It’s the hottest topic in the blockchain industry right now. Decentralized Finance (DeFi) has been steadily gaining traction over the past two months, capturing almost 4.5 billion dollars in total value locked. For reference, at the beginning of 2020, it was just 700 million, and it surpassed 1 billion in late May.
Why not? Through peer-to-peer lending or liquidity mining, it is possible to earn an APR that is much higher than the interest rate on bank accounts. As a result of the FED’s excessive money printing, investors must find new ways to protect their wealth from inflation.
However, as with all emerging technologies, there are still lots of issues that need to be tackled in order to make DeFi mainstream-ready. Here are some of the most pressing issues:
Most DeFi platforms are hosted on Ethereum. Although it is the first and up to this date most widely used smart contract platform, Ethereum has been struggling for years with its poor scalability. This became a major problem for the first time when the blockchain-based game Cryptokitties was released.
For a few days after the game went live, the Ethereum blockchain recorded a six-fold increase in transactions, which sent transaction fees skyrocketing.
With the rise of DeFi, it has felt like the kitty craze all over again. As DeFi began to gain significance in June 2020, the fees started to rise accordingly, to the point where, at the current time, transaction fees on Ethereum are now even higher than they were at the peak of the Cryptokitties hype.
The difference is that, while it was foreseeable that interest in Cryptokitties would die down eventually, DeFi is an ever-growing field, so the transaction fee problem is likely to persist and get even worse.
This not only limits the usefulness of DeFi, but it may also make other formerly viable Ethereum DApps unattractive.
In order to tackle this problem, Ethereum is preparing to transition to a more scalable multi-chain architecture based on a Proof-of-Stake consensus protocol. However, this is a tedious process that will take a long time to complete. By all estimates, Ethereum 2.0 will not be fully functional until 2022, so solutions are needed until then to mitigate these issues.
One solution that has been proposed is to outsource transactions to off-chain layer 2 networks, such as Raiden or Plasma. However, these technologies are far from mature in their own right. They are also highly centralized, which DeFi seeks to avoid, so platforms are rightfully reluctant to route transactions through these networks.
Another option is for DeFi apps to switch to a different blockchain altogether. Many state-of-the-art Proof-of-Stake blockchains have already implemented the functionalities that Ethereum 2.0 will eventually bring, such as multi-chain support and high transaction throughput. However, porting a DeFi platform originally designed for Ethereum to another blockchain requires a lot of development work, which adds a significant amount of friction to this transition.
There is another factor that complicates the use of alternative blockchains…
Porting a DeFi platform would usually mean porting all balances and token holdings as well. It would be easier if these blockchains were interoperable with Ethereum. In the blockchain context, interoperability basically means that if you hold a digital asset on one blockchain, you can transfer it to another blockchain and use it there for transactions, or within DApps running on this other blockchain.
A good example of this is Wrapped Bitcoin. Thanks to this DeFi product, it is possible to send BTC to a time-locked contract on the Bitcoin blockchain and receive the same amount of wBTC tokens on the Ethereum blockchain. At all times, wBTC can be redeemed again for the same amount of Bitcoin, thus pegging the price of wBTC to BTC.
Developing such parity bridges between Ethereum and other blockchains could greatly facilitate the creation of chain-agnostic DeFi protocols. However, this technology is not yet ready for the most part, and as a result, alternative blockchain networks aren’t yet attractive to DeFi platforms.
This poses a sort of chicken-and-egg problem. Without DeFi on alternative blockchains, there is little interest in developing parity bridges, and without the bridges, there is little interest to switch DeFi platforms to other blockchains.
Lack of Professionalism
Most DeFi platforms are non-profits. While this is ideal in cutting costs for their users, it also means that it is hard to find professional developers for new DeFi platforms. As a result, DeFi platforms are still highly risky from a technical standpoint, as the smart contracts that make them possible may contain bugs that make them vulnerable to hackers.
Very often, these platforms start off as part-time projects initiated by enthusiasts. Without a secure revenue stream, these projects cannot afford professional developers and code auditors. These things cost money and without a centralized and well-funded foundation, DeFi development remains slow and the end product may not be to the standard of a professional development team.
Priorly, non-profit blockchain projects were usually funded by ICOs, but this funding model largely died in 2018, due to widespread scams and failed projects. Afterward, IEOs became the new norm, but this arguably made funding more inaccessible to the majority of projects, as they now needed to persuade an exchange to host their token sale first. As for the token price of these projects over the medium or long term, this model has not proven to be more successful than ICOs, as many of these IEO tokens are now in the red relative to the price they were sold at.
These days, many projects must find alternative sources of funding in order to have enough runway to at least develop an MVP. Only afterward is a small portion of the token supply allocated to a public IEO. This model has proven to be more effective, as projects need to have something more than vaporware to show for their efforts, but it sets up yet another hurdle for DeFi projects.
Most funding for blockchain projects comes from VC and angel investors, but they are usually interested in shares from a profit-oriented company.
For non-profit DeFi projects, there are a limited number of options, such as development funds, contests, and incubator programs, but resources are generally scarce, so it is very hard to develop a professional DeFi project, in contrast to for-profit blockchain projects.
How Radix attempts to solve these Problems
Radix is the first blockchain network that is being designed specifically with DeFi in mind. Their proprietary Cerberus BFT consensus model allows for the highly efficient and scalable parallel execution of state instructions.
Further, Radix is working closely with Copper.co to implement their custodial service. As a first step, Copper has agreed to hold the proceeds from the Radix token sale in their custody and distribute the ERC-20 token. Recently, they have announced that they will be expanding their partnership by implementing a token wrapping service, bringing 137 of the top crypto assets across to Radix. This will make Radix interoperable with many other blockchains and the tokens they host, allowing these tokens to be transferred to Radix and used with DApps that are hosted on the Radix blockchain.
Other than interoperability, Radix is set to provide an ongoing stream of incentives for developers through a royalties program. Developers that contribute to the ecosystem by providing code functionality to the Radix Component Catalog can charge a royalty fee that is due any time their component is used. This incentivizes both code reuse and code creation. The more royalties a developer earns, the greater his incentive to develop new components for the growing Radix ecosystem.
In sum, Radix has an answer to the most pressing pain points in DeFi by creating a highly scalable DeFi-specific blockchain network that is interoperable with existing blockchains and by incentivizing ongoing and professional development.