Why the future DeFi protocol is multi-chain?
Ethereum is so not only the second largest crypto-currency (after Bitcoin), but also the largest (in terms of market cap and TVL) programmable blockchain. It was a home to first DeFis, but on-going issues with scalability and gas fees propel DeFi protocols to to go multi-chain.
TL;DR
Why the future DeFi protocol is multi-chain?
- Access to bigger market: TVL and DeFi community is spread across various blockchains
- Scalability: skyrocketing gas prices make transaction execution too costly to execute on Ethereum
- Diversification: do not host the protocol, DAO and all the treasury only on one chain
Introduction
DeFi (Decentralized Finance) is a term describing all dApps (decentralized application), which offer the financial services.
TVL (Total Value Locked) is the overall value of digital assets deposited in the DeFi protocol.
Access to bigger market
Although most of TVL is locked in Ethereum, other programmable chains are gaining traction. One the reasons are gas prices, which are even 1000x lower on other chains compared to Ethereum.
Scalability
Ethereum AYC Congestion
Ethereum is getting congested. The recent example is the NFT sales of land in metaverse (Otherside by Ape Yacht Club) on 1t May.
The gas prices reached 6'000 -7'000 USD to execute a single transaction on Ethereum. This annoyed not only the Otherside community but also prevented others from doing anything on the chain.
Solana Crash
The Blockchain Trilemma makes it impossible to improve the scalability without sacrifices on security or decentralization. Solana (in top10 blockchains by TVL) prioritized the scalability over decentralization. With only 2'000 validators it offers much higher transaction throughput than Ethereum.
However, on 3rd May the NFT minting event by Metaplex Candy Machine crashed the chain and made it totally unavailable for 6–7 hours.
On that day Solana experienced 6 million transactions requests per second, generating 100 Gbps of data at individual validator nodes. Consequently, the node operators’ servers maxed out their memory and crashed enough of the 1,730 nodes that the blockchain didn’t have enough votes to approve new blocks. As unconfirmed blocks built up, the blockchain began repeatedly forking. When too many forks built up, the only way to resolve the problem was to shut down the entire blockchain.
Diversification
Collapse of Terra
Terra is an example of blockchain, which made it to the top 10 chains, but disappeared overnight due to the bug in the algorithms of its underlying stablecoin UST. In this case, the blockchain infrastructure worked almost correctly, but the bug was in the economical assumption of the algorithmic stablecoin.
UST was a stablecoin pegged to USD. This means that it traded 1:1 with USD. In order to keep the peg 1:1, UST was loosely backed by the market cap of Luna (Terra native token). This approach was working fine until the market cap of UST become almost as big to the market cap of Luna (reserves turned out to be too small).
To read more about the stablecoins, go to my other blogs.
The rest of what happened with Terra (Luna) and UST is a history. However this situation left a lot of DeFi protocols homeless — those protocols lost not only the core blockchain on which they operate but also their DAOs and treasury.
DeFi protocol should diversify and do not host the protocol, DAO and all treasury only on one chain.
Closing Thoughts
Community is the most important for every DeFi protocol, but it can easily lost loyalty when it is unable to access the favorite DeFi protocol. This lack of access might be caused not by the bug in the protocol itself, but by scalability issues of the underlying blockchain. To avoid congestions as well as to access broader communities, DeFi protocols will go multi-chain. Diversification of chains will strengthen the Defi ecosystem and make it more resilient.
How to go multi-chain? There are three options available — Ethereum Layer2, Sidechains, Custom Chains, which I will describe in my next blogs. Stay tuned.
How to DeFi — Introductory Series
- Hitchhiker Guide to Blockchain
- Internet of Blockchains: Why are there so many blockchains?
- How to DeFi in Cosmos via Osmosis: From Zero to Staking Hero
- How to DeFi in Polkadot via Acala: From Zero to Minting Hero
- How to DeFi in Near via Jumbo: From Zero to Yield Farming Hero
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