Will 2020 Be The Year The Decentralized Finance Overcomes Ethereum Challenges And Embrace Bitcoin?

Within the cryptocurrency space, the rise of decentralized finance was one of the defining stories of 2019. For the benefit of the uninitiated, decentralized finance, or DeFi, is a broad term used to categorize financial services that operate using blockchain-based applications. The vast majority of DeFi applications are based on the Ethereum blockchain, but in principle, the term can be applied to financial applications on any blockchain. 

To say that DeFi is growing fast would be an understatement. The term itself only started to become popular among cryptocurrency enthusiasts somewhere around the middle of 2018. By the middle of 2019, more than half a billion dollars were tied up in DeFi. As things stand, that sum has now risen to over $800 million. The next milestone of one billion dollars can only be a matter of a few months away. 

So how has this phenomenon come to settle on Ethereum as its platform of choice when Bitcoin is by far a more popular asset? As the first smart contract platform, Ethereum has become the go-to for developers wanting to launch distributed applications (dApps.) According to dApp tracking website State of the dApps, Ethereum currently hosts 2,746 dApps compared to its next nearest competitor, EOS, with 320. 

Therefore, like many other dApps, DeFi found its home on Ethereum. 

How DeFi’s Enabler Could Be Its Downfall

Within the blockchain community, Ethereum often comes under heavy criticism for its lack of scalability. The chart above illustrates this - EOS significantly outperforms Ethereum on transaction volume, despite hosting far fewer apps. 

Last year, it emerged that the long-awaited Eth 2.0 upgrade could still be a matter of years away. Nevertheless, many of the 2020 predictions are that DeFi will undergo further stellar growth. Ultimately, there’s a risk that Ethereum’s lack of scalability could prove to become a constraint to DeFi’s expansion. 

A seemingly obvious solution is that developers could start building their DeFi applications on another platform. But another critical challenge in the blockchain space is a lack of interoperability between blockchains. If someone wants to develop a DeFi dApp on another blockchain, invested assets won’t be easily transferable to dApps on Ethereum, potentially alienating users.

However, the crypto community doesn’t necessarily need to wait for Eth 2.0 to overcome these issues. Many blockchain projects are developing second layers and interoperability solutions, which could provide more imminent relief. Syscoin is one such example, having recently launched its interoperability protocol called Syscoin Bridge. 

Bridging Ethereum’s Gap

The Syscoin Bridge enables any ERC-20 token to move between the Ethereum and Syscoin networks, without any effect on the overall token supply. This means that developers can leverage the benefit of transaction processing using the Syscoin network, which offers a far higher throughput of 60,000 transactions per second, compared to fifteen on Ethereum. Moving transaction processing to Syscoin would also reduce Ethereum’s overall network load, offering potentially limitless expansion for DeFi. Furthermore, Syscoin transaction fees also cost less than on Ethereum. 

The Syscoin Bridge offers additional appeal to decentralization purists. Although Ethereum itself is relatively decentralized compared to competitor platforms such as EOS, many of the DeFi smart contracts could be vulnerable to centralization risks. For example, the biggest DeFi application is lending protocol Maker, which dominates the space. As things stand, Maker accounts for over 50% of the total Ether staked in DeFi.

Blockchain engineer Micah Zoltu has highlighted a centralization flaw in the Maker governance model that means a wealthy attacker could drain the sum total of invested Ether (currently around $460m) with an investment of $20m Maker tokens. 

Conversely, Syscoin is merge-mined with Bitcoin. Anyone with Bitcoin mining equipment can mine Syscoin, which opens up the pool of potential miners to a vast array of participants and virtually eliminates any risk of centralization. Therefore, the Syscoin Bridge represents a scalable, decentralized, and low-cost alternative to processing DeFi transactions on Ethereum. 

Bringing Bitcoin Into DeFi

Plans are also underway to extend the Syscoin Bridge to the Bitcoin blockchain. Despite being the biggest asset in the cryptocurrency space, Bitcoin has been all but locked out of the DeFi ecosystem. However, as one analyst highlights, BTC is currently the primary form of collateral for derivatives markets outside of the DeFi space, so its inclusion could see DeFi go stellar. 

Syscoin isn’t the first project to see the potential of Bitcoin in the DeFi space, though. Money on Chain launched the first-ever Bitcoin-backed stablecoin late last year. Using a dual-token mechanism, Money on Chain stabilizes the value of its Dollar on Chain token so it’s pegged to the value of the US dollar. 

Further tying the project to Bitcoin is the fact that Money on Chain is an application developed on the RSK platform. RSK is a smart contract layer built as a side chain of the Bitcoin blockchain. A January report from crypto exchange giant Binance notes that DeFi on Bitcoin side chains is “likely to draw more attention” in 2020, highlighting Money on Chain as an example. 

Socializing Cryptocurrencies

As the smart contract platform based on Bitcoin, RSK is positioned to be at the center of any DeFi expansion involving crypto’s most significant asset. The company operating the RSK platform, IOV Labs, has also been making strides in the blockchain and cryptocurrency space. 

Last year, it announced it had acquired Taringa, the biggest social media network in Latin America. News reports at the time suggested that Taringa users can expect “tokenized social media,” providing an entirely new slant on the DeFi concept. 

The world of cryptocurrencies moves fast.

DeFi appeared seemingly out of nowhere during 2018, and less than 18 months later, it seems poised for a radical transformation. If blockchain innovators continue to launch solutions that address the challenges of interoperability, scalability, and decentralization, the DeFi space is likely to look very different in another twelve month’s time.

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