When I first heard about it decentralized finance (DeFi), I was very skeptical. But as the years have rolled on and I’ve learned more, I now believe that, done right, it has revolutionary potential with hugely beneficial implications for financial inclusion, transparent lending and borrowing, and remittancesto name a few things.
However, DeFi has a problem. With Total Value Locked recently surpassing 120 billion dollarsliquidity is fragmented across dozens of unbreakable blockchains connected by a tangled web of bridges. Even worse, these blockchains have different consensus mechanisms, data structures, and smart contract formats that inhibit interoperability.
This is inefficient and costly, ruins the user experience, and introduces security flaws that don’t need to exist. Let’s take a closer look at these and a few other questions before exploring how a single scalable blockchain can solve them.
Fragmented liquidity and its discontents
Fragmented liquidity is a problem for DeFi in and of itself: just as the US dominates the world’s financial system due to its deep capital markets, ease of access and the network effects of the US dollar, DeFi would benefit from something similar. However, it split permission for DeFi and the need to transfer between incompatible blockchains causes several other problems, some of which slow adoption of the technology.
Reduced efficiency – Everyone who has shopped at so-called decentralized exchanges know and likely loathe the term slippage. Essentially, it is when a trade is executed at a price other than the requested price. One of the main causes of slippage is thin liquidity, caused by providers spreading their capital across multiple protocols and blockchains.
Increased costs – While blockchains like Solana, Throneand BNB have respectable Total Value Locked numbers in the billions, Ethereum has by far the most, with over $65 billion locked up. Trading on Ethereum is not cheap – I was charged $34 for a recent exchange. Apart from this transaction cost, jumping between blockchains leads to bridging fees, and transactions often fail. As you will soon see, there is no need for any of these costs to exist.
Adventurous User Experience – Simply trying to bridge up to Polygon from Ethereum to make a bet on Polymarket recently made me curse out loud and swear to never use blockchain again. It’s not good for technology adoptionand frankly many would be put off even trying. Getting to know multiple interfaces, wallets, and derivatives of tokens is scary, and it’s never good. The user experience must be as seamless and seamless as possible if DeFi is ever to be adopted.
Reduced network effects – Remember what I said earlier about the USD? It 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, deeper liquidity, tighter spreads, less slippage, and many other benefits.
Increased security risks – You probably don’t need me to tell you about infamous 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 slip by. Add this smart contracts trying to communicate over incompatible protocols, and the risk becomes much greater.
These are not the only problems with fragmented DeFi liquidity, but they are the biggest. Let us examine how a single, scalable public blockchain can solve some of them.
Enter the original Bitcoin protocol
If you don’t know, Bitcoin was designed to scale without limit. Satoshi Nakamoto told the developer Mike Hearn it “never quite hits a scaling ceiling.” He envisioned a future where professional nodes in data centers processed billions of transactions.
There is no need to repeat what happened and how it went wrong here. Needless to say, BTC is nothing like it today, and that Bitcoin’s native functionality being shut down led to the proliferation of Ethereum and the thousands of other blockchains, and hence the DeFi fragmentation and all the associated problems described above.
Still, the original Bitcoin is not dead – it exists today as 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 such as sCrypt has made it possible to develop all types of applications at BSV. Everything from supply chain monitoring apps like Track App to revolutionary cyber security solutions that Sentinel Node has been developed and is live on BSV today.
DeFi needs a global, unifying blockchain. Let’s face it; it will not be Ethereum, Avalanche, Cardano, Ripple, and all the others are not up to the task. For DeFi to reach its potential, it needs to scale to millions of transactions daily, then hourly, then per minute, and they need to be seamless and virtually free.
Imagine how far DeFi could be today if all the liquidity that is fragmented across different blockchains was concentrated into 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 good adoption cycle led to more liquidity and increased competition, which led to even lower costs and more adoption would take off. Add the potential for microfinance and the entire developing world will be able to get involved because of the small fees, and the sky would be the limit!
Frankly, as an early skeptic turned DeFi believer, I fear that the unpleasant user experience, fragmented liquidity and high costs will limit it to richer markets or cause large numbers to give up altogether. That would be a shame because, despite some wrinkles that still need to be ironed out in terms of 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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