DeFi goes cross-chain.

The Polkadot DeFi landscape

Mapping DeFi on Polkadot

DeFi has started on Ethereum, where still a majority of the activity resides (as documented by DeFi pulse, for example). However, as the internet of blockchain expands, successful DeFi patterns start to appear on other layer 1 chains, and some applications (for instance Sushiswap), even operate across blockchains. Notable blockchains with an emerging DeFi landscape include Binance Smart Chain and Solana. Here, we are looking at another blockchain ecosystem which has gained considerable traction recently: Polkadot.

The Polkadot ecosystem is especially interesting because the infrastructure makes it possible for DeFi applications to have their own blockchain (“Parachain”) while participating in the shared consensus and security of the network. This not only solves scalability issues but allows projects to customize the blockchain they operate on to their specific needs, allowing for more advanced implementations of complex applications. Polkadot truly earns the title of a “next-generation blockchain” with these innovations, in addition to other novelties like on-chain governance, and a built-in sustainable fundraising mechanism called Parachain Crowdloans. 

As opposed to Ethereum, Polkadot does not natively support smart contracts. However, there are a number of Parachains that provide smart contract infrastructure: Edgeware is providing generalized smart contracts, whereas others focus on a specific area like Moonbeam on DeFi and Unique network on NFTs. 

Curious about the specific projects already live on Polkadot? Find a collection of leading applications in Polkadot’s current DeFi ecosystem below: 

Polkadot’s current DeFi ecosystem

• Acala: DeFi hub: Stablecoin (similar to Maker) 

• Akropolis: DeFi yield aggregator (YEARN ecosystem) 

• Bandot: Cross-chain credit for uncollateralized lending

• Bifrost: Staking derivatives platform (for staking liquidity)

• Centrifuge: Trustless cash-flow financing for businesses; real-world” securities on-ramp

• Chainlink: Oracle integration for Polkadot chains

• ChainX: Multi-chain bridge

• Equalizer: DeFi flash loans

• Equilibrium: Cross-chain money market: pooled lending & synthetic assets

• HydraDX: Cross-chain liquidity protocol

• Mangata: Fee-less DEX, frontrunning-resistant

• Mantra DAO: Cross-chain staking and lending protocol 

• Laminar: Synthetic assets and margin trading 

• PolkaDEX: Decentralised order book 

• PolkaSwap: Automated market

• Stafi: Staking derivatives

• Zenlink: Cross-chain DEX aggregator

The projects listed above show the beginning of a healthy ecosystem, with versions of the most successful “money legos” that make up DeFi on Ethereum, from Decentralised Exchanges to Stablecoins and lending.  

With this base starting to solidify, it now becomes interesting to look ahead: What is still missing? And more importantly, what novel applications could uniquely be developed on Polkadot? 

Missing money legos

Let’s start with some DeFi money legos not yet present in the Polkadot ecosystem. The list below names applications on Ethereum that are not yet developed on Polkadot, with some example projects: 

• Decentralized asset management (similar to Enzyme, Set Protocol, Balancer)

• Yield derivatives and self-repaying loans (similar to Alchemix)

• DeFi Dashboards & aggregators (similar to Zapper, DeFi Saver, InstaDapp)

• Prediction markets (similar to Augur) 

• Permissionless options trading (similar to Hegic, Opium)  

• No-loss lotteries (similar to Pool Together)

• Index funds for Polkadot assets (similar to Index-Coop, PieDAO, NFTX) 

• Synthetic assets for commodities, stocks, etc. (similar to Synthetix) 

• Advanced AMMs (similar to Curve or Uniswap v3) 

The applications above could either be developed by new teams, building on the model of the Ethereum money legos or by the same teams that developed the original applications (bringing it cross-chain). Contrary to other blockchains operating on the Ethereum Virtual Machine, like Binance Smart Chain, it is usually not possible to just copy the code from the original Ethereum applications to Polkadot (due to different languages, network architectures, etc.). Which is great news for innovation: it forces teams on Polkadot to push the boundaries of what they are building, and not just copy-paste. Not all of these applications will see the same success on Polkadot as their predecessors on Ethereum, but this list nevertheless provides a good starting point to understand where the ecosystem will likely develop. 

Now to the more interesting question: What DeFi applications could be especially relevant for Polkadot, given the particularities of the blockchain ecosystem. 

Searching for "killer-apps” for DeFi on Polkadot: 4 Trails 

First of all, complex applications that can be optimized on the level of the parachain are an obvious candidate. For instance, advanced decentralized exchanges that are faster, front-running resistant, etc. is an interesting use-case. Second, derivatives on native financial functions on Polkadot seem relevant: Built-in mechanisms from staking to parachain slot auctions and crowd loans can all be turned into derivatives, making the underlying financial rights more liquid, enabling their use as collateral, and as building blocks for other use-cases. 

In addition to the technical factors that enable the two areas of development above, the different socio-cultural conditions of the Polkadot ecosystem could also provide fertile ground for new innovations. First, the culture of on-chain governance could give applications that are “governance-heavy” a differential advantage on Polkadot. One of many possible areas of development is collective capital allocation, where many investors collaborate to make better investment decisions together.

Polkadot has a strong community in Europe, as well as other often overlooked geographies such as China. This cultural base would make it more likely that less US-centric financial applications would emerge on Polkadot, for example, scalable stablecoins pegged to the Euro, the Pound, the Swiss Franc, or even the Yuan. 

All of these are guesses, and we will see how reality measures up to them in due course. Whether the specific potential trails of development above lead somewhere or not, I am much more certain that differentiation and specialization of different blockchain ecosystems will become increasingly important as the industry develops. Looking at the technical and cultural factors that differentiate a given ecosystem seems like a good starting point, but can at most give us hints of where the complex, often chaotic process of innovation will take us.