Rollup Empowers a New Financial System: Multi-chain DeFi

introduction

After five years of rapid development of DeFi, the winners in all major directions in the field of basic building blocks/infrastructure have been determined, and the market structure has not changed much. Due to the lack of new financial infrastructure innovations, the easiest fruit in the Ethereum DeFi field has almost been picked up. Multi-chain DeFi is one of the few narrative directions for new entrepreneurs, but at present, most of the other public chains The financial protocol is basically a follower and replicator along the path pioneered by the predecessors of Ethereum DeFi.

On the one hand, due to the explosion of multi-chain narratives and the gradual saturation of the Ethereum ecosystem, activities on other chains have also gradually increased. But what is interesting is that the giant whales still show a strong preference for safety. The TVL of Curve.fi, the largest agreement on Ethereum, is more than the sum of the TVL of all DeFi applications built on Avalanche and Solana (does this also mark the DeFi business model and product experience that people have debated in the past two or three years? Should the dust settle on the topic of retail or insitution?).

On the other hand, because these multi-chains can provide lower handling fees, some users who cannot afford Ethereum fees are also squeezed out to other chains. However, considering that the actual capital and transaction volume provided by these users is still negligible, platforms based on the architecture of most mainstream single blockchains will actually be difficult to withstand the huge throughput of DeFi.

DeFi Map; Source: IOSG Ventures

Multi-chain DeFi expansion has been the new focus of DeFi development in 2021. Among them, BSC-Chain, Polygon , Terra, Avalanche and Solana have also made a lot of discussions. Although most of these chains are positioned as competitors of Ethereum, the leadership of Polygon and the community have chosen to support the biggest narrative of Ethereum, and even announced an ambitious and positioning itself as one of the leaders in the modular blockchain approach.

Due to the slow progress of existing Ethereum-native scaling solutions, this opens up a certain window of opportunity for its competitors to capture some market share. While TVL is most widely used to define a traffic volume metric for individual on-chain activity, this metric has certain drawbacks. Since most of the TVL is usually derived from a specific L1 native token, an increase in the price of the native token will naturally lead to an increase in TVL, which in turn will further cause speculators to drive up the token price.

As The Block shows in the figure below, it can be seen that Avalanche has the largest fresh capital inflow into the ecology.

Source: The Block

Despite growing activity on other chains, Ethereum remains the dominant solution when it comes to sheer TVL and the number of dApps built on it. Intuitively, we can see that the total TVL of Curve, the largest Ethereum protocol, is greater than the sum of the TVL of all applications built on top of Avalanche and Solana.

Source: Footprint Analytics

Other chains are more than 12 months behind Ethereum development. The new chain will have to stand the test of time in order to prove secure enough for large capital providers. The perception of risk is clear if we compare the yields of stablecoins on Solana to stablecoins on Ethereum. For example, Solend, the largest money market protocol on Solana, offers 2-3 times larger APY on USDC and USDT than AAVE . This gap suggests a larger implied risk premium for interacting with new protocols on a new chain.

Any chain that seeks to compete with Ethereum must rebuild the Ethereum DeFi map. Therefore, when the Ethereum DeFi ecosystem has been trying to explore new natives and build vertical fields, most other L1s are copying the Ethereum DeFi map.

If we look at the market value of DeFi tokens, the dominance of Ethereum DeFi is also very obvious. Among the top 20 token assets, only 4 are non-Ethereum ecological projects.

The status of a decentralized application pioneer has helped Ethereum accumulate soft power. All alternative L1a adopt EVM compatibility in some form, such as Avalanche's C chain, Polkadot 's Moonbeam, NEAR's Aurora, Solana's Neon, Fantom, Polygon, BSC, etc.

In the long run, we expect that most applications will be built on rollup, because this is the only sustainable solution that supports tens of thousands of users to have a good on-chain experience for a long time, and this is based on not sacrificing decentralization Basic principles such as globalization, anti-censorship, security and trustlessness.

This article is an excerpt from a part of "IOSG Report: Rollup Empowers a New Financial System": Multi-chain DeFi. Stay tuned for the full report.