When the “summer of DeFi” took off in 2020, decentralized finance held tremendous promise, but today, DeFi has a usability problem.
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When the “summer of DeFi” took off in 2020, decentralized finance held tremendous promise. An ecosystem of interconnected and permissionless peer-to-peer (P2P) financial pools would grant the underbanked access to global liquidity while mainstreaming the mechanisms once reserved only for hedge funds and institutional capital.
Fast forward to today, however, DeFi has a usability problem: It is mostly only available for the already wealthy, who can afford prodigious gas fees to interact with smart contracts on low-throughput transactions—a far cry from the original promise of what DeFi could mean for the world.
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Fractured Operation
Solutions to the high-fees due to the lack of scalability of Ethereum, the most popular smart contract platform, include next-generation, high-throughput blockchains and layer-2 designs that leverage technologies like zero-knowledge or optimistic rollups. However, both of these solutions have the same drawback: Value is fractured across multiple ecosystems that do not easily interoperate.
Moreover, smart contracts across these digital regions are not composable either, which is to say they cannot interact with each other well due to constraints that include, but are not limited to, the inability to communicate across blockchains that leverage different protocols and cryptographic signing primitives.
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The ideal solution to unify these disparate blockchain networks and scaling technologies are oracles and bridges. Oracles are mechanisms in blockchains that can allow blockchains, which are otherwise closed-loop systems, to communicate with the outside world and to securely bring in data from the outside world into blockchains. Bridges are technologies that can allow blockchains to communicate with each other and are usually facilitated by nodes that run instances on both of the chains they are connecting in order to have visibility on both sides of the fence they are aiming to connect.
While oracles are utilized today to power some of the largest DeFi projects, including Aave and MakerDAO, with price feed data, bridges are utilized to create synthetic versions of native assets from originating chains and wrapping them onto destination chains that can actually be used within DeFi smart contracts. These technologies allow assets that may be staked or locked in smart contracts elsewhere to be furthermore put to work as collateral in order to generate even more yield in a trustless manner on a different chain than it originated! We’re entering an era where cross-chain DeFi will create ineffable capabilities that previously were impossible, giving investors and participants financial yields that are just not available anywhere else.
No Guarantees
However, serious issues arise when peering deeper into the…
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