It could be the chart of any cryptocurrency this week: months of steady growth wiped out in the space of days. Since May 2020, the TVL into platforms such as Maker, Compound, Uniswap and Aave has grown from under $1 billion to $88 billion at its peak.
While some of this growth can be attributed to the rise in value of the underlying assets, not least WBTC (tokenized bitcoin) and ETH, the numbers don’t lie. Record sums have been pouring into DeFi protocols for over a year as investors chase the generous returns afforded by lending, borrowing, decentralized trading, and synthetics protocols.
As the crypto market licks its wounds after a bloody 48 hours that saw many assets shed half of their value, the question emerges, where does DeFi go from here?
The DeFi movement was born out of a mission to bank the unbanked, or at least hard-to-bank. In the past year, it has been co-opted by a diverse community of MoonBoys to professional speculators. Many of these newcomers, who only entered the market this year, were treated to a baptism of fire when crypto did what crypto routinely does – shaking out weak hands, as it liquidated billions of dollars of overleveraged longs.
Away from the price action there has been some incredible innovation happening in DeFi. New products, token models, and governance structures have been pushed out at breakneck pace and post pull back, this work is likely to diligently continue into the next wave of DeFi protocols, networks, dApps, and platforms. Given the quality and originality of many of these projects, there is good cause for optimism concerning where DeFi is headed next.
Ethereum Rivals Mustering for Price War
There is now double the amount of ETH locked in smart contacts as exists on centralized exchanges (CEX), a testament to the popularity of DeFi protocol products. Despite Ethereum’s DeFi dominance, its competitors are making a good fist of chipping away at its dominant market share.
Alternatives such as Binance Smart Chain (BSC), Polkadot, Polygon, and Tezos are gradually enticing users who have grown frustrated with Ethereum, largely due to the high gas fees of recent months. Even after the much-hyped Berlin hard fork, it can cost as much as $200 to swap tokens on an Ethereum automated market maker (AMM), meaning everyday users often find themselves priced out during busy spells.
Throughput is another consideration, with many so-called Ethereum killers capable of processing a higher number of transactions within a shorter time frame. The Solana blockchain, for instance, supports 65,000 TPS (transactions per second) compared to just 15 for Ethereum, though Ethereum’s long-awaited software upgrade 2.0 is expected to boost that figure up to 100,000.
What these blockchains are unashamedly attempting to do is replicate Ethereum’s DeFi ecosystem, but in a low(er)-fee environment. Users looking to swap tokens can use PancakeSwap, similar to Uniswap on BSC, or Pangolin on the Avalanche blockchain, or Polkadex on Polkadot.
As well as decentralized exchange (DEX) clones, there are liquidity pools, stablecoins, lending protocols, payment platforms, initial DEX offerings (IDO) launchpads, gambling dApps, NFT marketplaces, and the list goes on. Ethereum might have the brand name, the vast developer community, and the seemingly bottomless liquidity, but alternative networks are aggressively building their own platforms.
Not all of the next-generation protocols being pioneered are set up as Ethereum competitors. Some, like ZKSwap, operate as complements and provide a second layer that is more scalable and which connects directly to the Ethereum mainchain. With more than $1 billion locked into ZKSwap’s layer-2 DEX, there is clearly an appetite for low-fee ETH analogs.
Bitcoin Blossoms on Smart Contract Blockchains