The world of decentralized finance (DeFi) is developing rapidly, and its future potential is undeniably enormous. Barely three months into 2022, the total value locked (TVL) in DeFi protocols has already raced past $200 billion, underlining the significant interest in this sector.
Currently, the Ethereum network holds the lion’s share of DeFi. From the total $209.2 billion TVL, Ethereum single-handedly accounts for a whopping $114.97 billion. Although the legacy network faces steep competition from up-and-coming blockchains, especially third-generation networks, it has successfully maintained its dominance across the DeFi and decentralized application (dApp) markets to date.
While the Ethereum community is being hyped ahead of the upcoming Ethereum 2.0 upgrade that aims to overcome challenges like fees and scalability, several new layer-1 blockchains like Solana, Terra, and Polkadot have already entered the scene with solutions. These networks offer faster transaction speeds, higher scalability, and lower gas fees than Ethereum. Moreover, a threat vector from the Bitcoin network is materializing, with the legacy blockchain also foraying into the DeFi universe.
Can Ethereum continue holding on to its position in 2022 and beyond Amid this rising competition? Time will be the true test.
DeFi On Ethereum
The DeFi ecosystem on Ethereum witnessed widespread adoption in 2021, surpassing 800,000 daily active users. At the same time, the number of DeFi products and services on the network, too, grew at an unprecedented rate. DeFi dApps and protocols covering a wide array of decentralized financial solutions like lending, borrowing, derivatives, trading, issuance, asset management, savings, and stablecoins have flooded the crypto market. Together, the emergence of these platforms has propelled DeFi to be among the most-dominant sectors within the blockchain economy.
However, the growth of DeFi on the Ethereum network has also led to several new problems for Ethereum. The growing number of DeFi protocols and dApps have congested the Ethereum network to such an extent that average transaction costs have shot through the roof. At the same time, the network’s TPS processing speed, scalability, and efficiency have also been impacted.
DeFi On New Blockchains
Rising third-generation blockchain networks like Solana, Polkadot, and Terra, are among the top Ethereum competitors in terms of DeFi. In fact, all of these platforms have positioned themselves as new hubs for DeFi in the last couple of years, registering faster initial ecosystem growth than Ethereum.
For instance, Solana, which launched in April 2020, offers faster and cheaper transactions than Ethereum. The Solana developers and community claim that it can offer throughput of up to 50,000 TPS at a fraction of Ethereum’s gas costs. Likewise, Avalanche offers up to 4,500 TPS compared to Ethereum’s 15 to 30 TPS. Polkadot, as well, overcomes all of the problems associated with Ethereum, positioning itself as a leading contender in the ever-expanding list of “Ethereum killers.”
Other blockchain networks like NEAR, Fantom, Binance Smart Chain, Avalanche, and Algorand are also expanding their presence in the DeFi sector, stiffening the competition for Ethereum even further.
DeFi On Bitcoin
Bitcoin, the mother of all blockchains and the first modern iteration of cryptocurrencies, has remained sidelined from the DeFi market for a long time. DeFi on the Bitcoin network is minimal to non-existent, primarily because it does not provide the necessary tools for supporting DeFi protocols.
Why so?
Because the Bitcoin network in its original form was not designed for high throughput transfer of value, it has a limited amount of bandwidth, meaning that the number of transactions that can be processed at any one time is well below competing networks. The network is limited to a capacity of seven transactions per second (TPS), which is insufficient to handle DeFi projects because they require more frequent transactions.
Additionally, the Bitcoin network doesn’t support smart contracts, which is the key component for offering DeFi services without any intermediaries. However, thanks to layer-2 scaling solutions like RSK, Lightning Network, and Portal, there have been significant advancements in unlocking DeFi primitives on the Bitcoin network.
To that extent, Stacks, a layer-1 blockchain solution that enables the deployment of smart contracts and dApps on the Bitcoin network, is unlocking DeFi primitives on the legacy network while granting BTC champions new opportunities to use and earn more BTC.
Contrary to layer-2 scaling solutions and sidechains for the Bitcoin network, Stacks provides a consensus algorithm between two independent blockchains. Thus, it integrates smart contracts and dApps with Bitcoin’s security and stability, allowing developers to deploy DeFi smart contracts and leverage Bitcoin’s security standards.
Ethereum is expected to release Ethereum 2.0, a faster and more scalable version, but it’s not clear when it will transpire. Due to the delays in going live with the various stages of ETH 2.0’s full rollout, combined with the rising popularity of other smart contract blockchains and the emergence of DeFi primitives on the Bitcoin network, there is a growing possibility that Ethereum’s shrinking DeFi dominance will be threatened even further.
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