Gavin Wood’s Polkadot Is Coming for Ethereum’s DeFi Crown

Polkadot, the community-governed blockchain protocol launched by Ethereum co-founder Gavin Wood, has been one of the runaway success stories of 2020. Not only has its native DOT token firmly established itself as a top 10 cryptocurrency by market cap, but its community has rapidly expanded as the promise of fast throughput, forkless upgradability, rich customization capabilities and, most vitally, cross-chain interoperability resonates with developers.

Like Ethereum, with which it is often compared, Polkadot aims to solve blockchain’s long-standing scalability problem by uniting a vast network of purpose-built parachains and allowing them to operate seamlessly with one another at scale via the Polkadot Relay Chain. Its vision? To pave the way for "new decentralized marketplaces to emerge, offering fairer ways to access services through a variety of apps and providers."

If this ambition sounds familiar, then you’ve clearly been paying attention to the booming DeFi movement, whose permissionless systems have largely been built on Ethereum. Protocols like Uniswap, Maker, Aave and Yearn helped push crypto trading volumes up by $155B in Q3, and a quick scan of the projects building on Polkadot suggests they want a piece of the action.

Interestingly, Polkadot helps to finance the development of software protocols (dApps, parachains) via its parent company, the Web3 Foundation. Funding is dispensed trustlessly on-chain, and to date the Foundation’s grants program has bootstrapped over 100 projects in 20+ countries. Grants are disbursed in quarterly Waves, with recent recipients including Nsure.Network, an open insurance platform for open finance, and Saito, a Polkadot gaming protocol and library.

DeFi is not the only use case for Polkadot, incidentally: the blockchain’s infrastructure is such that products like cross-chain registries and cross-chain computation are possible. Suffice to say, however, that DeFi attracts the lion’s share of developers: yield farming protocols, stablecoins, wallets, decentralized exchanges (DEXs), automated market makers (AMMs), toolchains created to improve Substrate-based dApps – the list goes on.

Polkadot’s DeFi stack may be a fraction of the size of Ethereum’s at present, but that’s to be expected given the project’s age. Importantly, Polkadot has enjoyed the largest upsurge in developer activity this year, according to a report by Outlier Ventures. In contrast, developer numbers on Ethereum, EOS and Stellar fell during the observed period (12 months to May, 2020).

According to the PolkaProject directory, there are 282 active applications on the network including a number of sovereign, interoperable parachains. If Polkadot is to give Ethereum a run for its money, several of these will have to pioneer new concepts and modes of open finance while others merely need only outshine their Ethereum-based equivalents.

MANTRA DAO might sound uncannily close to MakerDAO, but it’s something else: a community-governed DeFi platform that promises to leverage the wisdom of the crowd to help users grow their wealth. One of 86 projects built on Parity Substrate, the development framework for creating distributed or decentralized systems, MANTRA DAO allows users to onboard collateral from other connected chains while interacting with staking, lending, borrowing and governance mechanisms.

As for that "wisdom of the crowd" tagline, it refers to the utility of the platform’s OM token, which confers voting rights that affect the allocation of ecosystem grants, support for staking assets and lending products, and factors like inflation levels and interest rates. MANTRA’s founders, whose background lies in finance, business and crypto, selected Polkadot due to its interoperability, scalability and network speed.

Thanks to Polkadot’s unique infrastructure, MANTRA is able to build cross-chain links to existing open-source DeFi lending protocols, enabling users to access lending interest for Ethereum-based assets.

Another intriguing Substrate-based project is Acala. Comprising a multi-collateralized stablecoin (aUSD), staking derivatives and DEX, the Acala Network powers cross-chain DeFi applications on Polkadot and beyond. A self-proclaimed "all-in-one DeFi service center," this particular parachain has serious institutional heft behind it, having recently closed a funding round backed by the likes of Pantera Capital, Coinfund and Arrington XRP Capital.

Acala recently launched a sister network, Karura, intended as a DeFi hub for Polkadot’s canary network Kusama. In essence, Karura will be to Kusama what Acala is to Polkadot. Once the canary network is bridged to Polkadot, both Karura and Acala will be interoperable with one another.

Because Polkadot allows for any type of data to be transferred between vastly different blockchains, its real-world applications are practically limitless. The real test will be whether its products reflect the ambition of its technology, and whether it can capitalize on both Ethereum’s bloated gas fees and its abortive efforts to launch 2.0.

DeFi might be the current talking point, but it’s clearly not the end of the line for Gavin Wood’s latest venture.