Nikola Dobrev
Northeastern University
Introduction
Blockchain technology has many different use cases that are not nearly anywhere close to their fullest potential, such as NFTs, gaming, and governance. Moreover, the main principle that drives all the sectors of crypto is that they’re all trustless systems which seek to transfer value through immutable code. There’s one sector in particular that has arguably the greatest potential to leverage these properties and disrupt the traditional way that we operate. This is the area of decentralized finance.
Decentralized finance (DeFi) utilizes blockchain technology to manage transactions in a way that removes the need for third parties and custodial agents. No approval is needed for a user to transact using DeFi and the user does not have to give custody of their funds to intermediaries such as banks.
Just as our current financial system depends on various entities fulfilling different roles and interacting with each other, DeFi ecosystems consist of various protocols responsible for services like lending, borrowing, swapping tokens, trading derivatives, bridging assets between chains, and more.
hich blockchains will emerge as the leaders (as blockchain continues on its adoption path). Every blockchain comes with its own technicalities and factors that influence the process of development and usage of applications built on top of it.
The goal of this paper is to explore the different DeFi ecosystems of some of the top blockchains and how the qualities of blockchains themselves play into their respective ecosystems.
Considering that there are 128 blockchains with DeFi ecosystems according to DeFiLlama, only the top five will be analyzed here in this paper. The metric for sorting these chains will be Total Value Locked (TVL), which is essentially the sum of the assets that are deposited into the protocol’s smart contracts in the system.
This paper will also answer some of the following questions:
- What are the characteristics of a blockchain with a DeFi ecosystem?
- What are some of the top projects in each ecosystem?
Methods & Factors For Evaluating A Blockchain & Its Ecosystem
Blockchain Technology
It’s hard to talk about a blockchain without mentioning the underlying technology and infrastructure that’s essential to its functioning. This may include mentioning whether it’s a layer 1, layer 2, a sidechain, or anything else. The consensus algorithm and sybil mechanism, which is basically how the nodes of the blockchain agree on what is a valid transaction, are another factor that has influence on how the blockchain operates.
There are entire whitepapers written on each blockchain, so there will be much more to be read and understood that goes beyond the scope of this paper.
Community
Many of today’s top blockchains have communities that build decentralized applications and NFTs on top of the blockchain. This is especially relevant in the scope of this paper as it covers the DeFi ecosystem of the top blockchains by TVL. A look into the number of projects, the distribution of projects by type, and the adoption rate of the blockchain can give a lot of insight about the community that builds on a blockchain.
Interoperability/Bridges
The blockchain and DeFi world is not entirely dominated by one chain, and we’re moving towards a world that’s more and more multichain. Therefore, interoperability is increasingly important in order for blockchains to seamlessly interact. This is especially relevant in DeFi for users to make the most out of the protocols available to them and mitigate liquidity fragmentation.
Foundation
Very closely related to the communities just mentioned are the foundations that back many of the top DeFi ecosystems. The function of these foundations and development funds is to help talented developers reach their potential and bring new talent to the platform.
Every blockchain has its nuances that make it unique – and this paper will cover both strengths and criticisms of every blockchain that is mentioned.
Apps
There’s obviously no ecosystem that can exist without its members. In this case, the members are the DeFi apps. Some of the key players in each ecosystem will be covered in terms of what they do and what role they play in the broader DeFi ecosystem of each blockchain.
1 Ethereum
The most popular blockchain in terms of DeFi activity by far is Ethereum. Ethereum has a large first-mover advantage because it was the first chain to offer smart contracts with the first DeFi apps like MakerDAO originating on Ethereum.
Ethereum launched in 2015, predating many of the top blockchain projects in the current market. Ethereum has several key components that distinguish it from other blockchains.
Just like Bitcoin, Ethereum used Proof-of-Work to validate transactions that are added to the blockchain. This is done through computers with a high computational capacity computing against each other to solve a math problem through brute force. The “miner” that’s able to do this first will add the current block to the blockchain and is given a reward in Ethereum’s native currency Ether (ETH).
However, Ethereum in September 2022 transitioned to Proof-of-Stake. Proof-of-Stake is an approach that uses validators that select which transactions are valid and should be added to the blockchain. Each validator node must put in a stake to ensure that they’re being trustworthy and not validating fraudulent transactions. If a validator approves a fraudulent transaction, part of its stake can be taken away. In the case of Ethereum, the minimum amount to stake is 32 ETH.
The transition to Proof-of-Stake comes with several benefits for the Ethereum network. One of them is energy efficiency. This is because Proof-of-Work has been highly criticized for its excessive use of energy for the computationally intensive procedures necessary for consensus.
Another huge benefit is that Proof-of-Stake will open the network up to becoming more scalable as future upgrades are put in place. One such upgrade is the adding of a feature known as “sharding.” This will allow for the network to be split up into several sub-chains that will each be in charge of handling transactions of a certain type. This will allow for parallel processing and in turn will make the network more scalable, will lower transaction times, and will make transaction fees cheaper. Ethereum is currently known to be quite slow and expensive making it unusable for many individuals that don’t have as much capital.
Another integral component to the Ethereum blockchain is the Ethereum Virtual Machine (EVM). The EVM is a virtual computer that allows for the deployment and execution of smart contracts on the Ethereum blockchain. The EVM is also responsible for keeping track of the current state of accounts, balances, and smart contracts in the Ethereum network. Much of DeFi on Ethereum relies on the EVM and its facilitation of composability. Other blockchains that are EVM-compatible allow for developers to easily deploy applications created on Ethereum onto those blockchains.
Interoperability/Bridges
Being by far the biggest network for smart contracts, Ethereum requires a lot of interoperability and is a top priority of developers when building out the infrastructure for a new chain. According to DeBridges, Ethereum has 98 bridges and has bridging possibilities available for a very wide array of tokens. Some of the largest bridges that connect to Ethereum include the Polygon Bridge, Avalanche Bridge, Optimism Bridge, and Arbitrum Bridge.
Foundation
The Ethereum foundation (EF) is a non-profit organization dedicated to the advancement of Ethereum (both on the protocol and ecosystem levels). The Ethereum Foundation supports the ecosystem with a three layered model.
- The first layer consists of EF teams who work within the EF to contribute directly to the ecosystem. EF teams include the Solidity team which is in charge of the programming language that most smart contracts are written in – and Geth which is the team that supports the most popular client used to run Ethereum nodes.
- The second layer is Grants, where teams outside the EF are funded by the EF. The Ethereum Foundation allocated $19.6 million in grant funding throughout 2021.
- The third layer is called the Delegated Domain Allocators, where the EF works with outside groups to decide what to fund in specific domains.
- The fourth and final layer is Third Party Funding, where the EF gives money directly to outside groups. Overall, the Ethereum foundation spent $48 million dollars in the advancement of the Ethereum ecosystem during 2021.
(Source: Ethereum Foundation)
What Are The Top Projects On Ethereum?
MakerDAO
MakerDAO is one of the very first known DeFi protocols in the entire blockchain space. It currently has the highest TVL at $8.69 billion and was the first DeFi protocol to surpass $1 billion TVL. At its peak, the protocol held nearly $20 billion in TVL.
MakerDAO was a pioneer in the field of blockchain lending, in particular crypto-collateralized lending. Using MakerDAO, users can borrow the Dai stablecoin against an overcollateralized position of crypto assets. The crypto assets are locked into a smart contract and can be later liquidated in order to pay off the loan if the value of the collateral drops below a certain value.
MakerDAO is known as a Collateralized Debt Position (CDP) provider. The Dai stablecoin is a huge player in the entire DeFi community, not just in the Ethereum ecosystem. It’s the largest crypto-backed stablecoin, and is key in the effort to decentralize stablecoins and bring real-world value on-chain in a decentralized manner. It’s the 4th biggest stablecoin in terms of market cap.
MakerDAO is arguably the largest DeFi project looking to bridge the gap between traditional real world assets that live off chain and assets in the decentralized finance realm. Maker has been working on integrating with Huntingdon Valley Bank, a bank based in Pennsylvania. The partnership will allow the bank to sell parts of its loans to Maker unlocking a new asset class on chain. Apart from the invention of stablecoins, this is one of the first steps in putting RWAs (real world assets) on chain. Maker will likely continue to be one of the most influential projects in DeFi in terms of both financial and governance innovation, paving the way for mainstream adoption.
(Source: MakerDao)
Lido
Lido holds the second most TVL in the Ethereum ecosystem at $7.43 billion. As mentioned before, Ethereum was a Proof-of-Work blockchain, but it transitioned to Proof-of-Stake.
Staking is the act of locking up Ether (the currency of Ethereum) in order to secure the network and validate transactions. In return, yield is paid out to those who stake. However, there are several features of the staking process that may make it unappealing. The first is that the minimum requirement to stake is 32 ETH which prices out some potentially looking to stake. Additionally, ETH cannot be unstaked during Phases 0 and 1 of the transition to Proof-of-Stake making staking especially unattractive. As a result, locked Ether is illiquid and cannot be used in other DeFi activities.
Lido provides a solution to those problems by allowing users to lock ETH into Lido smart contracts and returning a receipt token called stETH. Lido then stakes the provided Ether on the users’ behalf. Using Lido, users can gain yield from staking without needing to provide a minimum of 32 ETH and locking up their ETH. The token stETH can then be used in various DeFi activities. The Ether originally staked by the user can be redeemed at any time by burning the stETH token.
(Source: hashdex.com)
Though Lido has been one of the most popular and necessary projects in the Ethereum ecosystem. Many have brought up concerns that while Lido provides many users the opportunity to stake that would otherwise not be able to, it also is a potential vector for centralization in the Ethereum network if such a big portion of staking is done through Lido. Lido makes up nearly ⅓ of all staked ETH and up until recently has completely dominated all other liquid staking platforms. The recent launch of Coinbase’s cbETH may dig into Lido’s dominance.
2 Binance Smart Chain
Blockchain Fundamentals
The Binance Smart Chain (BSC) is a blockchain made for running smart contracts that was launched in 2020. This chain runs parallel to the Binance Chain used for decentralized exchange features and is built using the Cosmos SDK.
The BSC uses the Proof of Staked Authority system, a mix between delegated Proof-of-Stake and Proof-of-Authority. In this model, elected validators take turns confirming transactions and adding blocks to the blockchain. Each validator must have a stake in the form of BNB as well as reputation that may be slashed if they validate an invalid transaction. There are currently only 21 validators on the BSC, with each of them being approved before becoming a validator.
The BNB token is also used to pay for transaction fees on the BC as well as running smart contracts on the BSC. BNB token holders can stake their tokens by placing them in staking pools and voting on which validators get to create the next block. Elected validators can distribute their rewards to their voters. The logic of this functionality happens on the BC chain rather than the BSC in order to work with Ethereum.
It’s important to note that the BSC is a fork of Ethereum, meaning that much of the functionality of Ethereum was directly ported to BSC (other than the consensus mechanism). This means that the BSC is EVM-compatible and much of the applications on BSC are ported from the Ethereum ecosystem such as PancakeSwap, the leading decentralized exchange on BSC.
Interoperability/Bridges
Similar to Ethereum, BSC is a highly interoperable blockchain allowing for the bridging of many assets onto and from the chain. BSC features its own native bridge called the Binance Bridge 2.0. The bridge facilitates the movement of tokens between Ethereum and BSC by wrapping tokens into BTokens which can be redeemed for the underlying asset any time. There are currently 69 bridges that support the BSC with some of the biggest being Multichain, the Portal Token Bridge, and Allbridge.
What Are The Top Projects On The BSC?
PancakeSwap
PancakeSwap is by far the biggest project on BSC in terms of TVL with $3.07 billion – with the second biggest project trailing by over $2 billion.
PancakeSwap is the leading decentralized exchange on BSC. Since it’s a decentralized exchange, it offers users the service of swapping tokens via the Automated Market Maker (AMM) model.
On the other hand, users can also provide liquidity to liquidity pools in the form of token pairs in order to receive yield in the form of PancakeSwap’s CAKE token and 0.17% of trading fees proportional to their share in the pool.
The project offers several other products that give it more appeal than other DEXs. In addition to regular spot trading, users can trade perpetual futures as well. Though there is not much activity in terms of NFTs on the BSC, PancakeSwap offers an NFT marketplace as well. The platform has prediction markets and lottery features soon to come.
PancakeSwap has enjoyed great success being one of the first DEXs to be deployed on the BSC. Users unwilling to work with the often expensive and slow Ethereum blockchain have migrated to the PancakeSwap DEX and have brought it great success. The project has released a roadmap for additional features going forward.
(Source: PancakeSwap)
Venus
Venus is the second biggest project on BSC with a TVL of $694 million. Venus is a decentralized lending and borrowing money market platform. Users can choose to supply their assets in exchange for a yield, or they can switch their assets to collateral and borrow against them.
One thing that makes Venus unique is that it has its own stablecoin called VAI. VAI is minted in the same way that MakerDAO’s DAI is. However, users can earn yield on their deposited assets with VAI unlike with DAI.
Another token in the Venus protocol is XVS. XVS is the governance token of Venus. It can be obtained via supplying assets, borrowing assets, and minting VAI.
Venus has one more token known as the Venus Reward Token or VRT. VRT was distributed to borrowers and suppliers as an additional incentive in order for the protocol to limit the inflation of XVS, the governance token, and to implement a burning mechanism.
The protocol also offers vaults where users can stake their VAI, XVS, and VRT in order to earn yield.
3 Tron
Blockchain Fundamentals
The Tron blockchain was launched in 2017 by entrepreneur Justin Sun with a mission to “decentralize the web.” The platform is built to support DApps via smart contracts. Users need to acquire resources such as bandwidth, CPU, storage, and RAM in order to interact with smart contracts. This is done by locking the Tron native token TRX.
Tron uses the Delegated Proof-of-Stake (DPoS) system to reach consensus. There are 27 validators known as super representatives (SRs) that are in charge of verifying transactions and creating blocks. The DPoS system allows for the blockchain to be significantly faster than what Ethereum is now – with Tron claiming to be able to handle up to 2,000 transactions per second.
Holders of the TRX token can vote on SRs that most closely align with their interests. In addition to being validators, SRs also propose improvements to the Tron network.
Another core feature of Tron is the Tron Virtual Machine (TVM), a software-based operating system that’s used for smart contracts. In fact, the TVM is compatible with the EVM making it easier for developers to get acquainted with the ecosystem. Tron was also a fork of Ethereum initially.
The Tron blockchain supports several token standards, just as Ethereum does. Some examples are TRC-10, TRC-20, and TRC-721.
Foundation
Tron had a foundation known as the Tron Foundation prior to being dissolved in July 2022 in efforts to further decentralize the blockchain. The foundation has transitioned to the Tron DAO. The Tron DAO supports the TRON ecosystem through partnerships and events such as hackathons to help bring additional adoption and building.
Interoperability/Bridges
The Tron network does not seem to have the interoperability that some other top DeFi networks do. Regardless, it’s the second biggest blockchain in terms of DeFi, only behind the giant Ethereum. There are currently eight bridges which connect the Tron network to the other blockchains. Among them are the TronPad bridge which connects the BSC and Tron – and Transit which bridges Tron with several major blockchains like Ethereum, Avalanche, and Polygon.
What Are The Top Projects On Tron?
JustLend
JustLend is the biggest project in the Tron ecosystem by far in terms of TVL according to DefiLlama. Currently, it sits at $3.65 billion in TVL.
JustLend is a typical money market lending DeFi protocol, similar to Aave on Ethereum. It allows users to lend out their idle crypto assets and be paid a yield in return. Users may also borrow crypto assets against their over collateralized positions. JustLend currently supports the assets TRX, USDD, USDT, SUN, BTT, NFT, JST, WIN, USDJ, USDC, TUSD, BTC, ETH, and WBTT.
JustLend is not a particularly revolutionary DeFi project. Its popularity is likely due to it being the first lending project on the Tron ecosystem.
SUN
The second biggest project in the Tron ecosystem is SUN. It has a TVL of $1.22 billion. SUN is an integrated platform for stablecoin swapping, yield farming, and self governance. Within SUN is the SunSwap DEX, which is the leading decentralized exchange on the Tron chain.
SUN’s StableSwap allows for swapping between the various stablecoins that are found on Tron. The protocol works very much like Curve Finance, a popular Ethereum DEX project that is optimized for the swapping of stablecoins. The 2pool contains stablecoins USDD and USDT. The 3pool contains USDJ, TUSD, and USDT. The USDC pool contains USDC and 3SUN.
In addition to swapping stablecoins, SUN allows users to stake their LP tokens in farms in order to get SUN, the governance token, as well as other bonus tokens. Users may also take part in governance mining, where they lock up SUN for veSUN. veSUN holders are eligible to enjoy up to 2.5x mining rate for liquidity mining, vote to decide the weights of mining output, and earn 50% of the stablecoin pools' trading fees.
The SunSwap DEX lies within the SUN ecosystem and allows for the swapping of various assets on the Tron blockchain. An interesting feature of SunSwap is that the protocol will regularly swap 0.05% of the value of each transaction on SunSwap V2 for SUN and deposit SUN tokens into a designated address. Those tokens are then burned every four weeks to keep the supply of SUN down. SunSwap itself has a TVL of $767.48 million while the rest of the SUN ecosystem has $452.91 million.
4 Avalanche
Blockchain Fundamentals
The Avalanche Network was started in 2018 and launched in 2020 by Cornell professor Emin Gun Sirer. The platform enables smart contracts which allow for the building of DApps in the realms of DeFi, NFTs, oracles, and more. The Avalanche blockchain supports a blockchain explorer, cross-chain bridge, and is adding support for a core wallet.
The Avalanche network is split into three primary chains: the Exchange Chain (X-Chain), the Platform Chain (P-Chain), and the Contract Chain (C-Chain). The X-Chain is primarily used in the creation and exchange of assets. The P-Chain is in charge of validators and creating subnets which will be mentioned below. The C-Chain is used to execute smart contracts. DeFi activity on Avalanche happens on the C-Chain.
A core feature that greatly differentiates Avalanche from many other blockchains is the ability to create subnets. A subnet is a set of validators that validate a blockchain. Subnets allow for users to launch their own custom blockchains for specific use cases. This includes customizing features like selecting which validators secure the network, which token is used for gas, and custom tokenomics. Additionally, this helps with scalability and allows for great interoperability between chains unlike layer 2 solutions.
Avalanche uses Proof-of-Stake as well along with their own custom Avalanche consensus algorithm in order to reach consensus on the network. The Avalanche token AVAX is used for staking. The chain boasts a throughput of up to 4,500 transactions per second making it very fast.
Interoperability/Bridges
The Avalanche blockchain is one that’s highly compatible with a number of other blockchains as well as featuring very high compatibility between its own subnets. The chain has its own native bridge called the Avalanche bridge which currently supports ERC-20 token transfers between Ethereum and Avalanche. Additionally, there are 41 bridges supporting the Avalanche network according to DeBridges. Some of the biggest bridges that support Avalanche are Multichain, Portal Token Bridge, and Allbridge.
Foundation
Just as there are foundations to support many of the top blockchains, Avalanche is no different. The Avalanche Foundation helps to support the Avalanche ecosystem and seamlessly onboard builders onto the platform via grants and engineering collaboration.
Moreover, in August 2021, the Avalanche Foundation announced Rush which was a $180 million liquidity mining incentive program that brought Aave and Curve (two of the most successful blue-chip DeFi applications) onto Avalanche.
Avalanche also launched another incentive fund focused on DeFi adoption called Blizzard in November 2021. The fund has a value of over $200 million with contributions from big name partners like Avalanche Foundation, Ava Labs, Polychain Capital, Three Arrows Capital, Dragonfly Capital, CMS Holdings, and others.
Most recently in March, the foundation announced an up to $290 million incentive program named Multiverse. This program is focused on accelerating the growth of Avalanche subnets in particular. The foundation has been very active in promoting DeFi activity on the Avalanche blockchain.
What Are The Top Projects On Avalanche?
Benqi
Benqi is actually the second biggest project on Avalanche with a TVL of $346 million. The first is Aave, but it was not included since Aave is native to Ethereum. Benqi is an algorithmic liquidity market and liquid staking provider similar to Lido. Benqi was launched as a part of one of the Avalanche Foundation incentive programs.
The primary use case of Benqi is as the leading lending platform on Avalanche. This portion of Benqi makes up more than ⅔ of the protocol’s TVL. Users looking to borrow various crypto assets on Avalanche can do so by providing over-collateralized crypto positions. On the other end, those looking to generate yield from their idle assets can supply to the protocol.
The other portion of the Benqi protocol is the liquid staking solution. This is very similar to the Lido project mentioned previously. Users can stake their AVAX on Benqi and receive sAVAX in return. This can be used in DeFi or can be burned in order to redeem the staked AVAX.
Benqi is similar to AAVE and Lido on Ethereum as it provides users access to money markets and liquid staking, two key operations in any DeFi ecosystem.
TraderJoe
TraderJoe is the third largest project in terms of TVL on Avalanche with $197 million in TVL. TraderJoe is the leading decentralized exchange on Avalanche, though unlike some other blockchains it faces competition from another DEX called Platypus Finance which has a TVL of $187 million.
TraderJoe offers users the ability to swap between token pairs using pools and to generate yield by providing liquidity to these pools. Liquidity providers receive 0.25% of the fees proportional to their stake in the pool in the form of JLP tokens.
Users can stake their LP tokens in farms that yield that TraderJoe native token JOE as well as bonus rewards.
In addition to the decentralized trading features that it provides, TraderJoe also has lending and borrowing features. However, this is not the primary focus of the project so the TVL of this service is much lower compared to the trading portion. Currently, there are $34.5 million in deposits and around $10 million being borrowed.
Users can currently stake their JOE tokens for three different reward tokens. The most popular staking pool is the one that yields the sJOE token which earns additional USDC stablecoin yields. veJOE boosts the rewards that farms yield. rJOE is used to participate in RocketJoe launch events.
TraderJoe helps projects looking to launch a token using the RocketJoe Launches service. Users are able to spend rJOE tokens which allows them to deposit AVAX in exchange for the token being issued. This way, projects are able to raise more liquidity which reduces volatility and the chance of front running.
Though Avalanche NFTs are not a very big market, TraderJoe also provides an NFT trading marketplace called JoePegs.
TraderJoe has announced a new form of decentralized exchange called a liquidity book. This protocol will allow for the creation of unique and dynamic liquidity structures for paired assets.
(Source: TraderJoe)
Conclusion & Future Prospects
In the grand scheme of things, DeFi is still quite early in its development. It’s still not quite ready for mass adoption due to a few factors. One such factor is the lack of usability that comes with the majority of DeFi protocols. With many users not even being comfortable using a crypto wallet for simple transactions, using DeFi poses a challenge for even slightly more tech savvy users. Many DeFi protocols are quite complex, so abstracting the interfaces that these protocols interact with while keeping users aware of risks will be key in onboarding new users.
Though there is still a subset of users that are very active in DeFi, institutional activity has been quite limited. The lack of real world assets on-chain as well as lack of regulatory clarity have been huge bottlenecks for the expansion of crypto into the existing financial system. As more regulation is formed surrounding crypto assets, adoption will come. MakerDAO has taken some of the first steps to bringing traditional assets on chains. Other projects like Maple and Goldfinch have been working on innovative protocols to bring capital markets on chain and bring in institutional adoption to DeFi.
As of now, Ethereum continues to dominate DeFi, but layer 2 scaling solutions seem to be the way forward for DeFi. Optimistic rollups in particular have been gaining the majority of attention in DeFi recently with Arbitrum being very hyped due to the success of projects like GMX, Dopex, and Gains Network. DeFi protocols that pay out “real yield” based on the revenue they generate have become one of the top narratives in DeFi in the past months. Zero knowledge rollups may overtake optimistic rollups in the long run as they become more developed and more is built on top of them, but as of now much more volume lies on optimistic roll ups like Optimism and Arbitrum.
In addition to a layer 2 activity, there has been some buzz about DeFi on app specific chains such as those part of the Cosmos ecosystem. The huge decentralized order book exchange dYdX announced earlier this year that they would be migrating to an app specific chain built on Cosmos. Thorchain has enjoyed success throughout this year and a lot of hype is being generated around a new chain called Berachain, also built on the Cosmos SDK. Ultimately, DeFi and crypto in general are not winner takes all games and many chains will surely see increased adoption and success in the future.
