DeFi (decentralized finance) is a fantastic movement that promises to build financial products without the paperwork or expensive, outdated tech of banks. Essentially, DeFi services don’t require human involvement to function while still offering a faster, more inclusive, and transparent financial system.
That’s the big promise, but in reality, most DeFi applications don’t rise up to these lofty expectations. It’s not because someone has bad intentions, it’s just due to the fact that the underlying technology is still so young. I’m talking about the blockchain protocols powering these dApps.
Bitcoin is already more than a decade old, but it wasn’t built with DeFi in mind. Ethereum just hit the five-year mark, but almost every time when a new app grows in popularity it’s network gets clogged for days. The EOS protocol is running for two years with no serious applications built on it. According to stateofthedapps.com, this is it. Almost 3,000 dApps on Ethereum, 300+ on EOS, and the rest don’t matter because they’re hosting less than 100 active dApps. Or do they?
The rise and fall of blockchain protocols
Let’s get back to DeFi for a second. What’s making these apps so special? It’s not only the decentralization of services that make them so appealing, it’s the ability to execute actions (trades, loads) directly between participants as an automated process. There’s no intermediary, no papers to sign, no trust to build. It’s as simple as pressing a button and knowing that a computer will execute the command without improvisations. Actually, that’s exactly what’s happening behind the scenes, and it’s called a “smart contract”.
Smart contracts are, in fact, older than Bitcoin. Nick Szabo, a computer scientist, introduced smart contracts (10 years before the invention of Bitcoin) as “computerized transaction protocols that execute terms of a contract.” A simple concept that’s challenging even the brightest minds today.
Ethereum was the first one to put these ideas together and have smart contracts on blockchain as a trustless network. Tokens replaced money in this alternate decentralized world, which is how decentralized finance became a thing. With such a powerful tool released to the world, the possibilities are endless… with the exception of one thing; it can’t be used by too many people at the same time.
Blockchain gets its name from its unique structure that resembles a chain of blocks. Each so-called “block” is chained to each other, and a new “block” can be added only at the end of this “chain”. Once that’s done, no other previous blocks can be altered. Each block contains the temporary transaction history of its participants (accounts, funds, transactions.)
Can you tell what’s going to happen when the number of participants increases? Exactly! The ledger gets longer and longer, increasing in size. If you are imagining these blocks as “digital boxes” with limited space inside, you are perfectly right. The block size is limited, and if it fills up you need to wait until the next block for your transaction to be confirmed. With Bitcoin, a new block is being processed every 10 minutes, while Ethereum processes one every 10 to 19 seconds. Now it makes sense why Ethereum is better suited for DeFi applications. Anyway, even if each block takes only seconds, most of the time you might have to wait for more than one block because Ethereum just gives the impression of speed. One Bitcoin block can fit 1MB of data, while an Ethereum block can only fit 20 to 30KB. That’s a significantly lower amount and even if it is generated in seconds, you still have to wait in the queue for minutes or even hours. Unless, of course, you want to “speed up” your transaction by increasing the fees.
If you are not aware of the blockchain economy, then you should understand that decentralization comes at a price. Every transaction costs a fee that can vary from a few cents to tens of dollars; it is all based on the active users on the network. With demand, prices increase. This can be a bit counterintuitive. If you are inviting your friends to join the network you are going to pay more for it. In crypto, this is still due to it being “early”. You should join a project or an app as early as possible to benefit from its low prices before everyone else joins in.
Protocols of the future
If I would have to make the profile of a protocol that would bring all the DeFi ideas to life by overcoming the mentioned limitations, it would have the following characteristics:
- Efficient and fast block generation
- Big block size
- Low transaction costs
The requirements are pretty clear, so why has nobody come up with a solution yet? They did! In my research beyond the current popular protocols, I’ve found protocols that are overcoming these limitations.
One protocol that is ticking all the boxes is the ILCoin network. Have you heard about it? If not, you will soon. The team behind ILCoin managed to achieve fast speeds without compromising security or decentralization in any way. All transactions happen on the blockchain. Actually, their solution even includes on-chain data storage. Here’s how it looks under the hood:
- Block generation is fast. Very fast! ILCoin uses technology called the RIFT protocol that allows a block to contain mini-blocks and synchronize blocks simultaneously.
- The network successfully mined a 5GB block, which proves there’s no actual block limit.
- Transactions are as cheap as a few cents and based on the network’s nature to scale up with the demand, the fees can’t ever rise higher than this.
How about security? I thought there would be a catch, but my skepticism was unwarranted when I realized that the project is associated with the well-known Palo Alto brand whose veracity is unquestionable.
DApps are already being built on the ILCoin protocol. Some are built by their development team, like “Age of ILCoin,” a tower defense game (very addictive!), but other developers are moving fast and they’ve already deployed their own applications. You can find all of them at ilcointools.com. That’s where I’m keeping an eye out for the next big DeFi app!
There are other protocols that got my attention, too; TRON being one of them. This company already acquired BitTorrent, a peer-to-peer file-sharing network, and Steem, a blockchain-based blogging platform. The mix of these two technologies, plus merging their developers could lead to something meaningful. The network already hosts 60+ dApps and it has as many daily active users as EOS. But their main features are still in development, so we’ll have to wait and see.
Another promising solution for the future is the GoChain protocol. Their solution goes beyond scalability and decentralization, trying to solve the energy consumption problems of blockchains as well. The Proof of Work consensus mechanism that’s currently used by Bitcoin and Ethereum is being replaced by Proof of Reputation, a new concept in which those who are earning a better reputation and greater audience base govern the network. It sounds interesting. It’s meant to bring the same trust dependence of real-life brands to the blockchain, but how would it actually work? We don’t know yet, as the protocol is still in its early days with less than 10 hosted dApps.
That’s the result of my research. I will actively keep an eye on new protocols, especially the ones listed above, and I believe that DeFi is a movement that’s just getting started. Once developers realize the limitations of Ethereum and when users grow tired of the high fees, this new environment will attract more attention and the situation will snowball pretty quickly from there. Make sure you don’t miss out!