & Co-Founder, PARSIQ - a blockchain-based data-analytics platform, pioneering the concept of Blockchain-as-a-Service (BaaS) in both the DeFi and mainstream application space

“The sophistication and complexity of today's DeFi applications result in enormous gas fees and scalability issues when executed on the Ethereum blockchain. DeFi projects are looking at alternative chains, or even layer 2 solutions, for the more effective deployment of their protocols. 

The solution might be not full migration, but creating bridges between Ethereum and their various alternative networks like Binance Smart Chain, Solana, Cosmos, Polkadot for these DeFi protocols.

Indeed, PARSIQ has taken several steps in the recent past to integrate with alternatives to the Ethereum network. The current platform recently integrated with the Solana ecosystem, which boasts an average transaction fee of just $0.00001 per transaction. 

Moreover, we also integrated its network with Binance Smart Chain (BSC) - a popular DeFi-targeting blockchain ecosystem hosted by cryptocurrency exchange Binance that was up to 49x cheaper for layer 2 applications than Ethereum. 

Both integrations will allow their users to build blockchain to off-chain applications in their respective ecosystems at a fraction of the cost compared to Ethereum and in PARSIQ’s easy-to-use scripting language. This only strengthens PARSIQ’s accessibility for mainstream developers who will be the next big players in the DeFi market and are the principal customers for PARSIQ’s Blockchain-as-a-Service (BaaS) effort. 

The future of DeFi is a multi-chain reality, that allows seamless interoperability between these decentralized networks in addition to minimizing costs. But this future also involves taking a new approach to BaaS offerings, including moving away from collateral-based utility models to a more business-intuitive subscription model. 

On this front, PARSIQ’s IQ protocol introduces Power Tokens - its iteration of the concept of tokenized subscription to utility. Rather than the traditional stake-to-use model employed by most DeFi platforms (which requires an up-front investment in usually volatile tokens), Power Tokens generate utility over time, effectively giving holders a subscription to IQ’s features. 

This mirrors the model already used in mainstream development, allowing seamless integration into existing business models. Combining a reduction of the cost of development with easy integration to existing business models is the key to blockchain’s widespread adoption in the mainstream world as well as the future of DeFi space.” 

Chris Wang - CEO and Co-founder of ThunderCore - a leading public blockchain with its own native currency

The ThunderCore public blockchain is built on fundamental research and designed by the best consensus algorithm researchers. Previously, ThunderCore’s consensus algorithm was called Thunderella and it used to give us ~1200TPS, which was in itself very impressive. However, the team just kept innovating and we soon designed a new and better consensus algorithm called PaLa. We realized the potential of PaLa, which now gives us 4000+ TPS.We believe that PaLa is the most simple, elegant, and optimal Byzantine Fault Tolerant consensus algorithm for Blockchains.

DeFi services and DApps deployed on Ethereum will soon become unsustainable due to the chain’s high gas fees and slow confirmation time. A better solution is needed. Hence, we provide a one-stop solution to developers to migrate and develop their DApps on the ThunderCore blockchain; which is not only fast but also much cheaper than the gas fees on Ethereum. Cheaper gas fees allow developers to maximize their profits. Since DApps deployed on the ThunderCore network require Thunder Token (TT), our native token, as gas fees, developers and users will need to hold them to pay for gas fees themselves. As TT’s applicability increases, its demand and value will also increase. Similarly, part of the demand for TT also derives from the fact that you can earn a yield on your TT through a variety of ways such as TT Mining, SuperNode staking, and credit market services (borrowing and lending) we’re currently working on that will be released soon.

ETH is a big driving force for miners, but for users, it's a big pain point. As a user-centric company, ThunderCore decreases the cost for users dramatically. We believe that when users experience cheaper gas fees through our DeFi services, more transactions will follow as users will benefit greatly from the practicality of lower fees. With an accumulation of multiple transactions, developers will also benefit as more users join our ecosystem and enjoy our services, ultimately driving up the demand for TT.

Analogously, stakers of the ThunderCore network also get rewarded for maintaining the security of the system. The ultimate design goal is for the ThunderCore network to have many stakers securing the network just like how miners are mining on Ethereum 1.0.

ThunderCore is an EVM-compatible, high-performance public blockchain. Developers can move their DApps to our chain with ease and enjoy 4,000+ TPS, sub-second confirmations, and low gas fees. Performance-wise, our technology and our edge are undeniable. As for liquidity concerns, ThunderCore’s DEX TTSwap recently reached more than $4,800,000 in liquidity ($3M increase in just 20 days) and $2,200,000 in daily transaction volume after launching cross-chain services with Binance Smart Chain. This stark increase is projected to continue as we set to roll out more products and services in the upcoming months.

On top of that, ThunderCore Bridge, our cross-chain mechanism, allows users to transfer their digital assets between ThunderCore, Ethereum, and BSC with really low fees. Paired with multiple third-party DApps such as Egg DEX and TT Roll, developers will not only be able to avoid liquidity problems but also have multiple ways to increase their income.

We are excited for what’s yet to come and we’re confident that developers will benefit tremendously by migrating their DApps onto ThunderCore.