Waves Protocol
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Waves Protocol

Is inter-chain DeFi the next step in DeFi evolution?

In his article, Inal Kardanov, Waves developer advocate, provides his insights into how the DeFi space could evolve.

Many people think that the DeFi hype is gone, and there are some legitimate reasons to think so. The most telling indicator is the value locked in DeFi smart contracts. According to DeFi Pulse, this figure reached about 8.5 million ETH (11 billion USD) by late September and has hardly increased since then:

The boom has apparently ended and we’re seeing a plateau. But what is the reason for it? There are a couple of possible explanations:

  • DeFi products are still complicated from the tech and user experience point of view and this barrier is stopping regular users from entering this space
  • Just about all existing crypto users have tried DeFi products, made investments — gaining or losing, — but DeFi has been unable to attract new people to crypto.

In my opinion, there is more evidence in favor of the latter. DeFi has been mainly a tool for people who already use crypto.

If this is true, to save the DeFi space from going into obscurity, we’ll have to find new sources for growth. What could potentially give DeFi a boost?

Possible directions

One of the most likely factors that could reinvigorate the DeFi space inter-chain DeFi or InDeFi. Some of you may have never heard of it, so, let me do some explaining.

When we talk about DeFi, we usually mean DeFi products in the Ethereum network, as 96% of DeFi activity is on that blockchain. But more and more DeFi protocols are starting to emerge on other chains, such as Neutrino on Waves or Serum on Solana. One promising direction for DeFi development is merger between DeFi protocols on different chains. Neutrino on Ethereum is one of the best examples.

How exactly it is going to happen is still an open question. The easiest — but probably not the best — option is centralized or semi-decentralized bridges between Ethereum and other chains, such as Rainbow by NEAR, Wormhole by Solana.

Those bridges enable transferring tokens from a specific chain to Ethereum, the DeFi pioneering chain. If the bridge solution proves viable, Ethereum will become not just a chain with the highest DeFi activity, but a universal router between different chains. For instance, if you want to transfer funds from Waves to Solana, you’ll have transfer them from Waves to Ethereum first and then from Ethereum to Solana.

Another possible direction for inter-chain DeFi implementation is decentralized protocols, like Gravity. Inter-chain protocols enable users to transfer tokens from one chain to another without intermediaries. An additional advantage of Gravity is the standardization of API. The Gravity approach also leads to additional locks of funds on many chains as Gravity nodes will have to lock tokens on one of the target chains.

Both options can lead to growth in the total value locked in DeFi, as well in the non-Ethereum token collateral.

Less obvious InDeFi features

One of the less obvious consequences of InDeFi is an extra degree of privacy and anonymity. Interchain transactions through different chains will complicate transaction tracing. Currently, users pursuing anonymity tend to use mixers like TornadoCash based on ZkSnarks. However, if you use mixers, many exchanges will mark your tokens as *potentially* fraudulent and may require a KYC procedure.

InDeFi can help improve anonymity as it will become much harder to trace funds and in the case of Gravity-like solutions, it will be hard to mark tokens as *potentially* fraudulent. Of course, the success will depend on the anonymity set — the number of transactions, active addresses and value between different chains.

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Inal Kardanov

Co-founder & CTO of Billy. Software engineer. Blockchain, ML&AI developer. All opinions are my own.