The DeFi ecosystem on Dotsama
The DeFi ecosystem on Dotsama
Polkadot is an internet of blockchains offering DeFi projects a home that's scalable, secure, and inexpensive to use. Here’s everything you need to know about it.
Disclosure: This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice. Please exercise extreme caution if you intend to participate in these opportunities.
Polkadot, a multichain network, aims to act as a base layer for all blockchains that opt-in. The idea is to help developers focus on creating specialized chains and take care of messy parts like establishing consensus and maintaining security.
“No single blockchain design works optimally for every use case,” Wood said. Gavin Wood is the founder of Polkadot and co-founder of Ethereum. “Each chain comes with trade-offs making it good for some applications and not others. Blockchains need to be able to provide a variety of services. Parachains solve this.”
Unable to handle the sheer number of transactions that the booming decentralized finance (DeFi) industry has stacked onto its back, Ethereum transactions can run into long delays and carry fees that can range as high as $20 and even $50 per transaction at peak times — as opposed to the seconds and pennies promised by blockchain advocates.
Low-cost, real-time transactions are one of the main reasons to use cryptocurrency for payments. Decentralization Finance needs to deliver on this without compromising on decentralization.
Polkadot is an attempt to remake the entire industry, turning it from a collection of unconnected projects and chains into a single ecosystem in which all the decentralized apps can work together.
The main problems Polkadot is tackling include:
Scalability - Blockchains in isolation can only process a limited amount of transactions. Through connecting blockchains, the Polkadot network enables the execution of many transactions on multiple chains in parallel
Specializing - Enabling blockchains to communicate with each other allows developers to build highly specialized chains focusing on a specific use case while outsourcing additional features to other chains within the blockchain ecosystem.
Interoperability - Blockchains attached to the Polkadot network can exchange information and features without relying on centralized service providers. Polkadot provides interoperability and cross-chain connectivity, unlike previous blockchains that mostly operated as standalone systems. This allows participants to transfer data between chains and opens the door to inventive new services.
Community governed - The Polkadot Network allows DOT token holders and the Polkadot council to submit proposals to all DOT holders, which then will be voted on. All proposals have to go through a referendum.
How Does Polkadot Work?
Blockchains can connect with Polkadot and work in parallel as so-called “parachains” to access the network’s proof-of-stake validation of transactions and security. Parachains are sovereign blockchains. They run simultaneously and allow for transactions to be processed in parallel instead of sequentially.
In the network’s so-called “relay chain", transaction addresses are checked and data is standardized so that every system can understand it. This is where all the chains pool security. Parachains assemble and propose blocks to validators on the Relay Chain, where blocks undergo rigorous availability and validity checks. Once approved, blocks get added to the respective parachain and the validators are randomly swapped for the next block.
As the Relay Chain provides the security guarantees, collators – full nodes of these parachains – don’t have any security responsibilities. This allows them to interact without trust bounds. They share state and validation logic with the Polkadot network.
While functionality is taken care of, blockchains connected to Polkadot can use their own PoS mechanism, decide when and how to update their code and run the dapps or tokens they choose. It's essentially a pick and choose layer that allows networks to preserve their own security and incorporate new protocols.
DeFi composability relies on shared security, where all parachains that are connected to the Polkadot Relay Chain benefit from the economic security provided by the Relay Chain validators. With other proof-of-stake systems, teams must find and bootstrap their own set of validators, increasing the barrier to entry and creating the necessity of trust between communicating chains. By contrast, interchain communication on Polkadot is not bound by the trust that the receiving chain has in the sending chain. The trust is equal across all parachains, making it easy for developers and ensuring their users can have a seamless experience.
DeFi on Polkadot
Decentralized finance (DeFi) has emerged as one of the most popular use cases in the crypto ecosystem over the past few years. Substrate, a blockchain development framework, enables developers to build at each layer of DeFi, forming the backbone of Polkadot. Most DeFi teams sit within the protocol layer, creating applications for users to interact with.
Below are several DeFi teams in the Polkadot ecosystem and how they work at each layer.
Consensus Layer - Base layer responsible for guaranteeing security
Polkadot (or Kusama) - a network protocol that allows arbitrary data to be transferred across blockchains.
Parachain Layer - L1s where DeFi happens
General purpose chains -
Dedicated DeFi chains -
Acala - a DeFi hub and decentralized stablecoin called aUSD that allows users to send and receive USD across any blockchain connected to Polkadot.
Mangata - a DEX that prevents frontrunning with low fixed-fees and no network fees.
Stafi - allows anyone holding staking tokens to stake and obtain an alternative token (rToken) to trade and exchange immediately without waiting for the unbonding period to complete.
Bifrost - a parachain that allows users to deposit their staking tokens and mint vTokens to get staking liquidity.
Equilibrium - a cross-chain money market that combines pooled lending with synthetic asset generation and trading.
Centrifuge - allows businesses to secure financing against their accounts receivable and other future cash flows, all without needing to trust a middleman. They also provide the Centrifuge chain, which will be the gateway for real world assets into DeFi.
HydraDX - enables frictionless liquidity for crypto assets.
Laminar - a decentralized finance platform powering synthetic assets, margin trading and money markets built by Acala.
Application Layer - what users interact with
Polkaswap - an automated market maker (AMM)/non-custodial exchange built by the Soramitsu team.
Sushiswap - a community run AMM.
Clover - a DeFi platform powered by Bithumb for the Polkadot ecosystem.
Zenlink - a cross-chain DEX network.
Solarbeam - a decentralized exchange, providing liquidity and enabling peer-to-peer transactions on the Moonriver Network.
Solarflare - a decentralized exchange, providing liquidity and enabling peer-to-peer transactions on the Moonbeam Network.
Moonwell - an open lending and borrowing DeFi protocol on Moonbeam & Moonriver
Starlay - a non-custodial lending protocol for Astar Network.
Results
Polkadot has a powerful set of features that DeFi projects can take advantage of. By allowing for independent blockchains to be developed, we can see some truly interesting use cases.
Polkadot is likely to be the most adopted blockchain ecosystem for liquid staking. Liquid staking allows anyone with a staking token to get immediate liquidity without a lockup period by obtaining a tradable, synthetic token in the process.
Some teams are choosing to deploy their infrastructure on top of DeFi chains within the Polkadot ecosystem rather than building their own native parachain. Teams can choose to build on top of parachains either through building runtime modules and then integrating with the parachain, or through building on top of a parachain such as Moonbeam, Plasm, or Edgeware that supports smart-contracts (ie. Solidity or Ink! based smart contracts).
DeFi projects in Polkadot are not just copying existing concepts, but creating new concepts altogether. One example is Acala's decentralized sovereign wealth fund (dSWF). You can read more about the dSWF here.
Acala is a cross-chain decentralized finance project building a DeFi hub for the entire Polkadot ecosystem. With Acala, you can mint aUSD stablecoins using collateral from Polkadot-connected parachains and unlock the liquidity of staked DOT tokens by turning them into L-DOT.
Projects like Mangata Finance chose to build a parachain on the Polkadot ecosystem because it allows them to design the whole chain architecture according to their needs. In the case of Mangata DEX, it is to provide 0 gas fees, frontrunning prevention and enhancing capital efficiency through Proof of Liquidity. The result is a revolutionary DEX, unlike any the world has ever seen.
Proof-of-Liquidity increases capital efficiency by maintaining network security through staking of LP tokens. So, users can participate in DeFi and earn staking rewards provided by the network simultaneously.
This wouldn't be possible on other chains like Ethereum, where creators have limited ability to affect the blockchain architecture.
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