This article comes from an article on the Parity blog on December 10, 2020. The author is Peter Haymond, Parity Ecological Development Manager.
In the past few years, Decentralized Finance (DeFi) has become one of the most popular use cases in the crypto ecosystem. Simply put, DeFi can be described as financial software built using blockchain technology, which has the potential to make financial applications more open and accessible. At Parity, we see more and more DeFi teams using our blockchain development framework Substrate to build solutions, many of which are built for the Polkadot ecosystem.
DeFi stack
The DeFi technology stack allows teams to mix and match projects to build high-value applications. In simple terms, you can think of it as three layers:
- Application layer-what the user sees
- Protocol layer-a specific set of rules
- Basic layer-how to record value and data on the chain
Substrate allows developers to build at each layer, forming the backbone of Polkadot. Most DeFi teams are in the protocol layer, creating applications for user interaction. In addition, we are beginning to see that some of these DeFi projects have themselves become vibrant ecosystems, reflecting a distinctive feature of Polkadot, that is, Polkadot is an ecosystem of ecosystems.
DeFi on Polkadot
Here are a few DeFi teams in the Polkadot ecosystem and how they work at each layer.
Base layer
- Polkadot-a network protocol that allows arbitrary data to be transferred across blockchains.
Protocol layer
- Acala-DeFi hub and decentralized stablecoin aUSD, aUSD allows users to send and receive U.S. dollars across any blockchain connected to Polkadot.
- Stafi-Allows anyone who holds the pledged tokens to pledge and obtain alternative tokens (rToken) for immediate transactions and exchanges without waiting for the unbinding period to complete.
- Bifrost-a parachain that allows users to deposit their mortgaged tokens and mint vToken to obtain staking liquidity.
- Equilibrium-a cross-chain currency market that combines mutual lending and synthetic asset generation and trading.
- Centrifuge-allows companies to use their accounts receivable and other future cash flows to obtain financing without trusting middlemen. They also provide the Centrifuge chain as a gateway for real-world assets into DeFi.
- Zenlink-cross-chain DEX network.
- HydraDX-Achieve frictionless liquidity for encrypted assets.
- Laminar-a decentralized financial platform established by Acala to provide power for synthetic assets, margin trading and currency markets.
Application layer
- Polkaswap-an automated market maker (AMM)/non-custodial exchange built by the Soramitsu team.
- Sushiswap-an AMM run by the community.
- Clover-Polkadot Ecosystem DeFi platform supported by Bithumb.
Note: We mainly listed projects that were built for Polkadot or aimed to become parachains. Some of them (such as SushiSwap) are based on parachains, not Polkadot itself.
Composability
The composability of DeFi depends on shared security, that is, all parachains connected to the Polkadot relay chain will benefit from the economic security provided by the relay chain validator. Using other proof-of-stake systems, teams must find and guide their own set of validators, thereby increasing the barriers to entry and establishing the need to establish trust between the communication chains. In contrast, inter-chain communication on Polkadot is not restricted by the trust of the receiving chain to the sending chain. The trust between all parachains is equal, which makes it easier for developers and ensures that its users can enjoy a seamless experience.
Polkadot uses cross-chain messaging (XCMP) for asynchronous communication between parallel chains. With XCMP, the chain can send messages that do not expect a response (but it can guarantee that the receiving chain will act according to it), or it can send messages that expect to return certain information (such as the return value of a function called on the receiving chain).
DeFi based on Ethereum and Bitcoin will be able to communicate within the Polkadot ecosystem using a transit bridge. For example, Chainsafe and Snowfork are developing a trusted Ethereum bridge, and Interlay is building a low-trust Bitcoin bridge. Teams built on Polkadot can use XCMP and transit bridges to create novel and interoperable DeFi products.
What makes Polkadot unique
Polkadot has a powerful set of features that DeFi projects can take advantage of. By allowing the development of independent blockchains, we can see some really interesting use cases.
Some teams choose to deploy their infrastructure on the DeFi chain in the Polkadot ecosystem instead of building their own local parachain. For example, Ren collaborated with Acala by deploying its RenVM bridge module on the Acala network. Teams can choose to build a runtime module and then integrate with parachains, or build on parachains based on parachains (such as Moonbeam, Plasm, or Edgeware that supports smart contracts based on Solidity or Ink!). Smart contract). Looking ahead, we hope that some teams will continue to choose to build on existing platforms.
A unique subcategory in DeFi is liquidity mortgages. This type of application obtains tradable synthetic tokens during operation, so that anyone who owns the tokens in the mortgage can immediately obtain liquidity without a lock-up period. This brings obvious benefits to token holders, although it also brings some centralization risks in the process. We have seen at least six projects building liquidity mortgage solutions locally or through bridges with other chains, which makes Polkadot the most widely adopted blockchain ecosystem for liquidity mortgages.
The DeFi project in Polkadot is not only copying existing concepts, but also creating entirely new concepts. An example is Acala’s Decentralized Sovereign Wealth Fund (dSWF). The purpose of dSWF is to make Acala economically sustainable, to provide funds for ongoing research and development, and to pay for security on the Polkadot network. Acala’s stablecoin platform operates similarly to MakerDAO, that is, a stability fee is required when closing a collateralized debt position (CDP). After CDP is closed, the accumulated stability fee will be kept in the system treasury. Then, whenever the system profit exceeds a certain threshold, these tokens will be used to purchase DOT from the market and deposited to supplement the DOT reserve held by dSWF instead of burning local ACA tokens. This makes dSWF a compelling and versatile system. You can learn more about dSWF here:.
future
Teams in the DeFi ecosystem are building or thinking about various products. Currently, we see the most development activities in products such as stablecoins, non-custodial exchanges, currency markets, and oracles. This makes sense, because these types of products are generally considered DeFi primitives and basic elements. Looking ahead, we hope to see many types of DeFi products in the Polkadot ecosystem supported by Substrate, such as:
- Insurance platform
- Revenue aggregation platform
- DEX aggregation platform
- Derivatives
- Lossless Lottery
- Decentralized futures
- Option trading without permission
- Loan Credit Risk Agreement
- Fixed rate loan
As more and more teams build DeFi on Polkadot and combine creativity with highly scalable and composable systems, we are entering exciting times. We look forward to talented teams that continue to expand use cases and create novel products and results for the market.
