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Decentralized finance (DeFi) has emerged as one of the most popular use cases in the crypto ecosystem over the past few years. In brief, it can be described as financial software built on blockchain. DeFi has the potential to challenge existing financial systems and make financial applications more accessible. Now that Polkadot is live and parachains are on the way, we present an overview of the Polkadot DeFi ecosystem as it stands today.
The DeFi stack
The DeFi technology stack allows teams to mix and match projects to build high value applications. In simple terms, it can be considered as having three layers:
- The Application Layer — what users see
- The Protocol Layer — a set of specific rules
- The Settlement Layer — how value & data gets recorded on chain
Most DeFi teams sit within the protocol layer, creating applications for users to interact with. Additionally we’ve seen teams start to become ecosystems themselves, making Polkadot an enabler of many ecosystems.
DeFi on Polkadot
Several teams in the Polkadot ecosystem are already building at each layer.
Settlement Layer
- Polkadot — teams use parachains, parathreads and Ethereum Virtual Machine (EVM)-supported chains to settle transactions on the relay chain.
Protocol Layer
- Acala — is building a decentralized stablecoin called aUSD that allows users to send and receive USD across any blockchain connected to the Polkadot network.
- Stafi — allows anyone holding staking tokens to easily stake and obtain an alternative token (rToken) to trade and exchange immediately without waiting for the locking period to complete.
- Bifrost — is a parachain which allows users to deposit their staking tokens and mint vTokens to get staking liquidity.
- Equilibrium — is a cross-chain money market that combines pooled lending with synthetic asset generation and trading.
- Chainlink — created a Substrate integration that runs the Chainlink oracle network to power DeFi applications on Polkadot.
- Centrifuge — allows asset originators to finance their assets and allows investors to invest in them, all without needing to trust a middleman. They also provide the Centrifuge chain which will be the gateway for real world assets into DeFi.
- Zenlink — is a cross-chain DEX network based on Polkadot.
- DIA — is an open source oracle platform that enables market actors to source, supply and share trustable data.
- HydraDX — enables frictionless liquidity for crypto assets, built on Substrate.
- Laminar — is an open finance platform powering synthetic assets, margin trading and money markets built by Acala.
- Keysians — provides a financial channel to turn on-chain assets into flexible and tradable financial products.
- Reef — allows users to trade at the best price with liquidity from centralized exchanges and non-custodial exchanges.
- Tswap — is a scalable decentralized exchange protocol for crypto and synthetic assets.
- Polkastarter — is a DEX built for cross-chain token pools and auctions, enabling projects to raise capital on a decentralized, permissionless and interoperable environment.
- Katal — is a decentralized, standard framework for finance.
- Bandot — is the first stablecoin credit system built on Polkadot.
- Tidal Finance — insure assets across chains in custom balanced liquidity pools.
Application Layer
- Mantra DAO — is a community-governed DeFi platform focused on staking, lending, and governance.
- Polkaswap — is an automated market maker (AMM) non-custodial exchange built by the Soramitsu team.
- Akropolis — builds products that help people save, grow and scale.
- OAX — created a parachain with ERC20 functionality, atomic swaps, fee delegation and multi-transfer to allow for the creation of UX friendly dApps.
- Sushiswap — is a community run, automated market maker.
Other
- Rio — is building a blockchain built on Substrate dedicated exclusively to DeFi.
- SORA — is aiming to become a decentralized central bank for the world of blockchains.
- Clover — is a DeFi platform powered by Bithumb for the Polkadot ecosystem.
Note: We are mostly including projects built natively on Polkadot or building with the aim of being a parachain. Some, such as SushiSwap, are built on top of a parachain and are not native to Polkadot.
Composability
As Polkadot will be composed of many parachains and parathreads, many of which may be DeFi-focused chains, different blockchains need to be able to communicate with each other in order to maximize use of these different DeFi components. Polkadot uses cross-chain message passing (XCMP) for cross-chain communication. DeFi built on Ethereum, Cosmos, or Bitcoin will be able to communicate within the Polkadot ecosystem using a bridge. For example, Chainsafe and Snowfork are working on low trust Ethereum bridges. CDOT is creating a pallet that will enable developers to create their own Substrate-based blockchains with IBC capabilities. For those interested in bringing Bitcoin to Polkadot, Interlay is building a bridge to do so in a low trust way.
What’s critical to DeFi composability is shared security, meaning that all parachains that are connected to the Polkadot Relay Chain benefit from the economic security provided by the Relay Chain validators. With other Proof-of-Stake systems, teams must find their own set of validators, leading to independent security guarantees. These guarantees mean that interchain communication on Polkadot is not bound by the trust that the receiving chain has in the sending chain. The trust is equal across all parachains, making it easy for developers so their users can have a seamless experience.
What’s unique on Polkadot
Polkadot has a powerful set of features that DeFi projects can take advantage of. By allowing for independent blockchains to be developed, we can see some truly interesting use cases.
Liquid staking is a unique sub-category in DeFi. It allows anyone with a staking token to get immediate liquidity without a lockup period by obtaining a tradable, synthetic token in the process. This provides a clear benefit to token holders, though it introduces some centralization risk in the process. We already see at least six projects who are building liquid staking solutions, either natively or through bridges to other chains, making Polkadot likely the most adopted blockchain ecosystem when it comes to liquid staking.
Some teams choose to deploy their infrastructure on DeFi chains within the Polkadot ecosystem rather than building their own native parachain. For example, Ren partnered with Acala by deploying its RenVM bridge module on the Acala Network. Teams can choose to build on top of parachains either through building runtime modules and then integrating with the parachain, or through building on top of a parachain such as Moonbeam, Plasm or Edgeware that supports smart-contracts (e.g. Solidity or Ink! based smart contracts). Going forward, we expect that some teams will continue to choose to build on top of existing platforms.
DeFi projects in Polkadot are not just copying existing concepts, but creating new concepts altogether. Another example is Acala’s decentralized sovereign wealth fund (dSWF). The purpose of the dSWF is to make Acala economically sustainable to cover on-going funds for research and development, and to pay for security on the Polkadot network. Acala’s stablecoin platform operates similarly to MakerDAO, in that it requires payment of a stability fee when closing a collateralized debt position (CDP). Once a CDP is closed, the accumulated stability fees will be kept in a system treasury. Then whenever the system profit exceeds a certain threshold, instead of burning native ACA tokens, these tokens will be used to purchase DOT from the market and will be deposited to top up the DOT reserve held by the dSWF. The dSWF can also own other crypto assets and this makes it more versatile than the buy-back and burn model. You can read more about the dSWF here.
The Future
The teams in the DeFi ecosystem are building or considering a wide variety of products. We currently see the most development activity in products such as stablecoins, non-custodial exchanges, money markets and oracles. This makes sense, as these types of products are generally considered DeFi primitives and building blocks. There will likely be significantly more of these primitive and building block projects in the near future, as they look to gain a first mover advantage in the Polkadot ecosystem. Going forward, we hope to see many additional styles of products that may be built in the Polkadot ecosystem, such as:
- Insurance platforms
- Yield aggregators
- DEX aggregators
- Derivatives
- No-loss lotteries
- DAO infrastructure
- Non-custodial mimetic trading for synthetics
- Decentralized futures
- Permissionless options trading
- Credit risk protocols for lending and borrowing
- Flash loans
We are heading into exciting times as more and more teams build DeFi products on Polkadot, combining creativity with highly scalable, composable systems. While DeFi certainly isn’t without its risks, we look forward to seeing the results as talented teams expand the use cases for what’s possible today and create new, novel products for the market.
If you’re looking to build DeFi on Polkadot, get in touch with us.
If you’re interested in the Substrate builders program, check out this link.
Discover more about Polkadot on our website, or join in the conversation here.
DeFi on Polkadot was originally published in Polkadot Network on Medium, where people are continuing the conversation by highlighting and responding to this story.
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