IOSG: Rollup empowers the new financial system
In the long run, most applications will be built on rollups, as this is the only sustainable solution that can support tens of thousands of users with a good on-chain experience over the long term, and it is based on fundamental principles such as not sacrificing decentralization, censorship resistance, security, and trustlessness.Author: IOSG Ventures
Introduction
After five years of rapid development, the winners in various major directions of the foundational building blocks/infrastructure of DeFi have been determined, and the market landscape has seen little change. Due to the lack of new financial infrastructure innovations, the easiest fruits to pick in the Ethereum DeFi space have almost been picked clean. Multi-chain DeFi is one of the few narrative directions for new entrepreneurs entering the space, but currently, most financial protocols on other public chains are still following and replicating the paths paved by their Ethereum DeFi predecessors.
On one hand, the explosion of multi-chain narratives and the gradual saturation of the Ethereum ecosystem have led to an increase in activities on other chains. Interestingly, however, the whales still show a strong preference for security. The TVL of the largest protocol on Ethereum, Curve.fi, is greater than the total TVL of all DeFi applications built on Avalanche and Solana combined (does this also signify the settling of the debate over whether DeFi business models and product experiences should lean towards retail or institutional in the first two to three years?).
On the other hand, because these multi-chains can offer lower transaction fees, some users who cannot afford Ethereum fees have been pushed to other chains. However, considering that the actual capital and trading volume provided by these users are still negligible, platforms based on the architecture of most mainstream single blockchains will actually struggle to handle the enormous throughput of DeFi.
DeFi Map; Source: IOSG Ventures
The expansion of multi-chain DeFi has been a new focus of DeFi development in 2021. Chains like BSC-Chain, Polygon, Terra, Avalanche, and Solana have been discussed extensively. Although most of these chains are positioned as competitors to Ethereum, the leadership and community of Polygon have chosen to support Ethereum's largest narrative, even announcing an ambitious promotional roadmap and positioning themselves as one of the leaders in the modular blockchain approach.
Due to the slow progress of existing Ethereum-native scaling solutions, this has opened a certain window of opportunity for its competitors to capture some market share. Although TVL is most widely used to define the business volume of individual chain activities, this metric also has certain flaws. Most of the TVL typically comes from the native tokens of specific L1s, so a rise in the price of native tokens naturally leads to an increase in TVL, which in turn further causes speculators to drive up token prices.
As shown in the chart by The Block below, it can be seen that Avalanche has the largest influx of fresh capital into its ecosystem.
Source: The Block
Despite the increasing activities on other chains, when it comes to absolute TVL and the number of dApps built on them, Ethereum remains the dominant solution. Intuitively, we can see that the total TVL of the largest Ethereum protocol, Curve, is greater than the combined TVL of all applications built on Avalanche and Solana.
Source: Footprint Analytics
Other chains lag behind Ethereum's development by more than 12 months. To prove sufficient safety for large capital providers, new chains will have to withstand the test of time. If we compare the yields of stablecoins on Solana with those on Ethereum, the perception of risk becomes quite clear. For example, the largest money market protocol on Solana—Solend—offers an APY on USDC and USDT that is 2-3 times greater than that of AAVE. This gap indicates that the implied risk premium of interacting with new protocols on a new chain is quite large.
Any chain seeking to compete with Ethereum must rebuild the Ethereum DeFi map. Therefore, while the Ethereum DeFi ecosystem has been exploring new native developments and vertical domain construction, most other L1s have been replicating the Ethereum DeFi map.
If we observe the market capitalization of DeFi tokens, Ethereum DeFi's dominance is also very evident, with only 4 of the top 20 token assets being projects outside the Ethereum ecosystem.
The identity of being a pioneer in decentralized applications has helped Ethereum accumulate soft power. All alternative L1s have adopted EVM compatibility in some form, such as Avalanche's C chain, Polkadot's Moonbeam, NEAR's Aurora, Solana's Neon, Fantom, Polygon, BSC, and so on.
In the long run, we expect that most applications will be built on rollups, as this is the only sustainable solution that can support thousands of users with a good on-chain experience over the long term, based on fundamental principles without sacrificing decentralization, censorship resistance, security, and trustlessness.
This article is an excerpt from a section titled "Multi-chain DeFi" in the IOSG report: "Rollup Empowering a New Financial System." The complete report is forthcoming.
