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Opinion: What Makes a Healthy DeFi Ecosystem?

Ethereum is not the only player in the DeFi space. It’s not even the first. This could be an unpopular opinion, but DeFi is way bigger than Ethereum. To clarify, I am not anti-ethereum. I am pro-crypto. I think through the exploration of a diversity of ideas, in a plethora of settings we will discover the cocktail of cryptos that make up DeFi. There does seem to be a market sentiment in favour of Ethereum. However, in my estimation, this is an irrational, and dangerous pile-on into Ethereum based DeFi cryptocurrencies. We must be careful not to attribute the entire phenomenon of decentralized finance to a single platform. Such a misclassification is harmful to those who are new to cryptocurrency.

A plant with cryptocurrency symbols on branches

What Makes Up the Current DeFi Ecosystem?

It is shortsighted to say that decentralized finance is taking place exclusively on a single platform. Cryptocurrency is a broad and diverse ecosystem thriving with new ideas. Furthermore, decentralized finance taking place on a single platform is a bit oxymoronic. So what exactly constitutes a healthy and thriving DeFi ecosystem?

A Dominant Reserve Cryptocurrency

The first thing that makes up a proper decentralized financial ecosystem is some sort of reserve currency. When cryptocurrency got started in 2009, Bitcoin was the only game in town. Since then, a large number of other cryptocurrencies have unsuccessfully tried to dethrone bitcoin as the king of cryptos. Regardless of which cryptocurrency will be the de facto crypto reserve currency, we need one crypto to rule. Coinmarketcap tracks a metric that more or less determines the crypto reserve currency. That metric is market dominance in terms of market capitalization. Regardless of which currency is chosen by the people as the reserve currency, it is important that we make that cryptocurrency interoperable with all other platforms.

Scalable Smart Contract Platform

The second absolutely critical aspect to a healthy DeFi ecosystem is a scalable smart contract platform. It is important that this platform is able to host thousands, if not millions of decentralized applications. The platform must be able to host these dApps without compromising the customer experience. That is, the fees to use the network must remain low, and all transactions must be able to be processed in 1 minute or less. It is for this reason that I don’t think Ethereum is the optimal DeFi platform. Ethereum transaction fees are at an all time high, which ultimately leads to long wait times for transaction approvals. We may see all of this change with the release of Ethereum 2.0.

Ethereum 2.0 is set to launch in September 2020. However, the upgrade has already been delayed by years, prompting competing platforms to make a mad dash for dominance. Cardano is one cryptocurrency platform that is poised to give Ethereum a run for its money. The platform has focused on both fees, and speed without compromising the level of decentralization. Cardano is currently in its second of five phases of development. It is clear that Cardano has mapped out a real way to bring interoperability, scalability, and usability into DeFi.

It All Needs to be Usable 

One massive complaint from most newcomers to the cryptocurrency space is how difficult cryptocurrencies are to use. Signing transactions with your wallet, and understanding the difference between an exchange wallet, and a non-custodial wallet is not trivial. Transaction fees paid by the sender is a complete reversal of what most people are used to while using their VISA card. Regardless of what form DeFi takes in the future, using cryptocurrency needs to be dead simple. It needs to be obvious how to change my Bitcoin for USDT. It should cost me next to nothing, and it should take less than a minute. These are the hallmarks of a system that the average individual will adopt. 

The Users will Decide

The center of decentralized finance is not the technology, but the users themselves. Ultimately, the users will be making the decisions on which platform gets adopted. Much like how VHS beat out Betamax, there will be a war for every segment of DeFi. Even though Betamax had superior technology, the market, and the end user chose VHS. This is one reason why Ethereum might just be too far ahead of Cardano in terms of user sentiment. This is certainly the case with Bitcoin. There are many cryptocurrencies that are better technologically than bitcoin. That hasn’t seemed to matter, as bitcoin has kept its dominance despite its technical shortcomings. These examples illustrate that the users are at the center of the adoption of new technologies. It’s not what the technology can do, it’s about how that technology resonates with users.

What are the Major DeFi Platforms?

The major DeFi players are the platforms that have an established user base, and evidence of usage. Broadly speaking, this is Ethereum, and Bitcoin, with a special emphasis on Ethereum. One indication that Ethereum is the epicenter of DeFi is the amount of tokenized assets. Tether, the largest USD stable coin predominantly exists on the Ethereum blockchain. Even a respectable 21,000 bitcoins have been tokenized on Ethereum. This amounts to .1% of the total supply of bitcoin. While there are a number of other players in the DeFi space (Bitcoin Cash, EOS, TRON), the focus is on Bitcoin and Ethereum. Both cryptocurrencies have managed to capture the imaginations and market sentiment of the general population. As we covered earlier in the article, the cryptocurrency that wins the hearts and minds of the people, will be the ones that are adopted.