In-depth: Can the growing Polkadot DeFi ecosystem surpass Ethereum?

Kelvin Koh of Asian cryptocurrency fund Spartan Black has said that Polkadot could become a top three blockchain. In addition, Dan Morehead of Pantera Capital Management also recently shared his views with Bloomberg, highlighting that although Polkadot’s current market capitalization is about 10% of Ethereum’s value, his company believes that Polkadot has a “much higher than 10% chance of becoming a competitor to Ethereum.”

While there is constant speculation about what factors will drive ETH’s price, a trend has emerged over its lifespan: as more developers build applications with user traction and value, the price outlook for ETH becomes more bullish.

If the same holds true for Polkadot, then analysts’ predictions seem promising. The popularity of decentralized finance caused the price of ETH to double this summer. Now, DeFi developers also seem to be eyeing Polkadot, hoping to take advantage of its fast throughput, Substrate development framework, and eventual interoperability.

However, Peter Mauric, director of public affairs at Parity, told Cointelegraph that Polkadot has great potential to expand the existing DeFi ecosystem because parachains are a different type of smart contract that can be implemented in a variety of operating environments. He further elaborated:

“Once this powerful DeFi infrastructure is in place, the potential for innovation increases dramatically, and we see interesting new possibilities like decentralized sovereign wealth funds and cross-chain money markets, which lay the foundation for the next generation of DeFi protocols.”

Many of these new DApps and parachains have also received funding from the Web3 Foundation, Polkadot’s main sponsor. Mauric confirmed that the Polkadot Treasury is also providing trustless funding to projects that want to build on Polkadot. So, who is involved in Polkadot’s DeFi ecosystem, and how do they compare to their rival Ethereum?

A complete DeFi platform

Acala is a decentralized financial hub that has been described as a “one-stop DeFi service center.” It offers some similar features to Maker, allowing users to borrow and lend its aUSD stablecoin. However, it also operates a decentralized exchange according to an economic model called a “decentralized sovereign wealth fund,” which aims to provide an ongoing means to sustain the development of the ecosystem. Acala is also one of the first companies to participate in the new Polkadot-specific crowdfunding model, which is called the Initial Parachain Offering.

Acala is the first overcollateralized stablecoin project developed using the Substrate framework. Acala co-founder Bette Chen told Cointelegraph: "For example, by building Acala with Substrate, we can customize the fee schedule and allow users to pay fees in any acceptable token. The benefits of innovation are endless because we can add new features and solve problems without the need for a hard fork."

Mortgage and lending platform

Mantra DAO is a community-managed DeFi platform for staking, lending, and governance. The platform's OM tokens grant voting rights that influence various factors, such as inflation levels or interest rates. Mantra DAO will run on RioChain infrastructure and is on its way to becoming a fully decentralized DAO governed by its community.

Mantra DAO believes that scalability and interoperability are the main selling points of Polkadot, with its co-founder and council member Will Corkin explaining to Cointelegraph: “Interoperability is a big step in bringing DeFi to the mainstream, free from the network issues that platforms currently on Ethereum face.” He further added: “We can bring not only Ethereum DeFi to Polkadot, but all DeFi to all peers on all platforms.”

Another project, StaFi (short for Staking Finance), is a protocol that allows users to release liquidity in collateralized tokens. It works similarly to Yearn.Finance or Compound, issuing synthetic tokens rTokens that represent equity in the pool and can be used in other protocols. In addition to Web3 Foundation funding, the project has also received support from B-Tech, a technology accelerator for the Bitmax exchange.

DEX and Liquidity

Polkastarter on Polkadot is the equivalent of Uniswap, a decentralized exchange that allows users to launch interoperable token pools using cross-chain swaps. Projects can list their tokens and use the platform to crowdfund in decentralized auctions. The development team has created a proof-of-concept on Ethereum, and its roadmap includes migrating to Polkadot from early 2021.

Another project, Equilibrium, migrated from the EOS blockchain to Polkadot. It started out as a MakerDAO alternative, but with the move to Polkadot, it plans to expand its product range to include a decentralized exchange, a synthetic asset platform, and a new interoperable stablecoin.

A bridge to Ethereum DeFi

Moonbeam is a Polkadot parachain to Ethereum that enables developers to build smart contracts compatible with Ethereum. Through Moonbeam, DApps can be integrated with other blockchains, including Bitcoin. This also means that existing Ethereum-based front-ends can be connected to Moonbeam to interact with Polkadot-based DeFi applications.

Derek Yoo, CEO of Moonbeam developer PureStake, detailed the feature in an interview with Cointelegraph: “Moonbeam allows ERC-20 tokens to be transferred between Ethereum and Polkadot, which is needed for cross-chain deployments with a use case on both platforms.”

Moonbeam has found common ground with Ethereum-based DeFi projects that want to expand to Polkadot. It has announced a number of partnerships with notable DeFi projects, including SushiSwap, BetProtocol, and Linear Finance, and Yoo said more are in the works.

DeFi Infrastructure

Ethereum DeFi has grown up, with many innovators emerging and building on their predecessors. However, many projects on Polkadot see an opportunity to use Polkadot parachains to build an infrastructure layer for cross-chain transfer of assets and transactions.

Rio DeFi's RioChain is a Polkadot parachain built with Substrate and provides a ready-made tool suite for DeFi DApp builders. This includes the RIO generic asset bridge, which supports cross-chain transfers of multiple assets simultaneously. All of Rio's core tools can be accessed through the project's website interface, including the Rio wallet and Rio block explorer.

The team behind RioChain predicts multiple cross-chain DeFi use cases, including a Bitcoin lending platform, a Bitcoin savings account application, and instant stablecoin loans based on cryptocurrency portfolios. In addition, RioChain believes that eliminating intermediaries (such as PayPal) that earn significant revenue from merchant payments has the potential to disrupt the global e-commerce payment market.

Bithumb Global has also launched its own parachain Clover on Polkadot. To promote the development of DeFi, Clover will seek to utilize cross-chain functions and include some of Bithumb Global's own internal applications, decentralized exchanges, wallets, and lending protocols. Norelle Ng, managing partner of Bithumb Global, told Cointelegraph that the availability of infrastructure layers like Clover will ultimately help improve the user experience of DeFi: "The modules provided in Clover will greatly reduce the technical development threshold for upper-layer applications."

Akropolis is a project built on Ethereum that provides an open source protocol for DeFi DApp developers - effectively a DeFi operating system. In the context of Polkadot DeFi, it has received funding from the Web3 Foundation to provide a platform-as-a-service for Substrate nodes. It also provides a staking entry as a front-end to the Polkadot chain. Akropolis has been integrated with Ethereum DeFi DApps, including Compound and Aave.

There is still a long way to go for Polkadot DeFi

Based on the scale of development, Polkadot DeFi looks promising. Many projects have already begun to take advantage of the interoperability provided by the system. Polkadot is also trying to make progress in attracting developers from other platforms.

However, due to the current lack of composability between Ethereum and Polkadot applications, it will take some time to achieve interoperability. For example, it is not currently possible to arbitrage on different decentralized exchanges on other platforms through flash loans on one platform. Mauric said that Polkadot is achieving composability and admitted that this is a key development process.

“Cross-chain composability is a must for DeFi and Web 3.0 as a whole. We’ve seen a surge in demand for trustless, pegged Bitcoin in Ethereum for use in DeFi, which is a clear early sign that cross-chain connectivity and composability are coming. Solving cross-chain composability is a major milestone.”

However, until cross-chain composability becomes a reality, it’s possible that many DeFi DApps on Polkadot will simply seek to replicate existing applications on Ethereum. After all, this has already happened on Binance Smart Chain, where DApps like BurgerSwap and BakerySwap chose to copy the Ethereum-based SushiSwap.

The value of simply copying existing applications is questionable. Therefore, Polkadot DeFi will need to provide more products to attract users and keep them away from Ethereum's composable and liquid DeFi ecosystem.

Ultimately, it is a matter of time before Polkadot takes the DeFi crown from Ethereum. However, perhaps the more pressing question is whether Polkadot can eventually improve DeFi to increase its adoption and make it more friendly and convenient for ordinary investors and consumers. In addition to interoperability, this seems to be Polkadot's ultimate goal.