Decentralized finance, or DeFi, is one of the most transparent forms of modern finance with immediate oversight of the total value locked. Whether collateralized lending or automated trading pairs, the number of assets in each DeFi protocol can be traced, verified, and evaluated for trends.
The total value locked in Ethereum-derived DeFi protocols is now close to $60B, with up to 90% of DeFi still hinging on the Ethereum network, according to estimations of the largest projects and the value locked within them.
DeFi projects have a total market cap of $125B. Of those projects, the most popular ones such as Uniswap, Maker, Wrapped Bitcoin, Aave, and Compound still lock in a significant portion of collaterals. But among the top 10 projects, there are alternative networks already taking a significant chunk out of the DeFi market.
Pancake Swap is quickly gaining new token pairs and has become one of the fastest-growing projects on the Binance Smart Chain. Recently, price appreciation led the CAKE token to line up among the top 5 DeFi projects by market capitalization.
But Binance Smart Chain is not the only alternative to Ethereum that has appeared in the past few months. Newer chains like Terra (LUNA) and THORChain (RUNE), and Solana (SOL) are starting with the idea of a whole new ecosystem for staking and decentralized finance. These blockchains still have to gain new users, and so far the bulk of users are counted toward Ethereum-based protocols, but lucrative incentives are quickly raising the number of new wallets for alternative DeFi networks.
User analysis shows Ethereum-based DeFi is still not at its peak, as protocols keep adding new traders or lenders every day. But with time, the pace of expansion may stall. DeFi is still highly dynamic, with new protocols constantly adding both new users and new features.
Even without Binance Smart Chain and other new networks, older crypto projects are trying to gain market share from Ethereum. Projects like IOST, NEM, EOS, and TRON have offered various DeFi elements, but for now they remain less popular in terms of launching top decentralized exchanges or distributed apps.
The newly launched networks, especially created with DeFi in mind, will have to prove their relevance and longevity. One of the challenges they face is the ETH 2.0 network, which will add faster transactions and lower gas fees for trading.
Currently, automated swaps are not cheap on Ethereum and it may discourage some users from DeFi trading. High gas fees on the Ethereum blockchain also triggered the trend of Binance Smart Chain tokens and pairs, seeking the same high turnover with lower fees.
But there is another fundamental difference in terms of project success. ETH and BTC have been used as collateral for multiple DeFi projects. These large-cap coins have a vast network of exchanges, and their liquidity extends to the mainstream financial sector, with new fiat inflows from corporations and retail buyers.
New crypto projects, however, are just beginning to build up their value and their liquidity. The native tokens used as collateral are still in the price discovery stage, and the communities supporting the coins are fairly niche.
There are multiple examples of new projects fueling social media hype, only to lose most of their liquidity within hours in events known as “rug pulls”. With the growth of the alternative ecosystem, however, these events become rarer. New token-based DeFi pairs are creating mechanisms to lock in liquidity and prevent rug pulls.
I’ve asked some project leaders about their views of the DeFi world, and here’s what they had to say:
“DeFi is for those without lots of capital to deploy is expensive on Ethereum. Alternative platforms, like Binance Smart Chain, Solana, Cosmos, Polkadot, etc., offer a more cost-efficient option.
Part of the DeFi story is retaining control over your assets—which includes deciding if you want to move assets on Ethereum to more capital-efficient platforms.
We will see competition and liquidity move from chain to chain as bridges are built, but user acquisition will be aimed at those seeking safer, more secure, lower-yield projects.
These other platforms have native coins that are walled off from most DeFi products. I predict we will start seeing protocols design their codebase and product with the multichain world that is coming in mind.”
Chris Wang - CEO and Co-Founder of ThunderCore - A leading public blockchain with its own native currency
“ThunderCore is very different from Ethereum. The current Ethereum blockchain still uses the Proof of Work (PoW) consensus mechanism while ThunderCore’s Proof of Stake (POS) has been live for more than two years! Since it is ThunderCore’s mission to bring blockchain to the masses, we provide a one-of-a-kind blockchain, which not only provides lower gas fees than Ethereum but also better throughput and performance that supports 4,000+ TPS. We know that Ethereum is gradually shifting towards PoS, but there’s still work to be done. On the contrary, ThunderCore’s PoS consensus has been running and battle-tested for well over two years now so we are very confident that we have an edge. With the development of blockchain technology, PoS becomes more popular to address energy consumption issues and scalability issues. In addition, PoS blockchains allow token holders to stake their tokens so that they can run validators and earn staking rewards in return.
What’s great is that ThunderCore is EVM compatible, meaning that developers can move their dApps from Ethereum onto ThunderCore with ease. Even though Ethereum has market dominance now, we believe that by allowing developers and users to shift onto ThunderCore so they can enjoy low gas fees and little to no network congestion is something they can’t ignore.
On top of that, ThunderCore also has cross-chain services with Binance Smart Chain (BSC) through ThunderCore Bridge, making ThunderCore interoperable between two of the most prominent chains within the industry. This means your assets on BSC and Ethereum can be bridged onto ThunderCore and swapped with other assets through our DEX TTSwap without being victimized by high gas fees. This is just one example; the possibilities are endless. Recently, BSC has gained a lot of traction and as a result, BNB’s price hit a new all-time high. This means BSC will gradually be more expensive and congested, therefore, highlighting ThunderCore’s low gas fees and fast confirmation times once again!”
Maximilian Rang - Head of Token Strategy at Threefold - The world’s largest peer-to-peer Internet, formed by people who want to make a difference, by people who care, by people just like you.
“There's a huge and under-discussed issue with DeFi – an elephant in the room, if you will. While the core functionalities for DeFi reside on blockchains, what about the front end, websites, apps, and databases? Deploying these more centralized parts on ThreeFold capacity would make any DeFi project not only more resilient but also immune to censorship from cloud providers, like in the case of Parler.
Considering that a large percentage (70% [https://decrypt.co/44321/70-of-ethereum-nodes-are-hosted-on-centralized-services]) of Ethereum nodes – and blockchain nodes in general – are running on top of centralized cloud services, the current risks of DeFi seem to be overlooked. While the whole DeFi ecosystem is taking off in parabolic growth, the demand for proper security and reliability of the infrastructure increases.
The ThreeFold Grid provides decentralized internet capacity with Blockchain-like reliability and security. Data is spread across many storage locations and secured by efficient algorithms. Through ThreeFolds “Smart Contract for IT”, all workloads running and all data stored on the grid are monitored and secured by a blockchain.
The ThreeFold Token (TFT) is the currency of the peer-to-peer Internet, used to reserve storage and compute capacity on the ThreeFold Grid. Existing partner communities of ThreeFold like CasperLabs, DigiByte, Polygon, and Presearch can already run their nodes on the ThreeFold Grid, with many more partners and applications to come this year.”
Alternative blockchains, however, are one of the answers to the uncertain future of Ethereum’s network. For one, this blockchain still relies on miners who have an effect on overall market prices. Projects like Maker and Compound allow miners to deposit their block rewards and receive passive income instead of selling during a bull market.
It is also possible that some form of mining and gas fees will always remain on the Ethereum network, thus making DeFi usage more expensive. Making a complete hard fork, where miners refuse to accept the new network rules, would wreak havoc on the entire DeFi space, potentially breaking down the value locked due to loss of trust.
Additionally, there is the question of the total cap of the ETH supply. Despite a lower block reward, there is still no end to the creation of new ETH tokens. Alternative blockchains, on the other hand, have a more detailed roadmap about the planned scarcity of their native assets.
Some projects have looked ahead into the future. Binance Smart Chain, for instance, is created with the potential to communicate with the Ethereum Virtual Machine. Binance Bridge is the tool to perform cross-chain operations, communicating with multiple smart contracts. This technology may be one of the ramps to move DeFi value from Ethereum and into alternative blockchains. Even with ETH 2.0, the cross-chain capability will be key to establishing new DeFi platforms and attract more liquidity and quality projects.
As the DeFi ecosystem grows, it is possible more projects will offer some forms of cross-compatible moves. Currently, it is possible to wrap BTC or ETH on multiple platforms, and this is perhaps one tool for liquidity and compatibility. The appeal of DeFi remains in the possibility to gain passive income instead of selling the coins outright.
The popularity of DeFi has led to the creation of platforms that are built from scratch to solve some of the most pressing issues in decentralized lending, trading, and other financial operations. The central platform quickly gathers its own flock of token issuers.
Even relatively new blockchains, like Solana (SOL), already host 126 various decentralized projects. Despite criticism that some new networks are just the new batch of projects is quick to host new startups.
Here is the opinion of one service company owner:
Anton Dziatkovskii, Co-Founder of Platinum - A dApp and crosschain solution developer for Polkadot, Kusama, Ethereum, etc.
“It's hard for a single project to overturn the whole market and remove Ethereum’s dominance. But we, as a crypto sphere, are slowly moving to a gradual distribution of funds across multiple networks. Binance Smart Chain is eating into Ethereum’s market share. In Q1 2021 alone, the TVL in BSC has grown by more than 100% month-to-month and the number of unique active wallets has sky-rocketed. Then there's the example of Aavegotchi, which launched on Polygon and sold out of all its NFTs in under one minute.
Our recommendation is to focus on the technology and unique features that a project can offer and users will come over to Ethereum, BSC, Polygon, HECO, or any other blockchain. If you browse through the top 10 projects on Q DeFi Rating, you'll see that three of them operate only on BSC and two of them are multi-chain. Find the pain points of crypto users and solve them; it could be high gas fees, lack of interoperability, scalability, high risks of impermanent loss, etc.
In this paradigm, the service provider and the blockchain development company's advice is to concentrate on solving the user's problems rather than hype up new tech implementations.”
The growing adoption of alternative DeFi blockchains has also led the Launchzone project to aggregate access to Binance Smart Chain with a dedicated liquidity pool, as well as governance and project curation. Launchzone even performs its own curated token offers, or IDOs, offering either a centralized exchange approach or the creation of a liquidity pool.
The Ethereum network currently has access to 391,865 token contracts, still far ahead of the tokens using alternative blockchains. However, some of these tokens are older and not active, as there are only a few thousand usable ERC-20 assets. The growth of active addresses on newer blockchains suggests the possibility for users to shift to new networks while using the basic liquidity pool approach of DeFi to raise and lock value.
The attractiveness of Binance Smart Chain is already reshaping the balances of DeFi and pulling projects not only from Ethereum, but from its older competitors. Effect Network chose to relocate its project to BSC from EOS, citing problems with its legacy platform and choosing a DeFi-tailored blockchain.
Other projects, which initially started on the Ethereum blockchain, are pivoting to make use of the legacy chain’s power as well as the new opportunities of alternative blockchains. TosDis, a startup offering DeFi as a service, is also building a bridge between Ethereum and BSC.
The strongest attraction of alternative blockchains is that projects are quickly riding on the social media meme trends, and are able to draw in traders and liquidity with great speed. Recently, the SAFEMOON token, launched on BSC, set out to reach peak prices. The token, although turbulent, managed to attract the attention of Twitter and added to the enthusiasm for new BSC tokens.
Jordan Beauchamp Chief Technology Officer at CENNZnet.
At CENNZnet we see things from the point of view of DApp devs. Ethereum has been revolutionary by allowing DApps to tap into the blockchain using smart contracts, but now the stage is set for more interesting interplays at a protocol level.
CENNZnet, built on substrate, provides devs with a set of protocol-level runtime modules which provide the key functions for any DApp (identity attestation, currency (generic assets), and NFTs). By taking these functionalities to a protocol level devs can make more interesting interactions and have higher privileges than simply smart contracts. For example, our recent exchange module CENNZX is part of the CENNZnet protocol, while uniswap is a 2nd class citizen on Ethereum.
Carl Ulvinen - Vice President, Project Hydro.
“The main differences we have been experiencing so far is that of throughput and lower fees, which has made for a much smoother user experience overall.
While Ethereum enjoys the privilege of being fully decentralized, there has been a lot of friction arising from having multiple swaps/dexes/dApps running on top of its network.
To alleviate these issues within our project we came to the conclusion that deploying our protocols on multiple blockchains would give our users the choice of leveraging different chains for different purposes.The future of DeFi, we believe, is about connecting chains so that they may interact with each other seamlessly to create the freedom of choice for the user.”
Another success story is that of Terra (LUNA), which runs both its own separate blockchain and a bridge to Ethereum and BSC. The Terra protocol, with its own LUNA staking, also gives access to liquidity on the two other blockchains with access to some of the largest exchanges, like Uniswap and SushiSwap.
THORChain (RUNE) wants to expand on cross-chain capabilities and move beyond the wrapped asset technology. RUNE will run on a proprietary blockchain which bridges the biggest DeFi ecosystems, similar to Terra. The recently launched blockchain also built a significant social media presence, adding to the interest in decentralized trading.
Solana (SOL) is also finding its array of projects, while helping older ICO token KIK join the DeFi world. SOL also gained visibility as a top-15 digital asset by market capitalization, showing that new platform coins could have rapid success with the current DeFi climate.
It’s important to realize that alternative blockchains are not directly threatening Ethereum; they are instead choosing to bridge the network as in the case of the recently popular Avalanche blockchain. Despite setbacks, DeFi seems to be learning from its mistakes in preventing smart contract flaws and rug pulls, and it is improving both the underlying technology and the tokenomics for a thriving crypto financial system. Adding new tokens to the liquidity pools also means less reliance on the price of ETH and more stability during market corrections.
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
Whilst Ethereum has established itself as the launchpad for new projects relying on decentralized applications (dApps), the increasing cost of development and app usage has prompted development teams to start exploring other dApp-compatible platforms.
PARSIQ is no different on this front. Originally launched on Ethereum, it has explored and implementing a number of integrations in recent months, including making several of its workflow applications compatible with Binance Smart Chain (BSC) and Solana. The justification behind those decisions was two-fold: reducing cost (development and usage) and increasing access for newly established communities building on Ethereum alternatives.
Indeed, PARSIQ’s latest major development saw the launch of IQ Protocol, a pioneering new platform with a subscription-based model for token utility at its core. The launch was PARSIQ’s first fully-fledged attempt to enter the decentralized finance (DeFi) space. With the DeFi space being notoriously transaction-heavy, the integrations with BSC, which was 49 times cheaper for dApp transactions in 2020, and Solana, which boasts a $0.00001 transaction fee, reduce costs significantly at a time when Ethereum is seeing record-high transaction fees.
Moreover, both the BSC and Solana communities have a plethora of development teams operating DeFi-focussed projects in these ecosystems. Therefore, the integrations also serve as a method for expanding IQ Protocol’s reach to potential users as well as other developers and projects PARSIQ might collaborate with in the future.