Similar to other implementations of blockchain technology, DeFi also faces similar challenges. But it is increased manifold because of the massive usage expected from any financial-specific applications. For example, the DeFi trade climbed to $2 billion within three weeks due to yield farming.
Challenges to Defi’s Momentum
Speed & Scalability
DeFi demands large volume transactions to occur every second with high chances of a massive surge in transactions at specific points. This means blockchain should offer super-fast transaction resolution and be highly scalable to handle rapid network expansion. Both are associated with the consensus mechanism.
Transaction Fee
The issue with slow transactions and limited scalability means users must either wait longer or pay a higher fee to process their transactions. As more users join the network, the fee will increase.
Achieving Liquidity through Rewards
The growth in DeFi space needs a lot of coin liquidity. Though the daily transaction is high, many users hold a lot of idle coins. These can be put to good use like developer or governance activities.
To attract liquidity, blockchains incorporate various rewarding and incentive mechanisms such as staking and yield farming.
Smart Contracts and Programming Language
Smart contracts are the heart of any DeFi operation and applications. The capability of DeFi tools is therefore proportionate to various smart contract-related factors –
- Developer-friendly programming language
- Speedy execution
- Flexibility
Status of Three DeFi Candidates
This section will explore how three major players in the DeFi space are tackling the issue to drive the DeFi growth.
#1. Ethereum
Smart Contracts
Ethereum employs stateful smart contracts offering and a Turing-complete Ethereum Virtual Machine (EVM) on nodes, making them highly flexible to create.
Ethereum’s Solidity programming language offers numerous programming benefits. However, the Java & C++-inspired language is not user-friendly due to the high learning curve for underlying Ethereum system tech.
Speed, Scalability, Transaction Fee
Ethereum employs its own version of the Proof-of-Work consensus algorithm. It can offer only 15–20 TPS speed and very limited scalability. Ethereum founder Vitalik Buterin has admitted that the Ethereum network is already full, and further joining will only make transaction fees expensive.
Ethereum’s average transaction fee is about $6, but it went as high as $99.
To solve this, Ethereum will shift to the Proof-of-Stake consensus algorithm with Ethereum 2.0. But the launch keeps getting delayed.
Rewards
Ethereum’s offers $2 as block rewards for every block mined. Though Ethereum has proposed to reduce it to $0.5 for network improvement, miners have protested the decision.
Upcoming Ethereum 2.0 will require a minimum investment amount of 32ETH to be a validator. This translates to $12,800 (one ETH costs $400), which when added with $180 validation cost and an average reward of 5%, results in about $190 annual profit.
A low stake value costs the validator right. A workaround would be to make a staking pool using staking-as-a-service providers like Bitfienx or Poloniex in exchange for a small percentage of the earned reward.
#2. Cardano
Speed, Scalability, Transaction Fee
Cardano’s Ouroboros Proof-of-Stake consensus mechanism allows stakeholders to pool their resources into a single stake pool. Its latest Shelley mainnet (hard fork) removes stake dependency.
Its layer-1 throughput is 50–250 TPS. Its layer-2 off-chain protocol Ouroboros Hydra incorporates sharding to allow horizontal scaling. With each node managing up to 1,000 TPS, collectively, they can offer one million TPS theoretically. Cardano improves scalability in the 4th phase, Basho.
The minimum transaction fee is 0.155381 ADA (about $0.017) with an added cost of 0.000043946 ADA per byte of transaction size. ADA price is expected to increase to $2 by 2023.
Rewards
There are two earning options using staking –
- Running your own ADA stake pool — 4.82% annual adjusted reward (AAR)
- Delegating ADA to a stake pool run by another validator — 3.65% AAR
There’s a 14.91% default provider fee for stake delegation.
Pool operators may pledge their stakes to make their pool attractive. Every 5 days, 0.3% incentive from 13.8 billion reserved ADA is distributed among all.
Smart Contracts
In Q4, 2020, Cardano’s third phase Goguen, will bring smart contracts and enable DApps to create a versatile financial operating system. Its Hydra off-chain protocol is expected to offer fast and economic transactions with decreased latency than Ethereum.
Cardano uses Haskell-based Plutus smart contract-writing language. Non-technical users will benefit from its upcoming Plutus-based high-level language Marlowe. The on-chain and off-chain capabilities of both languages promote enterprise-grade DeFi solutions.
#3. Algorand
Speed, Scalability, Transaction Fee
Algorand’s Pure Proof-of-Stake consensus mechanism is stake size-independent. Its cryptographically verifiable lottery offers increasingly robust security as the network expands.
Each such layer-1 lottery completes within one microsecond and is independent of each other. This enables multiple lotteries to run simultaneously, granting Algorand linear and horizontal scalability. Algorand mainnet offers 1,000 TPS throughput.
Rewards
Algorand charges 0.001 ALGO per transaction fee ($0.0006 at $0.6 rate) and every account must have 0.001 ALGOs of minimum refundable balance for transactions.
Anyone holding at least 1 ALGO can earn staking rewards irrespective of their participation in cryptographic sortition protocol. Algorand currently offers a 0.19% adjusted annual reward with a future plan to increase the reward for online stakers.
Smart Contracts
Algorand incorporates both stateful and stateless smart contracts on layer-1. While the former offers high-speed transactions at very cheap rates, the later charges a similar fee with the same scalability. This layer-1 implementation enables ultra-quick transaction and flexibility at low fees, offering an enterprise-grade solution for DeFi.
Algorand utilizes PyTEAL to write both smart contracts. To benefit further, Algorand allows developers to write code in Python, which PyTEAL compiles to its proprietary TEAL opcode.
Conclusion
While Ethereum struggles to manage DeFi growth on its network, Cardano is preparing itself slowly but methodically to support it. Algorand, on the other hand, is proving to be a powerhouse with its period feature addition and meaningful high-ticket partnerships. But all three combined can truly drive DeFi.