Polkadot’s DeFi ecosystem is expanding, but will its interoperability be sufficient to present itself as the replacement for Ethereum?

Polkadot’s Blockchain platform only launched its mainnet in May, but it is already pushing to become a major competitive force in the industry. At the end of August, following a re-naming of the DOT token, Polkadot crashed into the top 10 cryptosystems, outperforming established altcoins such as EOS, Litecoin (LTC) and others.

Kelvin Koh of Asian cryptomoney investment fund Spartan Black said earlier that Polkadot could be among the top three Blockchains. Dan Morehead of Pantera Capital Management also recently shared his view with Bloomberg, noting that although Polkadot is currently trading at around 10% of Ethereum’s value, his company believes it has „a much greater than 10% chance of being a competitor to Ethereum“.

Although there is endless speculation on what factors drive the price of Ether, a trend has emerged throughout its life: As more developers build applications with user appeal and value, the outlook for Ether’s price seems more optimistic.

If the same is true for Polkadot, then analysts‘ predictions look promising. The popularity of DeFi caused the price of ETH to double this summer. Now, DeFi developers also seem to be looking towards Polkadot, keen to take advantage of the fast performance, Substrate development framework and ultimately interoperability.

However, Peter Mauric, head of public affairs at Parity Technologies, told Cointelegraph that there is great potential for Polkadot to extend the DeFi ecosystem beyond its current capabilities, saying that para-chains are a different type of smart contract that will allow a different degree of implementation. He explained in more detail:

„Once we have these turbo-charged DeFi primitives, the potential for new innovations will be vastly expanded, and we will see exciting new possibilities such as decentralised Sovereign Wealth Funds and cross-chain money markets that will provide the basis for the next generation of DeFi protocols.“

Many of these new DApps and para-chains are also being boosted by grant funding from Polkadot’s main sponsor, the Web3 Foundation. Mauric confirmed that Polkadot’s treasury is also reliably disbursing funds on an on-chain basis for projects seeking to build on Polkadot. So, who participates in Polkadot’s DeFi ecosystem and how do they compare to their Ethereum counterparts?

A complete DeFi platform

Acala is a decentralised financial centre, billed as an „all-in-one DeFi service centre“. It offers some features comparable to those of Maker, allowing users to lend and borrow their stablecoins toUSD. However, it also operates a decentralised exchange under an economic model called „decentralised sovereign wealth fund“, designed to provide a continuous means of sustaining the development ecosystem. Acala was also one of the first to participate in a new crowdfunding model specific to Polkadot known as the parachain initial offers.

Acala is a classic example of a project that takes advantage of Substrate’s great capacity for customisation. Bette Chen, co-founder of Acala, told Cointelegraph: „By using Substrate to build Acala, we can, for example, customise the fee schedule and allow users to pay fees on any accepted token. The positive side of innovation is that there are no limits, as we can add new features and solve problems without the need to use forks“.

Staking and lending

Mantra DAO is a DeFi community platform for gambling, lending and governance. The platform’s OM token confers voting rights that influence various factors such as inflation levels or interest rates. Mantra DAO will operate in the infrastructure of the Rio Chain and is on track to become a fully decentralized DAO governed by its community.

Mantra DAO believes that scalability and interoperability are the main selling points of being based in Polkadot, as co-founder and board member Will Corkin explained to Cointelegraph: „Interoperability is a step towards incorporating DeFi and eliminating the current network issues faced by the platforms in the Ethereum“. He added: „Not only can we bring the DeFi from the Ethereum to Polkadot, but we can bring the entire DeFi to all peers across all platforms.

Another project, StaFi (short for Staking Finance) is a protocol that allows users to unblock liquidity tied up in staking tokens. It works in a manner comparable to Yearn.Finance or Compound, issuing synthetic tokens called rTokens that represent a share in the pool and can be used in other protocols. Along with the Web3 grants, the project has received support from B-Tech, a technology accelerator affiliated with the Bitmax exchange.

DEX and liquidity

The Polkadot equivalent of Uniswap is Polkastarter, a decentralised exchange that allows users to launch groups of interoperable tokens with cross-chain exchanges. Projects can list their tokens and use the platform to make a pool in a decentralised auction. The development team has created a proof of concept at Ethereum, with a roadmap that includes migration to Polkadot from early 2021.

Equilibrium is another project that is migrating to Polkadot from a different Blockchain: EOS. It started as an equivalent of MakerDAO, but with the move to Polkadot, it plans to extend its product range to include a decentralised exchange, a synthetic asset platform and a new interoperable stablecoin.

A bridge to DeFi at Ethereum

Moonbeam is a Polkadot para-chain bridge for Ethereum, which allows developers to build intelligent contracts compatible with Ethereum. Using Moonbeam, the DApps can be integrated with other Blockchains, including Bitcoin. It also means that existing front-end designs based on Ethereum can be connected to Moonbeam to interact with Polkadot-based DeFi applications.

Speaking to Cointelegraph, Derek Yoo, CEO of Moonbeam PureStake developer, elaborated on the functionality: „Moonbeam allows the ERC-20 tokens to move between Ethereum and Polkadot, which is necessary to feed cross-chain deployments where you have an instance of the application on both platforms.

Moonbeam is already finding traction with DeFi projects based on Ethereum that want to expand to Polkadot. He has announced several partnerships with prominent DeFi projects, including SushiSwap, BetProtocol and Linear Finance, with Yoo indicating that more are on the way.

DeFi infrastructure

The DeFi at the Ethereum has grown organically, with multiple innovators coming and building on the work of its predecessors. However, many projects at Polkadot are seeing the opportunity to establish layers of infrastructure using Polkadot’s para-chain for asset transfers and cross-chain transactions.

DeFi’s River Chain is a Polkadot para-chain built using Substrate and provides a ready-made toolkit for DeFi’s DApp builders. These include the Rio Generic Asset Bridge, which allows the simultaneous transfer of multiple assets in a chain. All of Rio’s core tools are accessible using the project’s web site interface, including Rio’s wallet and Rio’s Block Explorer.

The team behind the Rio Chain envisages several cross chain DeFi use cases, including a Bitcoin loan platform, a Bitcoin savings account application and Stablecoin instant loans based on a crypto wallet. In addition, Rio Chain believes that there is room to disrupt the global e-commerce payments market by eliminating intermediaries such as PayPal that earn significant revenue by taking a share of merchant payments.

Bithumb Global is also starting its own para-chain in Polkadot, called Clover. In order to stimulate the development of DeFi, Clover will seek to leverage cross chain capabilities and include some of Bithumb Global’s own applications, including a decentralised exchange, portfolio and loan protocols. Norelle Ng, managing partner of Bithumb Global, told Cointelegraph that the availability of infrastructure layers such as Clover will ultimately help drive improvements in the DeFi user experience: „The modules made available in Clover will greatly reduce the technology development threshold for top layer applications.

Akropolis is an Ethereum-based project that provides open source protocols for developers of DApps in DeFi – effectively an operating system for DeFi. In the context of DeFi for Polkadot, it has received a grant from the Web3 Foundation to provide a platform-as-a-service for the Substrate nodes. It also offers a staking portal as a front end for the Polkadot chain. Akropolis is already integrated with Ethereum DeFi’s DApps, including Compound and Aave.

A long way to go

Based on the scale of development, things look promising for the DeFi ecosystem in Polkadot. Many projects are already starting to take advantage of the interoperability offered by the system. Polkadot is also trying to make progress in attracting developers from other platforms.

However, the vision of interoperability will take some time to reach its true potential, mainly due to the current lack of composability between Ethereum and Polkadot applications. For example, it is not yet possible to obtain a flash loan on one platform to benefit from arbitrage on different decentralised exchanges between other platforms. Mauric said that Polkadot is on the way to achieving composability and acknowledged that this is a critical development:

„Cross-chain composability is a necessity for both DeFi and Web 3.0 as a whole. We already see the thirst for Bitcoin Wrapped in Ethereum, which operates without trust, to be used in DeFi, this is a clear early indication that cross-chain connectivity and composability is coming. Solving the composability of the cross-chain is an important milestone.“

However, until cross-compositionality becomes a reality, there is a risk that many DeFi DApps in Polkadot will simply try to replicate existing applications in Ethereum. After all, this has already happened with Binance Smart Chain, where DApps like BurgerSwap or BakerySwap chose to copy the Ethereum-based SushiSwap.

The value of simply copying existing applications is debatable. Therefore, the DeFi in Polkadot will need to increase its offering to attract users away from the liquid and compostable Ethereum DeFi ecosystem.

Ultimately, it is still a matter of time before Polkadot will steal the crown from the Ethereum DeFi. However, perhaps a more pressing question is whether Polkadot will eventually be able to improve the DeFi to increase its adoption and make it more user-friendly and accessible to regular investors and consumers. Beyond interoperability, that would seem to be the ultimate achievement.