Avalanche $AVAX is the ultimate blockchain to create DeFi projects
DeFi, decentralized finance, has been growing at a giant pace in the past 12 months.
According to the DeFi Pulse website, the amount of value deposited as collateral for use in DeFi has grown more than 20 times, as shown in Image 1.
Among the 5 largest projects currently we can see that there are decentralized exchanges (DEX), lending platforms and also assets.
In this article I will describe about each category, raising the pros and cons.
DEX
Currently the most common way to buy and sell cryptocurrencies like Bitcoin and Ethereum is to deposit fiat money (Euro, dollar, etc.) in a centralized exchange such as Coinbase, Kraken, Binance, among others.
However, in these exchanges your private keys, that is, the custody of the cryptocurrency, stays with the exchange.
Historically, we know that many brokers have been hacked and bankrupt, failing to return assets to their clients.
Decentralized exchanges have the great advantage of increasing security for the user because they allow you to trade your cryptocurrencies while keeping your assets in custody.
For this reason DEX like Uniswap are growing a lot and still in August of this year the volume traded rose, reaching almost $ 3 billion dollars in volume traded, according to Dune Analytics.
However, as they are run on top of blockchains, mainly in Ethereum, they present scalability problems because currently Ethereum has a low transaction speed (TPS) and a high finality (Seconds). Finality is the time between sending a transaction and it being confirmed and this can reach up to 60 minutes on the Bitcoin blockchain and 30 minutes on the Ethereum blockchain, to maintain a high level of security. In the best of cases, the minimum in Ethereum would be 14s, while in centralized exchanges this is done in less than 1s.
In addition, Ethereum has only 14 TPS (transactions per second).
These limitations caused the Ethereum network to become congested and fees for transacting on the network skyrocketed reaching $ 15, making it almost impossible to use the network.
Not to mention that this market is still small, if we compare it with traditional finance in which a volume of over 1000 times a day is traded in stocks and derivatives, in the range of several trillion dollars.
Avalanche easily manages 4500 TPS without losing decentralization.
In addition, the Avalanche finality is less than 3s and is expected to be less than 1s in future improvements.
How does Avalanche get this incredible performance for blockchains?
This is only possible because of the new consensus protocol, also called Avalanche, released in a White Paper in May 2018 by Team Rocket.
Ethereum 1.0 and even Ethereum 2.0, when it was thought more than 5 years ago, did not even have the possibility of using the Avalanche consensus protocol, as it did not yet exist.
Ethereum 2.0, for example, promises high transaction speed, in a few thousand TPS, but using sharding, which basically is like using multiple blockchains in parallel to increase the speed of transactions, but the finality, the time to finish the transaction does not improve.
The implementation of Ethereum 2.0 is expected to start this year, however, as predicted by the developers themselves, the improvement in the transaction speed will only occur between 1 and 2 years.
If any DEX wants to migrate to Avalanche without changing all of its code, this can be done very quickly since Avalanche has its C-Chain, which has the Ethereum Virtual Machine and then allows it to run Ethereum smart contracts , for example, with a speed of 200 TPS.
Is it taking too long for a DEX to be created on top of the Avalanche blockchain?
There is already a beta version of the Avaxwap.
The Avaxwap is a descentralized plataform to exchange ERC 20 tokens from Ethereum to tokens created on the Avalanche blockchain, including the native token AVAX.
Assets
The WBTC is an ERC 20 token from Ethereum that is paired 1: 1 with Bitcoin (BTC).
As the vast majority of DeFi projects run on Ethereum’s blockchain, WBTC is an option to enter the DeFi world without having to get rid of your Bitcoin.
That way you can trade for example within Uniswap with your WBTC.
In addition, BTC has had scalability problems for a long time and has been having serious congestion problems for at least 3 years, when the Bitcoin network took several weeks to process some transactions and the average rate reached 50 dollars in December 2017, as shown in the image 3.
The WBTC was created in January 2019, a time when ETH transactions had very low rates, around $ 1 or less, and the network rarely congested.
Continuing, trading WBTC was much faster and more economical on the Ethereum network than trading BTC on the Bitcoin blockchain.
But today, less than 2 years later, Ethereum has been leading the DeFi market but has high transaction rates and slowness.
What would be the solution to increase the speed transactions of ETH?
Avalanche is a great option.
As shown above, the Avalanche C-Chain has the Ethereum Virtual Machine and therefore any Ethereum project can be easily migrated to Avalanche to take advantage of its superior performance.
Additionally, an Avalanche-Ethereum bridge has just been announced.
It is a bidirectional token bridge that allows ERC-20 and ERC-721 continuous transfers between Avalanche (via C-Chain) and Ethereum.
In other words, it will soon be possible to send a WBTC, which is an ERC-20 token, directly to the Avalanche’s C-Chain and thus transact WBTC with a speed of 200 TPS and finality less than 3s.
And If you want to use ETH in decentralized apps in Avalanche, you can lock WETH (packaged ETH) in the ChainBridge contract and an equivalent token in Avalanche will be minted.
Lending
Decentralized lending systems are becoming quite popular and we can even say that the DeFi wave started with the Maker DAO in 2015, which is still the most popular descentralized finance project.
The system uses smartcontracts that allow people to deposit collateral and borrow from DAI, a stablecoin paired with the US dollar.
It has a very ingenious system for maintaining parity at 1: 1 in a decentralized manner, as shown here.
This project is quite revolutionary and encouraged the creation of many others that came and will come in the coming years.
However, not everything worked well.
Maker DAO was also marked by a $ 150 million dollars hack.
As this occurred still in the early days of Ethereum in 2016, the impact was so high that it generated a division in the community that ended up resulting in a fork and a chain split that generated the Ethereum Classic, anopther blockchain.
Fortunately MAKER DAO and Ethereum managed to move on and are going very well currently.
However, vulnerabilities like this have unfortunately been constant in DeFi projects that run on top of the Ethereum blockchain.
This platform has been great for experiments, but security has never been one of its strongest points.
Recently there was another hack in an Ethereum’s DeFi.
As commented on twitter by Emin Gun Sirer, one of the founders of Avalanche and Ava Labs, Avalanche cannot fix all of these problems, but it has the great advantage that every token created in the Avalanche network is a real asset.
ERC 20 tokens are only code.
That’s why Avalanche is more secure against hacks in cases where a token attacks another token.
Gun Sirer also anticipated the vulnerability that spawned the famous MAKER DAO hack.
He has been studying cryptocurrencies since 2003, when he launched a proof of work cryptocurrency project, before Satoshi Nakamoto.
Now all your knowledge and experience is being put into practice with Avalanche $ AVAX.
Avalanche was designed to be a true platform for issuance of all types of tokens, from DeFi to traditional financial market assets such as real estate, stocks, derivatives and many others.
