Polkadot launch could start DeFi reinvention

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The attempt by Ethereum co-founder Gavin Wood to take his creation off his pedestal as the blockchain on which nearly all DeFi, non-fungible tokens (NFTs), and many other decentralized applications run was launched this weekend.

Five Polkadot “parachaines” were put online on Saturday, December 18, the first of 100 that will call the “blockchain blockchain”. Parachains are essentially complete blockchains with a few differences: they can talk to each other, and they are much faster and cheaper than Ethereum.

Polkadot is one of the most creative of the top five ‘Ethereum killers’ – projects that seek to topple number 2 in the Ethereum blockchain, which has been overtaken by its success as decentralized finance and NFTs enter the market. dominant consciousness.

Unable to handle the large number of transactions that the booming Decentralized Finance (DeFi) industry has piled up on its back, Ethereum transactions can experience long delays and incur fees of up to $ 20 and even $ 50. $ per transaction at peak times – like unlike the seconds and sub promised by blockchain boosters.

Read more: PYMNTS DeFi Series: What is DeFi?

This is where Ethereum collapses, especially as a low-cost real-time payments platform.

Low cost real-time transactions are the main reasons for using cryptocurrency for payments. If DeFi can’t deliver it because Ethereum is overtaxed, there’s no point in using it for transactions.

But it’s not all about the payments. Who is going to spend $ 10 on a DTV when the purchase cost is double the price? Or invest a few hundred dollars in a DeFi loan platform for a fee of $ 50?

A better mousetrap

All of Ethereum’s major competitors, including Binance Smart Chain, Solana, Cardano, and Avalanche, are focused on building much faster blockchains – up to 50,000 transactions per second versus 15 to 25 for Ethereum – and less polluting. . Hindered by the same power-hungry system as Bitcoin, Ethereum now uses as much energy as Norway.

But Polkadot is more ambitious. Unlike its competitors, Polkadot is an attempt to remake the entire industry, transforming it from a collection of walled-up projects into a single ecosystem in which all decentralized applications can work together.

“No single blockchain design works best for every use case,” said Wood. “Every chain comes with tradeoffs that make it good for some applications and not others. Blockchains must be able to provide a variety of services. Parachaines solve this.

What does it mean? Well, all of Polkadot’s 100 parchains will be full blockchains that can talk to each other. This means sending data back and forth, making transactions on one blockchain that was started on another, and even transferring value – using a token from one parachain to buy something on another.

Right now, if you have bitcoin but want to invest in a DeFi lending and borrowing platform like Compound Finance or Aave to get interest in providing funds to a liquidity pool that they are borrowed from. , you must first go to a stock exchange and sell your bitcoins (BTC) for ether (ETH) or the DeFi project’s own token, such as COMP or AAVE.

See more : PYMNTS DeFi Series: What is Yield Farming and Cash Extraction?

Why? While almost all of the tokens in DeFi projects are based on the Ethereum standard, Bitcoin is not compatible. Many DeFi projects also do not accept each other’s cryptocurrencies.

Polkadot does this by separating how new information is added to a blockchain – the transaction – from the product or service provided by the blockchain, such as sending payments, offering DeFi loans or investments, managing transactions. supply chains and even supply chain management hosting social networks. media platforms or the construction of a metaverse.

A good way to think of Polkadot is like a hub with spokes. The hub is the Polkadot relay chain, which manages the main function of a blockchain: permanently recording data on a decentralized database.

Rays are parachains, which are otherwise blockchains in their own right, except they can all work together.

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