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Is Ethereum DeFi gaining an unbeatable lead?

Posted by
Ilya Abugov

The Ethereum DeFi sector has become a developers’ playground

As Ethereum 2.0 continues to inch closer to the highly anticipated release of Ethereum 2.0, rivals struggle for an angle to draw dapp developers to their platforms. This is especially evident in the Ethereum DeFi sector, which has been holding the market’s attention for much of 2020.

Ethereum’s ecosystem has now weathered numerous storms from the DAO calamity to the MakerDAO crash and still continues to grow.

More than that, Ethereum despite its decentralized nature has proved nimble enough to absorb competitors’ features into its ecosystem. So, while many have tried to make it out as the Netscape of blockchain, it is looking more and more like Google.

The stable coin race

MakerDAO with its Sai/Dai stable coin has long been the lifeblood of the Ethereum DeFi ecosystem. On one hand, it incentivizes users to lock up their assets, on the other it provides a market governed currency unit that can be (relatively) easily used across other dapps.

MakerDAO is not without its flaws, and there have been numerous attempts to try to address them in other projects. Tron’s JUST, tries to leverage the network’s underlying scalability and feeless structure to improve operational efficiency.

A number of projects have tried to address perceived algorithm flaws in the system, while others have tried to address asset diversity, interoperability, and commercialization. Still, MakerDAO, and the dapps surrounding it continue to mature and grow, and perhaps that appears to be the defining theme.

The BTC play

Tendermint appears to be the source of the most intense competition for Ethereum. While it is most known for being the backbone for Cosmos, a network focused interoperability, its technology has also been used by Binance Chain.

Tendermint has also partnered with Kava, a project working on multi-collateral CDPs accepting BTC, XRP, and ATOM. The combined capitalization of these assets dwarfs that of Ethereum and was a threat to draw away users.

However, projects in the Ethereum DeFi sector adjusted with MakerDAO moving towards a multi-collateral model and both it and Compound accepting wBTC. Numbers suggest that wBTC has been gaining popularity on the network. So while Kava may have exposed some critical missing features it looks like it may have been too slow to capitalize on it.

The liquidity play

Uniswap is another systemically important dapp in the Ethereum DeFi ecosystem. It is more than an exchange, it is a way to generate liquidity, which is critically important for smaller projects. However, Uniswap had limited markets and was constrained to the Ethereum token standards. Thorchain, which is also based on Tendermint, has been working on cross-chain liquidity pools.

It has given special attention to BEP2 tokens, which are on the Binance Chain. With Binance venturing into the DEX space and being one of the leaders when it comes to centralized liquidity, the approach may be logical.
Here is as well though, Ethereum dapps have shown an ability to adjust.

With Uniswap V2 being launched, Uniswap has expanded its capabilities, and with the wrapped BTC gaining acceptance, wrapped tokens may become a way for other non-Ethereum tokens to make their way into the DeFi ecosystem.

The eCommerce play

Another Tendermint project, Terra, has made its way into the CoinMarketCap top 100. Besides implementing a more complex stabilization mechanism, Terra boasts an impressive list of commercial partners. Terra appears to be focused on growing its distribution channels and is already being used by the mobile payment application, Chai.

This may be the Achilles heel for Ethereum’s DeFi, as most projects lack strong financial backing and business development know-how, while the underlying network is too decentralized to generate an organized commercial push. For now, BTC and Ethereum remain key gateways for crypto onboarding, but projects like Terra threaten to change that.

This is still a marathon

Ethereum has confidently adhered to the principle that: “slow and steady wins the race”. It has continued to accumulate users and activity across its dapps and may start to experience network effects, especially in the DeFi sector. Ethereum has the largest DeFi ecosystem, which provides additional utility for each individual component. For example, Sai/Dai is more useful than an alternative decentralized stable coin, because there are more dapps that accept it. Similar is true for Compound and its cTokens.

Moreover, it is important to remember that while Ethereum 2.0 may be ways away from being fully functional, second layer scalability protocols like Matic Network may be able to help sooner.

Still, the Ethereum DeFi sector is a developer’s playground and does not appear to have a coherent commercialization and expansion strategy. This opens the door for competitors to utilize partnerships, to promote and integrate their products outside the existing crypto market.

So, while Ethereum may not be Netscape of the blockchain world, if it does not address its strategic shortcomings, it may become its Internet Explorer.

We will continue watching this space. Make sure you bookmark DappRadar and sign up to our newsletter below to get updates direct to your inbox.

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