Greetings Phore community. In this article, we are going to define and explore DeFi, and explain why Phore will be the most attractive DeFi platform in the space.
The term “DeFi” is one that you’ve likely heard tossed around in the crypto universe over the past several months. With the release of crypto yield farming, DeFi platforms and protocols have been on a meteoric rise. So, what exactly is DeFi, and what is all of the hype about?
The word DeFi is a concatenation of the words “Decentralized Finance.” Broadly speaking, it refers to any financial instrument that is outside of the hands of a government or business. Under this broad definition, cryptocurrency itself (most cryptos, anyway) fits into this mold, as no government or other entity owns or controls Bitcoin, Ethereum, Phore, etc.
However, when this term is used within the crypto industry, it usually refers to Ethereum-based tokens and platforms. If DeFi itself refers to the nature of a financial application, the application must also be decentralized — otherwise, the party controlling the application would be a centralized “weak point”. Decentralization is only as good as its weakest link. While other Dapp platforms exist (such as EOS, and TRON) Ethereum is by far the most popular.
DeFi has been on the rise as a critical component of the “Be Your Own Bank” movement. As the need for middlemen continues to decrease, the flexibility (and returns) for tech-savvy crypto investors continue to increase. Over time, this revolutionary technology is bound to have a significant impact on the entire financial sector. Unlike any other time in history, you are now able to deposit funds, earn interest, and take out loans — all without a bank or traditional bank account. As governments, banks, and other third parties encroach more and more on personal finances, the need for Decentralized Finance becomes all the more relevant. Aside from the “Be Your Own Bank” terminology, many in the crypto industry refer to DeFi as “Money-Legos” which, when put together in different combinations, result in new and exciting financial tools. Decentralized protocols such as Gnosis, Uniswap, Curve, MakerDao, Dai, Compound, and Aave can all be combined in various ways to create useful utilities and yields for crypto enthusiasts.
One of the first popular DeFi applications to come to the Ethereum blockchain is the well-known MakerDAO. The Maker protocol first began in 2014, when its founders sought out to create a permissionless credit system. This system would allow users to create crypto-collateralized loans, all powered by smart contracts. These loans are paid out in DAI — a stablecoin that is pegged to the dollar.
But Decentralized Finance extends beyond the currency itself. Other applications of DeFi can include (but are not limited to): Decentralized Exchanges (DEX), Lending/Borrowing platforms, Derivative platforms, and Insurance Platforms. Defipulse — a website dedicated to all things related to DeFi — keeps an up to date ranking of all DeFi projects. Currently in the lead is Compound, followed by Maker, and then Synthetix. It’s worth pointing out that essentially all of the top DeFi applications are built on the Ethereum blockchain. In fact, the only application that isn’t built on Ethereum is the Bitcoin Lightning Network, which is designed to run in tandem with the Bitcoin chain as a second layer. The lightning network comes in ranked #16, with a measly $9.2M worth of assets locked — peanuts compared to Compound’s $686M and Maker’s $645M at the time of writing.
While DeFi products and applications are exciting, provide far better returns than traditional financial vehicles, and are rapidly growing and innovating, there is one glaring problem that will stifle this growth:astronomical gas fees.
If we look at the average gas price for Ethereum transactions (in Gwei) over time, we see a significant increase since the beginning of May. Prices nearly tripled, going from ~10–15 Gwei to 40+, and they have remained high since. These insanely high prices have rendered DeFi products nearly unusable for smaller investors. Since gas prices do not vary based on transaction size, you pay nearly the same amount sending $100 as you would $10,000. The gas required to lend, and then re-claim collateral on a platform like Compound could be north of $20 — an amount that would take small investors years to recover. It simply is not practical.
Aside from gas fees and throughput, there is also the issue of code execution speed. In most modern computers, processing speed is so fast that these differences become unnoticeable. However with Blockchains, old and new technology are magnitudes of order apart. Ethereum Smart contracts execute code about 200x slower than native code, making it both slow and crowded.
Herein lays a fantastic opportunity for Phore and Synapse. We have said countless times in Synapse articles that this new sharding architecture will be scalable on a level never before seen in the industry. A potential throughput into the millions of TPS is achievable, making Ethereum’s 15 TPS look paltry. Not to mention, its code execution speed is nearly synchronous with native code, making it almost 200x faster than Ethereum. With numbers like these, the network will be able to support any level of demand, keeping transfer fees low. This is essential for bringing DeFi to a global scale.
It’s also possible that Synapse could be the link between various DeFi ecosystems. While Ethereum has been the most developed thus far, it’s within the realm of possibility that in the coming years, EOS and TRON could play a role in a thriving DeFi market. Remember that as a shard-based blockchain, the network can support a number of “side-chains” that are compatible with each dApp platform. Of course, all of this could be achieved through Synapse’s native smart contracts — maintaining the integrity and decentralization of the system.
Another way that Synapse can leverage its sharding capabilities is by having multiple shards dedicated to DeFi. Rather than Ethereum, which lumps all of its smart contracts (of various types) onto one crowded chain, Synapse could have a dedicated shard for each individual aspect of DeFi. One for lending, one for pooling, one for issuing assets, the list goes on. Applications like CryptoKitties and Compound would not be on the same chain. This would ensure that there is more than enough available throughput available in each channel, while retaining full interoperability, chain security, and integrity.
As the Crypto Industry and DeFi ecosystem continue to grow, new technologies must be developed to handle the growing load. Ethereum was a great innovation for its time, but its inherent limitations prevent it from scaling to meet current demands. If Ethereum was the “Model T”, Synapse is the Ferrari. Synapse will solve a number of challenges that the DeFi market will face as it grows. A scalable, multi-compatible, and low-fee solution will only spur the industry on to new heights.
Stay tuned for more updates!