When I first heard about decentralized finance (DeFi), I was very skeptical. However, as the years have passed and I have learned more, I now believe that, done right, this system has revolutionary potential with extremely beneficial implications for financial inclusion, lending transparency and borrowing, as well as remittances, to name just a few.
However, DeFi has a problem. While the total value locked recently exceeded $120 billion, liquidity is fragmented across dozens of non-scalable blockchains linked together by a tangle of bridges. Worse, these blockchains have different consensus mechanisms, data structures, and smart contract formats that hinder interoperability.
This is inefficient and costly, ruins the user experience, and introduces security vulnerabilities that don’t need to exist. Let’s take a closer look at these and other issues before exploring how a single scalable blockchain can solve them.
Fragmented liquidity and its discontents
Fragmented liquidity is a problem for DeFi in itself: just as the United States dominates the global financial system due to the depth of its capital markets, ease of access, and the network effects of the US dollar, DeFi would benefit of something similar. However, the fragmented state of DeFi and the need to transfer between incompatible blockchains causes several other problems, some of which slow adoption of the technology.
Reduced effectiveness – Anyone who has traded on so-called decentralized exchanges knows and probably hates the term slippage. Essentially, this happens when a trade is executed at a different price than asked. One of the main reasons for this slippage is low liquidity, caused by providers spreading their capital across multiple protocols and blockchains.
Increased costs – While blockchains like Solana, Tron, and BNB have respectable figures of total value locked in the billions, Ethereum has by far the most, with over $65 billion locked. Trading on Ethereum isn’t cheap: I was recently charged $34 for a trade. Besides this transaction cost, jumping between blockchains incurs bridging fees and transactions often fail. As you will soon see, these costs do not need to exist.
Compromised user experience – Just trying to link Polygon from Ethereum to make a bet on Polymarket recently made me swear out loud and vow to never use that blockchain again. This is not good for technology adoption and, truth be told, many would be discouraged from even trying. Getting to grips with multiple interfaces, wallets, and token derivatives is intimidating, and that’s never a good thing. The user experience needs to be as simple and seamless as possible if DeFi is ever to be adopted.
Reduced network effects – Remember what I said earlier about the dollar? This has global network effects. People will accept it everywhere, from Thailand to Tunisia to Bolivia and beyond. The fragmented DeFi ecosystem mitigates network effects and reduces user bases around a given protocol. More people using one or two protocols on a single blockchain means faster growth, innovation, greater liquidity, tighter spreads, less slippage, and many other benefits.
Increased security risks – You probably don’t need me to tell you about the famous blockchain bridge hacks. Their centralized components and complex architecture make them vulnerable, and with security experts spread across multiple protocols, it’s much easier for a vulnerability to go unnoticed. Add to that smart contracts trying to communicate over incompatible protocols, and the risk becomes much greater.
These are not the only problems with DeFi’s fragmented liquidity, but they are the main ones. Let’s look at how a single, scalable public blockchain can solve some of them.
Enter the original Bitcoin protocol
In case you didn’t know, Bitcoin was designed to scale without limits. Satoshi Nakamoto told developer Mike Hearn that it “never really hits a ceiling of scale.” He envisioned a future in which professional data center nodes processed billions of transactions.
There is no need to rehash here what happened and how it went wrong. Needless to say, BTC has nothing like it today, and the disabling of the original Bitcoin functionality led to the proliferation of Ethereum and thousands of other blockchains, and thus to DeFi fragmentation and all associated problems described above.
However, the original Bitcoin is not dead: it exists today under the name BSV. It recently reached one million transactions per second, has fees of $0.000001 per transaction, and many of the original opcodes have been restored. High-level smart contract languages like sCrypt have made it possible to develop all kinds of applications on BSV. Everything from supply chain monitoring applications like Trace App to revolutionary cybersecurity solutions like Sentinel Node have been developed and are available today on BSV.
DeFi needs a global, unifying blockchain. Let’s be realistic; it won’t be Ethereum, Avalanche, Cardano, Ripple, and everyone else falls short. For DeFi to reach its potential, it must accommodate millions of daily, then hourly, then minute transactions, and they must be transparent and virtually free.
Imagine how big DeFi could be today if all the fragmented liquidity between different blockchains was concentrated on just one. Sure, there would still be many different protocols (competition is good), but they would be fully interoperable and compatible, making moving between them as easy as clicking the Buy Now button on Amazon (NASDAQ: AMZN) .
As liquidity deepened and fee savings were realized, a virtuous adoption cycle led to more liquidity and increased competition, leading to even lower costs and a greater number of adoptions taken off. Add to this the potential of microfinance and the entire developing world will be able to get involved thanks to the minimal fees, and there will be no limits!
Honestly, as an initial skeptic turned DeFi supporter, I worry that the unpleasant user experience, fragmented liquidity, and high costs will either limit it to wealthier markets or cause many to give up on it altogether. This would be a shame because, despite some issues that still need to be resolved when it comes to regulatory compliance and related issues, DeFi has the potential to change the world for the better. Developers should take a closer look at scalable blockchains like BSV before the window of opportunity closes.
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