Welcome to the ninth installment of PYMNTS’ nine-part series on decentralized finance (DeFi).
Over the previous days, we’ve looked at every part of DeFi — the biggest, hottest, most rewarding and risky part of the blockchain revolution. Now that we’re at the end, you should know what DeFi is, how it works, and the risks and rewards of investing in it.
See Part 1: What Is DeFi?
See Part 2: What Are the Top DeFi Platforms?
See Part 3: What Is a Smart Contract?
See Part 4: What is Yield Farming and Liquidity Mining?
See Part 5: What is Staking?
See Part 6: What Are DeFi’s Top 10 Uses?
See Part 7: Unpacking DeFi and DAO
See Part 8: DeFi’s Very Real Risks
So, what are the top DeFi blockchains?
Let’s start with this. Ethereum has won DeFi. The vast majority of DeFi runs on Ethereum. And that’s the problem — there’s too much of it.
Ethereum was created as a smart contract platform, and its where the self-executing contracts came into being. It’s not just a matter automating X transferring value (in the form of ether or ether-compatible ERC-20 token) to Y. A complex enough smart contract is a computer program — a decentralized application (DApp) leading Ethereum’s primary creator, Vitalik Buterin, to call it the “world computer.” DeFi is built on that virtual computer.
The problem is Ethereum is slow. Visa routinely handles 1,700 transactions per second (TPS) and can manage up to 24,000. Ethereum can only manage 10 to 15 TPS, leaving it overwhelmed. Transactions pile up faster that they can be posted, leading to delays and high transaction fees as users try to buy their way to the front of the line.
So, it’s pretty clear that for DeFi to become an alternative to centralized blockchain and traditional finance, that TPS disparity has to go.
That’s something the Ethereum Foundation and the project’s developers understand. In December 2020, they launched the first stage of Ethereum 2.0, a project that is essentially building an entirely new blockchain and merging Ethereum 1.0 onto it. It will, in theory, be able to scale to 100,000 TPS. The long-delayed project is scheduled to be completed in 2022.
There’s a lot more to it, of course. And this is important because all of DeFi is built on it.
Ethereum 2.0 will get rid of bitcoin-style mining as the consensus mechanism by which transactions are validated and added to the blockchain in exchange for newly mined ether tokens. That system, proof-of-work (PoW), is horrendously polluting and can’t scale. So Ethereum 2.0 will use proof-of-stake (PoS), a system that replaces miners with validators who post an ether stake — essentially a bond for good behavior — in exchange for the right to validate transactions and earn transaction fees called “gas” and new ETH coins.
All the rest of the blockchains that are competing with Ethereum already use PoS, making them faster, more scalable and cheaper.
Here’s a look at some of the top contenders for the title of Ethereum Killer.
Algorand (ALGO) offers 1,000 TPS, and transactions are completed in five seconds. Designed by Silvio Micali, an MIT computer science professor and Turing Award winner, it manages this with a two-tiered structure. There’s a base level — known as Layer 1 — on which simple transactions are made and sent to be validated. All the more complex smart contract functions, such as running a DeFi lending/borrowing platform, for example, run on Layer 2, shifting just the final transaction data to Level 1.
Most blockchains like Ethereum, bitcoin and others are called Level 1 blockchains because everything is done on a single layer. There are some pure Layer 2 projects, such as Lightning Network, designed to lie on top of bitcoin and other single-layer blockchain to make them more scalable.
Avalanche (AVAX) can handle 4,500 TPS and has attracted some important DeFI projects like the bZx lending platform, SushiSwap decentralized exchange (DEX), and TrueUSD stablecoin. There are three “subnet” blockchains with a different role. Avalanche has an exchange chain (X) on which assets are exchanged, a smart contract (C) platform on which the smart contracts run, and a platform (P) chain on which DeFi projects can build their own “subnet” blockchain.
Binance Smart Chain — or BSC — is probably the fastest growing of the would-be Ethereum Killers, with its technology helped along by the name and reputation of the world’s largest crypto exchange. It works in conjunction with the centralized exchange’s other blockchain, Binance Chain (BC). Smart contracts run on BSC, which is parallel to BC, which runs transactions. Both use the Binance Coin (BNB), trading them across a Binance Bridge.
Cardano (ADA) was created by Ethereum Co-Founder Charles Hoskinson in 2017, making it one of the older competitors. A PoS chain with 266 TPS capacity, Cardano has a big advantage (or disadvantage, depending on your point of view) in that all code updates are rigorously peer-reviewed. It is working on a Layer 2 update to up its TPS to match later competitors.
Polygon is a scaling solution, a Layer 2 blockchain on top of Ethereum, intended to improve Ethereum’s scalability rather than replace it. Formerly known as Matic Network, Polygon offers developers a way to build scalable sidechains bound to Ethereum, using several methods. It’s main Matic POS Chain adds PoS security to child chains built on it. Plasma Chains bundle transactions into a single block, with batches of blocks sent to Ethereum in a single submission via bridges. zk-Rollups executes transactions and then sends only the proof of validity to Ethereum. Optimistic Rollups does the same, except it sends proof of fraudulent transactions.
Polkadot (DOT) is a “blockchain of blockchains” that will host 100 “parachains” that separate transactions from the actual smart contract action, sending only transactions to the main validation chain. What sets Polkadot apart is that the parachains will all be interconnected, able to transfer data and tokens freely among themselves. It will also offer bridges to other blockchains, including Ethereum.
Solana (SOL) is the speed demon, with 50,000 TPS capacity. It achieves this by several methods. One is that it adds a consensus mechanism called proof-of-history (PoH) to PoS that speeds up the process by which validated transactions are accepted by all the nodes (the decentralized computers on which copies of a blockchain run). Other components do things like assign the order and execution of transactions, define how and when transactions are exchanged, and verify each component of the transaction.