6 Blockchains Trying to Solve the DeFi Scalability Trilemma

defi scalability trilemma horizen

Polygon, Avalanche, Horizen, or Binance Smart Chain?

Making DeFi smoother, faster, and cheaper without losing the security of the blockchain, that’s what we’re looking at in this Top 6 solutions for the DeFi scalability trilemma: speed, decentralization, and security. What’s important for the future of DeFi, and in which basket should you put your eggs?

With over $94 billion in value locked in DeFi protocols, it is clear that we are witnessing a seismic shift in the way financial services are being delivered over the internet. Gone are the days of long-drawn-out loan applications and earning a measly 0.50% annual interest in your bank account. Welcome to the new wave of yield farming, staking, flash loans, and 100%+ APYs measured in food-themed tokens that you can lend out in exchange for animal-themed tokens so that you can repeat the cycle all over again.

There’s never been a better time to be part of the DeFi revolution, as new players emerge from every part of the globe to compete for a slice of the multi-billion dollar pie created by crypto investors chasing yields. Scalability could arguably be the most important attribute in the race to become the most dominant DeFi protocol.

The ability to perform tens of thousands to hundreds of thousands of transactions per second is marred by the fundamental limitations of operating a decentralized and distributed network. 

This problem, commonly known as the scalability trilemma, requires developers to make critical tradeoffs between speed, decentralization, and security when designing their blockchains.

Today we’re sharing a list of the top DeFi protocols and supporting blockchains that are meeting and exceeding this challenge, as well as some newer players that are offering novel approaches to solving the scalability trilemma and are showing promising results. 

Polygon – Sushi, 1inch, Aave, and others

The Polygon blockchain leverages a combination of zk-rollups, optimistic rollups, and other standalone sidechains to process transactions more quickly while maintaining security from the underlying Etherum blockchain. The scaling solution often referred to as an alternative to Ethereum, features many of the top DeFi protocols. On Polygon these DeFi protocols can beef up their transaction throughput while still remaining part of the Ethereum network. Think about Sushi, 1inch, Aave, and Curve Finance as examples. Polygon also features its own native DeFi solution, including Quickswap and EasyFi. Fees cost a fraction of a cent, while the network supports up to 7200 transactions per second. 

Solana – Raydium & Serum 

Solana is arguably the breakout blockchain of 2021. Having captured significant market share from both the DeFi and more recently the NFT mania, we can think of no other project that has done more this year to prove out its value as a high throughput and cost-effective blockchain. Solana officially launched in March 2020. Shortly after, the automated market maker Raydium and the decentralized exchange Serum launched. Through its novel Proof-of-History (PoH) consensus mechanism, Solana achieves up to 1,800 live TPS, with average transaction fees of just $0.00025. The network basically creates snapshots of events and then places these snapshots in chronological order. Each node has a built-in cryptographic clock that helps the network agree on the time and order of events and transactions. 

Binance Smart Chain – PancakeSwap

In early 2021 Pancakeswap made waves for being the first non-Ethereum based DeFi protocol to challenge the dominance of Uniswap and Sushiswap. Built on the Binance Smart chain (BSC), PancakeSwap became the de facto alternative for traders who were unwilling to pay the high gas fees charged on Ethereum-based DEX’s. In April 2021, PancakeSwap briefly overtook Uniswap and Sushiswap in 24-hour trading volume, achieving a massive $3.21 billion in volume, over 3 times Uniswaps $1.14 billion in trading volume and almost 10 times Sushiswaps $336m in trading volume.

These numbers also drew criticism from members of the crypto community who suspected BSC of being far more centralized than it was marketing itself to be. The subsequent series of hacks on BSC did not help to silence those arguments either. BSC uses Tendermint and the Cosmos SDK and uses a Proof-of-Stake-Authority (PoSA) consensus mechanism. One of the main criticisms of BSC stems from the fact that its network has been maintained by just 21 validators, making it highly centralized and vulnerable to exploits. 

While the hype of BSC may have died down a bit in recent months, the Pancakeswap V2 DEX is still going strong with more than $960m in daily trading volume only behind Uniswap V3’s $1.6 billion. 

Horizen – Privacy-conscious, multi-consensus DeFi solutions

The Horizen blockchain promises to bring a unique set of security, scalability, and privacy-preserving features to the world of DeFi. The project has developed an innovative sidechain solution called Zendoo, which enables developers to build independent and highly customizable blockchains that operate as sidechains to Horizen’s secure Proof-of-Work main blockchain. These sidechains can be set up to work with any consensus mechanism, including PoS, PoH, pBFT, DAG, etc, and can even be made to communicate with each other using the project’s novel cross-chain transfer protocol solution.

Horizen is one of the only companies tackling the issue of privacy in DeFi. Using zero-knowledge cryptography, the project enables transactions that occur on a sidechain to be verified or confirmed on the mainchain or on an interoperable sidechain without revealing any details about the transaction. This innovation enables private companies to leverage public DeFi protocols while preserving sensitive information such as total value locked or wallet addresses. It also opens doors for KYC/AML compliance measures to be implemented on public DeFi protocols without doxing wallet addresses. 

Horizen also provides a special privacy-preserving auditing solution called zkAudit, which allows audits to be performed on private companies without revealing sensitive details about those companies. Celsius Network recently partnered with Horizen to leverage its zkAudit solution to securely verify proof of reserves in real-time without revealing details about who holds those funds or where they are held. Horizen has also partnered with Sikoba, a  decentralized blockchain-based system for peer-to-peer IOUs. Horizen’s solution enables Sikoba’s users to ​​obtain legal certainty, establish credit history, and verify financial transactions in a safer and more secure manner. Horizen’s ‘consensus agnostic’ approach to achieving scalability allows DeFi projects building on its network to match the speed and cost of competing protocols while retaining Bitcoin-level security (and beyond) through the main chain and its unique enhancement of the Proof-of-Work consensus mechanism. Lastly, the project has the largest multi-tiered node infrastructure in the industry, with over 40,000 fully distributed nodes, making it one of the most decentralized and secure networks for launching DeFi applications. 

Terra Blockchain – Anchor & Mirror Protocol 

The Terra Blockchain is often left out of the conversation of top blockchain networks due to its primary market being in Asia and particularly South Korea. Despite this lack of mainstream attention, it has carved quite a niche for itself in the payments space through the launch of CHAI, a blockchain-based e-commerce payments app that has over 2.5 million users. Terra’s Mirror Protocol allows users to trade synthetic stocks on the blockchain. Users can freely trade anything from Gamestop to AMC and even Robinhood stock and earn LP rewards that far exceed what these companies payout in dividends. 

Terra also hosts the Anchor protocol, which is a high yield savings protocol where depositors vote on how much yield the platform should generate for them (known as the ‘anchor rate’). The current anchor rate is 19.4% APY. Anchor Protocol then lends out or stakes depositors’ funds in different PoS protocols in order to generate the returns requested. Any returns generated in excess of the 19% APY is reserved for future use, in the event that the protocol can’t meet the APY threshold and must compensate users. 

Terra Blockchain is also built using the Cosmos SDK, which claims to achieve over 10,000 TPS with block confirmation times of just 6 seconds. Fees range from 0.1% up to 1%. On the Mirror Protocol, a 1.5% fee is charged for closing positions and withdrawing from liquidity pools. This fee is redistributed to token holders who stake the MIR token. 

Avalanche – Trader Joe, Benqi, and Yield Yak 

The Avalanche blockchain is an Ethereum competitor that enables users to build decentralized applications on a fast, secure and scalable blockchain. The team claims to have developed a smart-contracts platform that achieves 4,500 transactions per second, confirms transactions in under 2 seconds, supports the entire Ethereum development toolkit, and enables millions of independent validators to participate as full block producers. 

Avalanche is one of the more recent entrants into the DeFi space, yet in just the past few weeks, the blockchain has launched a series of DeFi protocols that are beginning to gain significant traction, including lending protocol Benqi, the Trader Joe decentralized exchange, and yield farming and aggregator Yield Yak. 

Avalanches approach to the scalability trilemma has been to develop its own unique consensus protocol. According to the team, there have only been 3 distinct approaches to the consensus problem: Classical, Nakamoto, and Avalanche. Classical describes the approach used by permissioned blockchains, which achieve high transaction throughput at the cost of decentralization and security, while Nakamoto’s consensus describes the Proof-of-Work mechanism we’ve all come to know as the more secure yet slower method for permissionless blockchains to achieve consensus. Avalanche’s approach is a hybrid of these two. Its consensus mechanism actually consists of a spectrum of protocols including Slush, Snowflake, Snowball, and Avalanche, which together make up the Snow Family.

The Snow Family of consensus protocols work by randomly selecting a sample of nodes to verify what is the current state of the network, then repeating this process multiple times until an accurate state is determined across multiple samples. This method is based on the Directed Acyclic Graph (DAG) protocol used by Hedera Hashgraph and IOTA Tangle. The Snow Family was developed by Team Rocket in partnership with a group of distributed systems researchers. 

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