It’s now virtually unarguable that decentralized finance is blockchain’s “killer use case.” Total value locked in DeFi grew by over 3,000% over the year leading up to January 2021. On the DApp Radar rankings, eight of the top 10 DApps on Ethereum are DeFi. Uniswap sees more users than any other application and is set to average $1 billion per day in trading volume for January.
Given the challenges we see with centralized exchanges, the push toward DeFi is hardly surprising. Centralized platforms offer limited lending and staking opportunities, and those that do exist depend on users putting their trust in the exchange. They’re also subject to region blocking and trade censorship, suffer from fragmented liquidity due to a disparity in product offerings, and have a limited range of instruments.
By comparison, DeFi users now have access to a range of on-chain lending and staking options. DeFi is also censorship-resistant, with composable apps that many have dubbed “money Lego” and to have almost limitless possibilities for different types of financial vehicles.
However, DeFi’s biggest Achilles heel is Ethereum. The more apps that pile onto the platform, the more Ethereum starts to show its wear as a dated technology in dire need of upgrades. Ethereum 2.0 shows some promise, but the timeline is distant, with scalability only expected in 2022 or later.
In the meantime, users are left to put up with slow confirmation times and, more importantly, exorbitant fees that limit DeFi participation to big spenders and whales. In January, the average transaction fee was up to over $10. When DeFi transactions rely on more complex smart contract interactions or users engaging in multi-protocol trades, these costs can become prohibitive for many people.
Interest in multi-chain DeFi is growing
Partly driven by Ethereum’s problems, interoperability and second-layer platforms became a significant focus…