Judging from the development of Ethereum and DeFi this year, DeFi has played a vital role in the formation of a public chain ecology.
It was 17 years before Ethereum really became popular. At that time, Ethereum was not an ecology, but a tool for project financing. It was the big bubble created by this tool that allowed the later ecology to have enough fertile soil, which contained funds, users, developers, and so on.
DeFi makes Ethereum an Ethereum ecosystem
So when do we see Ethereum grow into an ecosystem? An obvious signal is that DeFi has grown from budding to becoming a closed-loop DeFi ecosystem. Now we see that DeFi has locked up a large amount of funds and users for the entire Ethereum ecosystem, forming a series of business divisions and collaboration relationships including DEX, lending, stablecoins, aggregators, etc., and most importantly, due to the popularity and continuous development of DeFi With development, a large number of assets are flowing into the Ethereum ecosystem, such as more than 150,000 Bitcoins circulating on Ethereum.
In addition to horizontal development, we have seen more in-depth evolution of DeFi, such as decentralized options, derivatives, synthetic assets, and so on. Although such an ecology seems to be an overly singular financial ecology, just like the 17-year Ethereum bubble brought the foundation for the development of the DeFi ecology, the rise of the Ethereum DeFi ecology this year will also provide the diversity of the Ethereum ecology. A strong enough foundation.
See DeFi on Polkadot from the DeFi ecosystem
According to this logic, we can look at another popular public chain IP-Polkadot. Polkadot has not experienced the situation of Ethereum in 17 years, but it faces Bitcoin and Ethereum, which have huge market capitalization, and a relatively mature user market. The design of Nepoka’s heterogeneous multi-chain interconnection structure and PDK kits such as Substrate are also far more mature than the situation three years ago. These are all attractive to developers.
To a certain extent, we can say that Polkadot has caught up with the era of “good days”. As the starter of ecological development, is Polkadot DeFi ready for the “good day”?
The well-known venture capital Multicoin Capital recently dismantled DeFi into a 6-layer stack, including atomic value units, transaction layers, price oracles, DeFi underlying products, protocol aggregators, wallets and front ends. Next, we will use this model to analyze the current development of Polkadot DeFi.
We all know that a large part of the DeFi wave this year is due to the high returns of liquid mining, and the reason why we were able to create tools such as liquid mining is because of the composability of the DeFi protocol, using the founder of the venture capital fund Variant Jesse Walden’s words are: “If the existing resources on the platform can be used as building blocks and programmed into higher-level applications, then the platform is composable. Composability is important because it allows Developers do more with less work, which in turn can lead to faster and more complex innovations.”
So how do we view the development of Polkadot DeFi from this perspective?
Level 1: Atomic Value Unit
Whether it is society or business ecology, the foundation is assets, and because it needs to be traded and flowed, assets need to be decomposed almost infinitely small. This is the first layer of the DeFi ecology, the atomic value unit.
Ethereum has ETH, various stablecoins based on the ERC-20 protocol, and anchored assets such as WBTC, renBTC, etc. These assets are used as raw materials to flow into various lending and derivative agreements, and finally return to the original state. At present, Polkadot’s own DOT and testnet Kusama’s KSM have not yet reached the level that can be used as a basic unit of value. But fortunately, Polkadot’s own cross-chain design, Polkadot’s DeFi ecosystem can easily introduce other mainstream assets. ChainX, the most famous asset cross-chain protocol in the Polkadot ecosystem, can completely decentralize assets such as BTC, ETH and EOS to transfer to other public chains for circulation. In addition, there are transfer bridge projects such as Darwinia, which can realize services such as stable currency cross-chain or asset transaction exchange, and external assets can seamlessly connect to Polkadot’s DeFi ecosystem.
In addition, we have also seen Polkadot’s own cross-chain BTC: PolkaBTC, including the decentralized stablecoin Acala. Acala mainly generates stablecoin aUSD through over-collateralization. In the early stage of the ecological startup, aUSD is likely to become Polkadot. The most important stablecoin in the DeFi ecosystem. The most important thing is that in the face of the mortgage wave brought by ETH2.0, projects including Bifrost are using cross-chain networks to allow huge amounts of mortgage assets formed by ETH2.0 to flow into Polkadot in the form of derivatives.
Level 2: Transactions
The transaction here is not a simple transfer. With the continuous enrichment of DeFi protocols, on-chain transactions have also begun to become more complex, such as performing liquidation, allocating rewards, issuing deposits and leverage, etc. On Ethereum, these often have to be completed across multiple protocols, and this process will produce A large amount of gas fees, and due to the complex transaction process, has largely caused congestion and high cost of transactions on the chain. Finally, if you want to directly transact across the network, it is even more difficult. For example, it is almost impossible to complete cross-bitcoin and ethereum. It usually requires the help of various centralized solutions.
Polkadot DeFi’s “transaction capability” is obviously more powerful. As early as September, the Polkadot network successfully completed inter-chain asset transactions through the XCMP protocol, which can save a lot of redundant links. The expansion plan of the relay chain is also simpler. The most important thing is that with the function of the transfer bridge, the various protocols of the Polkadot DeFi ecosystem can communicate and interoperate with other network protocols or assets more directly.
Layer 3: Price oracle
In terms of trading capabilities, price oracles are the most important foundation of the DeFi ecosystem. The triggering of various DeFi protocols requires market data as a basis. The most mainstream oracles are the centralized Coinbase and the decentralized MakerDAO. medianizer, Chainlink, Band, Tellor, UMA, API3, Compound Open Oracle and Nest.
At present, Polkadot DeFi has a slightly different approach to the development of oracles. It is more to directly choose oracles such as Chainlink as the source of price feed. Polkadot officials even declared: “Chainlink will become all Substrate-based chains, and even the entire Polkadot The network’s first and most important oracle provider.” In addition, it also includes an open source financial information platform such as DIA.
The most special thing is that in Substrate 2.0, it is implemented through the off-chain worker module, which can obtain real-world information without relying on external oracle providers. Substrate’s development module from the beginning has gradually become a network middle station, like a tray, inheriting various tools or protocol modules needed by developers. Since the off-chain working machine module uses Substrate nodes to perform operations that are usually outside the capabilities of the blockchain, these nodes can perform Web requests, encryption and decryption, data signing, random number generation, and other CPU-intensive tasks. In contrast, an oracle system like Chainlink has its data collection logic completely off-chain. Smart contract developers can only access the final data submitted by the oracle, which requires a certain degree of trust in these providers, and the information obtained based on the off-chain working machine should be more secure and credible.
After reaching this layer, developers can basically build more complex DeFi underlying products.
Layer 4: DeFi bottom layer products
The complete DeFi underlying products include:
1. Loan agreement: Akropolis, which was hacked a while ago, and Honzon agreement of star project Acala
2. DEX: Reef Finance, Acala’s own DEX, Homa protocol, derivatives trading protocol Bifrost, cross-chain DEX Polkastarter and Zenlink, derivatives DEX-Nirvana, Polkaswap, Polkadex, Mangata.finance
3. Asset management platform: Reef Finance and Konomi that combine global liquidity aggregators, revenue aggregators and asset management products
Why are these bottom products? Because each bottom product can be used independently or combined with other bottom products or even lower products. The atomic value unit of the first layer can be used as a mortgage operation in this layer of Acala, or it can borrow assets from the lending platform and deposit it into DEX for liquidity mining, and then transfer the obtained tokens back to the lending platform to become new Collateral.
Layer 5: Protocol aggregator
Products on this layer are usually built based on smart contracts, allowing users to directly interact with other DeFi protocols without invoking smart contracts by themselves. These aggregators can be mainly divided into supply-side aggregators and aggregators. But on Polkadot, we didn’t see any specific aggregator products, which were more integrated into some wallet applications or comprehensive Polkadot DeFi projects.
Layer 6: Wallets and front-end applications
This layer is the closest to users and belongs to the top of the entire DeFi ecosystem. The product purpose of this layer is more to enhance the experience of DeFi users. The product no longer considers the underlying structure or economic and logical issues, but more in design and user feedback , Ease of use, starting from these directions, try to compete for user resources.
The most important are various wallet applications: Polkadot-JS Apps, Polkadot’s mobile wallet Polkawallet, hardware wallet Parity Signer, one-stop digital asset management platform HashKey Hub also includes multi-chain asset digital asset wallets such as imToken.
There are also some front-end applications: polkadot{.js} is a collection of tools, interfaces and libraries, Android (Kotlin) allows Android clients to interact with the Substrate-based chain, Polkadot running environment to implement Gossamer, and so on.
Looking at it in this way, we can see that Polkadot’s DeFi ecology is still in the stage of building the underlying structure. The bottom layer has not yet reached the level that can make the upper layer ecology explode, and it will take some time for development. However, considering Polkadot’s own cross-chain design advantages, parallel chain auction nodes and the current development status of Polkadot’s DeFi ecological infrastructure, these conditions can basically enable Polkadot’s DeFi ecosystem to achieve its initial goal of cold start.
