How Interoperability Can Take DeFi to the Next Level

Following a breakout year for decentralized finance (DeFi), the nascent sector has demonstrated that it can handle traditional financial services such as lending, borrowing, and trading with aplomb. It has also delivered unique and highly profitable financial instruments, such as proof liquidity mining. The question now is, “what comes next?”

While it’s easy to get swept up in all the goodwill and hyperbole surrounding this rapidly growing industry, success brings challenges of its own. The popularity of DeFi has put increasing pressure on the Ethereum network. At times, the strain has shown with the average cost of a transaction hitting $25.10 on February 5, 2021. As much as Ethereum is making a valiant attempt to support the entire industry, the cost for users is increasingly prohibitive.

It’s an issue which Ethereum’s founder, Vitalik Buterin, is aware of. In his keynote address at CoinDesk’s “invest: ethereum economy” event in October 2020, Buterin provided leadership, calling on power users to adopt Layer 2 scaling solutions to help strengthen the network’s capacity. At the same time, projects such as Polygon (previously Matic) have made further progress. They have developed their own Layer 2 scaling for Ethereum.

Beyond Layer 2

Beyond Layer 2 scaling, there is another option that could yet help deliver on the full promise of the DeFi industry. Interoperability or cross-chain technology facilitates the transmission of value and information between separate blockchain networks. This allows the representation of assets of one blockchain on another, such as Bitcoin on the Ethereum network as wrapped Bitcoin (wBTC).

One way for this asset transfer to occur is with Hyperloop, the bridge protocol adopted at PlasmaPay. Using Hyperloop, smart contracts can lock to Ethereum’s ERC-20. These are then replicated on the Plasma network as a side-chain. Plasma Chain is a highly scalable blockchain that utilizes a POS consensus mechanism to deliver near-instant transactions with zero fees. If successful in attracting users to their solution, PlasmaPay can do their bit for interoperability and the sustainability of the sector. Additionally, it can offer users a way of avoiding rocketing gas costs.

PlasmaPay Founder
PlasmaPay Founder: Ilia Maksimenka

The team behind PlasmaPay has also developed Plasma.Finance, a universal platform that combines the most popular DeFi protocols. Furthermore, it unites them under the same roof.

While the bulk of protocols are aggregated on the Ethereum network, the potential for shifting to zero-fee Plasma Chain remains intriguing. In the meantime, Plasma.Finance is rolling out the Plasma Gas Station (PGS), which allows users to alternatively pay Ethereum gas costs in stablecoins such as USDT and DAI. This means greater flexibility and greater choice.

Future – Multiple Interoperable Blockchains

Using smart contracts to peg assets across chains is not the only way of achieving interoperability. Networks of multiple interoperable blockchains are being developed on Cosmos and Polkadot, with Bloomberg recently touting the latter as an “Ethereum killer.” If anything, however, the last thing DeFi needs is Ethereum dead and buried. DeFi needs an Ethereum which functions at its very best, helped by spreading assets across multiple powerful blockchains. Beyond the hyperbole, there is room enough for both a successful Ethereum and Polkadot.

With a number of contenders, such as PlasmaPay and Polygon(previously Matic), vying to give Ethereum a helping hand, and with networks of interoperable blockchains such as Polkadot and its competitors, such as Comos, gaining momentum, the DeFi sector could yet be set for another fantastic year in 2021.

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