It’s pretty safe to say that we are currently living in the DeFi era. The following is a Google Trends chart that shows interest over time for the “DeFi” keyword.
As you can see, there has been an increasing amount of interest in everything DeFi related over the past 12 months. As per DeFi Pulse, the total value locked up in DeFi is around $7.85.
For the uninitiated, DeFi stands for decentralized finance. It’s an all-encompassing term for decentralized versions of traditional financial instruments. So, what are the most popular types of DeFi applications?
For that, let’s refer to DeFi Pulse once again.
As per the screenshot above, the top two DeFi protocols – Aave and Maker – are both lending apps. Following that, we have a couple of decentralized exchange applications to round off the top four.
Various DeFi projects working to bring innovative blockchain-based financial tools and derivatives have flooded the space. These are creating enough traffic to increase the value of several tokens, including ETH.
However, the DeFi space is not without its issues.
Scalability – The biggest problem with DeFi
Ethereum is the de-facto blockchain for pretty much any project you can think of, this can solely be credited to the fact of its rich features and easy adoption facility. Therefore DeFi is also no exception as hundreds of DeFi apps have put their trust on the blockchain. But though Ethereum has managed to dominate this space so far, starting in 2020, the table is seemingly turning slowly. DeFi, particularly the broad adoption of stablecoin, has added to issues Ethereum, like any other first-gen blockchain, was already facing - scalability and congestion.
Allowing just 15-20 transactions per second, Ethereum has always faced the scalability problem. Though it has tried to improve TPS with its permissioned variants, it has gained only a little. This is a severe shortcoming while trying to support the DeFi space. DeFi, by its very nature, requires a large volume of transactions every day. Unable to meet the necessary demand, the DeFi traction only raised the price of ETH token.
This is only increasing the Ethereum network’s ever-growing technical debt. Since Ethereum's underlying protocol Proof of Work is not suitable to handle the scalability issue, the team has decided to switch to Proof of Stake protocol in its 2.0 version. In its new iteration, Ethereum will address the scalability issue with its new sharding technology.
However, there are two issues.
- This is a drastic technological shift at the base level, and therefore, it has a high probability of crashing if the transition doesn’t occur smoothly.
- Not undermining the level of complexity involved, this is a long-overdue upgrade Ethereum needs. Even though Ethereum 2.0 is being tested, the transition will likely take over a year to fully upgrade and implement the staking and sharding technologies.
Currently, developers are looking for alternative platforms like
Scalability and Algorand
Algorand is built to be highly scalable. This is due to the fact of how the PPoS (Pure Proof of Stake) protocol functions. Note this is the type of protocol Ethereum is trying to switch to in its next iteration.
To select block producers and validators, the PPoS protocol adopts a lucky draw process. Each lottery is run independently of each other i.e. in complete isolation with other nodes in the network. This allows the protocol to run multiple such lotteries simultaneously without weighing down the whole network, making it linearly scalable.
Given that each process takes just a microsecond to complete and the mainnet can allow 1000 TPS, Algorand can significantly scale up fast. This provides Algorand the unprecedented ability to handle the large transactional volumes the DeFi space requires daily and also enables a scope to grow multifold. Stablecoins and any CBDC need precisely this level of scope from a blockchain.
Also, coupled with zero transaction fees on the base level, Algorand’s scalability prowess promotes authentic microfinance opportunities. This is another added but significant advantage that Algorand offers that differentiates it from other blockchains and pursues projects such as IBMR.io and CBDC to select Algorand.
Algorand Smart Contracts – The perfect blueprint for DeFi
The main thing that sets Algorand’s smart contracts apart is the implementation of a new language called Transaction Execution Approval Language (TEAL). This allows the ASCs to provide a layer-1 solution to smart contracts giving developers unprecedented speed, cost-effectiveness, and simplicity. If you think about it, these are the exact issues that DeFi creators are facing right now. Some examples of applications that you can create with ASCs are as follows:
- Automating sales so that anyone can purchase from you without requiring any involvement from your side.
- Make a loan secured by the collateral of the borrower. If the borrower fails to pay then the lender takes over the collateral.
- Conduct an automated crowdfunding project with a preset limit.
- Create multi multi-sig wallets that can be managed by multiple groups.
Algorand’s Smart Contracts are highly flexible and reliable in that they are executed on a tamper-proof (trustless) network providing complete transparency, with error-free, immutable, and accurate applications.
With Ethereum faltering due to their underlying technological issues, the time has come for a new project to snatch the crown away from the king. Algorand, with its fantastic tech and solid cryptographic principles, has optimally positioned itself to take over.