Is the DeFi Throne of Ethereum really untouchable?

Note: The original author is Mohamed Fouda, a cryptocurrency investor and researcher. The following is a translation:

Ethereum has a dominant position in the public chain, and DeFi seems to have become the current core.

However, DeFi is not unique to Ethereum, it is already the core focus of all smart contract platforms.

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Growth of DeFi users in the Ethereum ecosystem, source: Alethio

Ethereum's decentralization, network effects and rich developer tools have created a moat for the DeFi protocol, making it difficult for the DeFi protocol to leave Ethereum to invest in other competitive smart contract platforms. Some people hold this view. For example, the original synthetix team decided to build DeFi products on both Ethereum and EOS, and found that their initial logic was flawed. Later, the team publicly stated that it was a waste of time to build DeFi products outside of Ethereum.

One feature that attracts developers to build DeFi products on Ethereum is the chain's composability. In the simplest sense, this means that DeFi applications can use other DeFi applications to perform their functions. For example, if a user's position is liquidated, they can use Uniswap or 0x to sell their collateral on MakerDAO or Compound.

Composability allows developers to build DeFi layers on existing DeFi infrastructure. However, with the upgrade of Ethereum 2.0, different dapps will be encouraged to occupy different segmentation chains, and people have great doubts about whether this level of composability can be maintained.

In this regard, Vitalik also published several research articles .

For Ethereum competitors, Ethereum transformation is a good opportunity

It is foreseeable that the uncertainty of Ethereum 2.0 will be a very good opportunity for competitive smart contract platforms. EOS, Tezos, Cosmos, Algorand and several other upcoming platforms are all looking to replace Ethereum as the dominant platform for DeFi.

It is for this reason that many public chain project parties have invested a lot of resources and seem to be preparing for the war, such as the project eco-funds providing generous grants to encourage developers to build dapp/DeFi agreements on their smart contract platforms. Things are not uncommon. They bet that Ethereum will bring enough uncertainty and friction to the DeFi project during the transition to PoS, so developers will turn to the alternative blockchain. Another point they bet is that this upgrade to Ethereum will reduce the user experience and force DeFi users to migrate to alternatives to competing platforms.

The next question is: Are the Ethereum competitors ready for this opportunity?

Do they have a competitive alternative to the Ethereum DeFi project? This article attempts to answer this question by examining the DeFi infrastructure of competing projects and assessing the potential of these agreements to win in the upcoming DeFi war.

EOS

EOS is currently the most mature competitor of Ethereum. Since its launch in 2017, EOS has been positioned as a better-performing Ethereum alternative with the goal of attracting dapp developers to migrate their dapp from Ethereum to a free-to-use EOS platform and provide a better user experience. .

EOS has successfully attracted a specific class of dapps that do not require significant decentralization or review resistance, such as games and "spinach." However, for DeFi applications, the success of EOS is quite limited. Although there are already many DeFi projects in the EOS ecosystem, they are only slightly modified for Ethereum's DeFi application, not original.

For example, Pizza (USDE) and Equilibrium (EOSDT) are trying to replicate MakerDAO (DAI) for the EOS ecosystem. Both stable currency projects use EOS as collateral (where USDE has a mortgage rate of 150% and EOSDT has a 170%). Currently, the EOSDT system collateralizes 5 million eos (approximately $19 million), which is still small compared to MakerDAO's $290 million ETH collateral.

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It can be said that EOS's most famous DeFi application is the loan platform EOSREX. EOSREX allows developers and users to borrow the resources (CPU, RAM, NET) required to run on EOS at a certain cost. Although the EOS value locked in EOSREX is higher than the locked ETH value in MakerDAO and Compound, the actual borrowing amount is smaller.

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In addition, the EOS network also has some decentralized exchanges, but they are unable to capture enough volume. The main reason is that most digital asset tokens issued in EOS do not capture significant value, and many application tokens can only be used in a single dapp. In addition, since EOS transactions are essentially free, their DEX trading volume is easier to brush. Therefore, it is unreasonable to compare the transaction volume on the EOS platform directly with the Ethereum platform.

P4 Daily trading volume of several major EOS DEX, data source: DappRadar

Cosmos

Although Cosmos is a new competitive platform, it attracts a lot of attention in its unique way, and Cosmos focuses on interoperability between different blockchains. For example, with the Cosmos SDK, dapp can have its own Cosmos zone/chain instead of building on Ethereum (more recently, Aragon announced that it will partially leave Ethereum and use the Cosmos SDK to build its own Aragon chain).

The same method allows DeFi to migrate from Ethereum to payment currencies such as Bitcoin, Zcash and Monroe. The DeFi protocol for these currencies can be implemented as a stand-alone Cosmos zone that interacts with other zones or Cosmos hubs via the Inter-Block Inter-Chain Communication (IBC) protocol. For example, suppose you have a Bitcoin-MakerDAO zone that interacts with a bitcoin blockchain and you can use BTC as a collateral for casting DAI. Even better, imagine this MakerDAO zone interacting with multiple other zones while using BTC, ETH, and ZEC as collateral.

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Cosmos DeFi realizes the vision of currency and Dapp zone interaction

The first step in achieving this vision is to create a Cosmos zone that brings these cryptocurrency assets into the cosmos ecosystem. Examples include Kava introducing XRP into Cosmos and Nomic.io's bitcoin anchor zone . Once these zones and IBC cross-chain protocols are up and running, the dapp zone can implement cross-chain interactions.

Bitcoin anchored Zone

The cryptocurrency community is very interested in introducing Bitcoin into the smart contract platform to use the DeFi protocol. Projects like WBTC and TBTC are precisely to achieve this goal. However, some people in the Bitcoin community are looking for a solution in which Bitcoin can still be used as a fee currency.

Cosmos is an interesting alternative to Ethereum in this area. People can use the Cosmos SDK to create a bitcoin anchor zone to allow faster bitcoin settlement and potentially develop a DeFi protocol using bitcoin. A prominent achievement in this area is nomic.io's nBTC , which created a PoS version of the Bitcoin sidechain. Users can lock their own bitcoin in a reserved multi-signature wallet and cast the corresponding nBTC token in the bitcoin anchor zone. The coined nBTC token will be instantly finalized and open the door for multiple DeFi applications. These DeFi products can be implemented either in the nBTC zone or in other zones that interact with the nBTC zone via IBC.

Decentralized price oracle (Oracle)

Cosmos's second interesting DeFi project is Microtick, which attempts to solve a difficult problem: decentralized price oracle problem. Currently, Ethereum's lending agreements (such as Compound) use a trusted feed mechanism to determine if the collateral meets the loan requirements. There are several projects that have been trying to provide a decentralized version of these price oracles (Oracle).

Microtick brings a new market-based distributed oracle (Oracle) design. In this system, market makers propose asset prices and provide financial support to support their price proposals. The system averages these different proposals and reaches a consensus price. Using this consensus price, traders can trade these price offers as options. This process inhibits market makers from reporting false or inaccurate prices and uses market dynamics to create a decentralized price feed.

Tezos

Although Tezos was available in June 2018, it was not until mid-2019 that they began to take an interest in DeFi (in June of this year, the word DeFi appeared on Tezos' Request for Proposal (RFP)). The likely reason is that Tezos has been working on the chain of agreements since ICO. However, with the development of the DeFi narrative, the Tezos Foundation began to focus some attention on this area, and the DeFi agreement is now the first in the Tezos ecosystem grant request. However, Tezos lacks a developer-friendly language and related development tools that limit the development of the DeFi protocol on the platform.

Perhaps the most interesting DeFi protocol ever established on Tezos is Checker, a mortgage-stable currency project developed by Tezos co-founder and CTO Arthur Breitman. According to the existing public information, the project will be somewhat similar to MakerDAO.

An interesting feature of Checker is that its locked XTZ will qualify for the Tezos baking reward. There is no doubt that Checker will be an important cornerstone for the Tezos DeFi ecosystem, just like MakerDAO in Ethereum.

Will Ethereum’s DeFi dominance be threatened?

Given that other competitive smart contract platforms are all working in the DeFi space, will Ethereum's dominance in the DeFi sector be truly threatened?

The answer to this question depends on two important factors. First, how the Ethereum community and influential participants deal with the uncertainty of Ethereum 2.0 composability. Followed by the views of the developers and whether they are ready to change ships.

These factors are not fixed, and they change greatly over time.

However, so far, the wind seems to be still beneficial to Ethereum.

First, the Ethereum Foundation's efforts to deliver Ethereum 2.0 on time and to communicate the upgrade plan to the community have increased significantly. The best example is that Vitalik has published several research articles during Devcon to resolve the transition from Ethereum 1.0 to 2.0 and the cross-chip composability of the DeFi project on Ethereum 2.0.

Second, developers' preferences still tend to be Ethereum. At present, almost all new DeFi ideas are first built on Ethereum.

Here are a few prominent examples, such as:

  1. Enable , this is a P2P social lending platform that relies on social authentication. This project is from the Consensys Labs virtual hackathon contest.
  2. LSDAI , a synthetic asset used to hedge the variable rate of the Compound protocol, comes from the ETHBerlin hackathon contest.

Ethereum's proven infrastructure and rich development tools enable developers to turn their DeFi products from simple ideas to actually available products in a relatively short period of time. Eos, Tezos and other Ethereum competitors currently lack the same factors. As a result, the gap between Ethereum's DeFi ecosystem and its competitors may continue to widen.

Thanks to Myles Snider, Matt Bell, Arthur Breitman, and Devin Walsh for their feedback on this article.