Jamie Dimon of JP Morgan recently made a statement that JPM Coin was winning big business deals moving trillions of dollars around the world every day. This newly formed crypto currency has allowed their enterprise business to grow and this is just one example of how the DeFi space is booming. You’ll also notice Defillama.com lists the top blockchains and their TVL or Total locked value. This is a really helpful tool I use when considering projects to invest in, possibly stake, or add liquidity to. From a bird’s eye view you can search for interesting DeFi projects and see what exactly is going on with their finances.
The fact that the applications (dapps) built on these blockchains all work together and the information they store is visible to all, is reminiscent of the idealism of the early architects of Internet, before most users embraced the walled gardens offered by tech giants. The idea that a new kind of “decentralized” digital economy might be possible has been reinforced over the past year as many applications built on different blockchains have exploded in size and functionality. Perhaps the most important part of this economy is decentralized financial applications, which allow users to exchange assets, receive loans, and store deposits (staking). Above all, Ethereum, the main DeFi platform, seems to be losing its exclusivity.
Until recently, the Ethereum blockchain was the undisputed host of all this activity. It was created in 2015 as a more general-purpose version of Bitcoin. Bitcoin’s database stores information about transactions in the associated cryptocurrency, providing proof of who owns what at any time. Ethereum stores more information, such as lines of computer code. Many have called it the world computer.
The fight resembles competition between operating systems on computers, says Jeremy Allaire, the boss of Circle, a firm that issues USD Coin, a popular crypto-token stable coin. Current blockchain technology is clunky. Both Bitcoin and Ethereum use a mechanism called “proof of work”, where computers race to solve mathematical problems to verify transactions, in return for a reward. At busy times, transactions are either very slow or very costly (gas fees). It is predicted that Ethereum will be moving to their consensus layer protocol, once called ETH 2.0 by June this year which will be their unique proof-of-stake protocol.
When demand to complete transactions on Ethereum’s network is high, the fees paid to the computers that verify them climb and settlement times grow. Developers have long been trying to improve Ethereum’s capacity. Another idea is to split the blockchain up, through a process called “sharding”.
In early 2021, nearly all of the assets locked in DeFi applications were on Ethereum’s network. However, in a recent research note JPMorgan Chase, a bank, estimates that the share of DeFi applications using Ethereum fell to 70% by the end of 2021. A growing number of networks, such as AAVE, Avalanche, Binance Smart Chain, Terra and Solana, now use proof of stake to run blockchains that do the same basic job as Ethereum, but much more quickly and cheaply. Avalanche and Solana, for instance, both process thousands of transactions a second.
Solana can handle “Visa-scale volumes” with “settlement finality in about 400 milliseconds and a transaction cost of about a twentieth of a penny”. Other DeFi applications, like Sushi Swap, an exchange founded on Ethereum, have also launched on several other blockchains. Anyone can access the data they produce and view their operating code, making it possible to build bridges or applications that work across many blockchains, or which aggregate information from different blockchains.
Some applications, like 1inch, already scan exchanges on several blockchains in order to find the best execution prices for various crypto transactions. “Multi-chain” blockchains, like Polkadot and Cosmos, act like bridges between different networks, making it possible to work across them and send assets. For as long as decentralized finance holds promise, competition to be the network of choice will naturally be fierce.