Polkadot’s Launch Could Begin DeFi Reinvention

Ethereum Co-founder Gavin Wood’s attempt to knock his creation off its pedestal as the blockchain on which almost all DeFi, non-fungible tokens (NFTs) and many other decentralized applications run launched this weekend.

Five Polkadot “parachains” went live on Saturday (Dec. 18), the first of 100 that will call the “blockchain of blockchains” home. Parachains are essentially full blockchains with a couple of differences: They can talk to each other, and they are far faster and cheaper than Ethereum.

Polkadot is one of the more creative of the top five “Ethereum Killers” — projects that seek to unseat No. 2 blockchain Ethereum, which has become overwhelmed by its success as decentralized finance and NFTs enter the mainstream consciousness.

Unable to handle the sheer number of transactions that the booming decentralized finance (DeFi) industry has stacked onto its back, Ethereum transactions can run into long delays and carry fees that can range as high as $20 and even $50 per transaction at peak times — as opposed to the seconds and pennies promised by blockchain’s boosters.

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This is where Ethereum is breaking down, particularly as a platform for low-cost, real-time payments.

Low-cost, real-time transactions are the core reasons to use cryptocurrency for payments. If DeFi cannot deliver it because Ethereum is overtaxed, there isn’t much point in using it for transactions.

But it’s not just payments. Who’s going to spend $10 on an NFT when the cost of buying it is twice the price? Or invest a few hundred dollars in a DeFi lending platform for a $50 fee?

A Better Mousetrap

All of the main Ethereum competitors, including Binance Smart Chain, Solana, Cardano and Avalanche, are focused on building blockchains that are far faster — running as high as 50,000 transactions per second to Ethereum’s 15 to 25 — and less polluting. Hobbled by the same power-hungry system as Bitcoin, Ethereum now uses as much power as Norway.

But Polkadot is more ambitious. Unlike its competitors, Polkadot is an attempt to remake the entire industry, turning it from a collection of walled projects into a single ecosystem in which all the decentralized apps can work together.

“No single blockchain design works optimally for every use case,” Wood said. “Each chain comes with trade-offs making it good for some applications and not others. Blockchains need to be able to provide a variety of services. Parachains solve this.”

What does that mean? Well, all of the 100 Polkadot parachains will be full-on blockchains that can talk to each other. This means sending data back and forth, completing transactions on one blockchain that was started on another, and even transferring value —using a token from one parachain to buy something on another.

Right now, if you have bitcoins but want to invest in a DeFi lending and borrowing platform like Compound Finance or Aave to interest by providing funds to a liquidity pool from which they are borrowed, you must first go to an exchange and sell your bitcoins (BTC) for ether (ETH) or the DeFi project’s own token, such as COMP or AAVE.

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Why? While almost all DeFi projects’ tokens are based on the Ethereum standard, Bitcoin is not compatible. Nor do many DeFi projects accept each other’s cryptocurrencies.

Polkadot does this by separating the way new information is added to a blockchain — the transaction — from the product or service that the blockchain provides, such as sending payments, offering DeFi loans or investments, managing supply chains, and even managing supply chains hosting social media platforms or building a metaverse.

A good way to think of Polkadot is as a hub with spokes. The hub is the Polkadot relay chain, which handles the core function of a blockchain: Permanently recording data on a decentralized database.

The spokes are the parachains, which are otherwise full-on blockchains — except that they can all work together.

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