Polkadot launched its mainnet in May, yet it has quickly become a major competitor in the blockchain space. After its DOT token denomination change in late August, Polkadot broke into the top ten cryptocurrencies, overtaking established altcoins like EOS and Litecoin.
Kelvin Koh of Spartan Black, an Asian crypto fund, suggested that Polkadot could become one of the top three blockchains. Dan Morehead of Pantera Capital Management echoed this sentiment, telling Bloomberg that although Polkadot's current market cap is about 10% of Ethereum's, the likelihood of it becoming a serious "Ethereum competitor is significantly greater than 10%."
A consistent trend in Ethereum's lifecycle has been that as more developers build appealing and valuable applications, its price outlook improves. If the same holds true for Polkadot, analysts’ predictions appear promising. The surge in decentralized finance (DeFi) helped double Ethereum’s price this summer. Now, DeFi developers are also looking toward Polkadot, attracted by its high throughput, Substrate development framework, and potential for interoperability.
Peter Mauric, Director of Public Affairs at Parity, told Cointelegraph that Polkadot’s architecture offers significant potential to expand the existing DeFi ecosystem. He explained:
“Once powerful DeFi infrastructure is in place, the potential for innovation increases dramatically. We see intriguing new possibilities like decentralized sovereign wealth funds and cross-chain money markets, laying the groundwork for the next generation of DeFi protocols.”
Many of these new DApps and parachains have also received grants from the Web3 Foundation, Polkadot’s primary backer. Mauric confirmed that the Polkadot treasury is also trustlessly funding projects building on the network. So, who is building in Polkadot’s DeFi ecosystem, and how do they compare to their Ethereum counterparts?
A Comprehensive DeFi Platform
Acala is a decentralized financial hub billed as a "one-stop DeFi service center." It offers features similar to Maker, allowing users to borrow and lend its aUSD stablecoin. However, it also operates a decentralized exchange under an economic model described as a "decentralized sovereign wealth fund," aimed at providing sustainable ecosystem growth. Acala was also among the first to participate in a new Polkadot-specific fundraising model known as an Initial Parachain Offering.
Acala is the first project to use the Substrate framework to build an over-collateralized stablecoin. Bette Chen, Co-founder of Acala, told Cointelegraph: "Using Substrate allows us to customize fee structures and let users pay transaction fees with any accepted token. The benefits for innovation are limitless—we can add new features and fix issues without requiring hard forks."
Staking and Lending Platforms
Mantra DAO is a community-managed DeFi platform focusing on staking, lending, and governance. The platform’s OM token confers voting rights on matters such as inflation levels or interest rates. Mantra DAO will operate on the RioChain infrastructure and is evolving into a fully decentralized DAO managed by its community.
Mantra DAO highlights scalability and interoperability as key advantages of building on Polkadot. Will Corkin, Co-founder and Council Member, told Cointelegraph: "Interoperability is a major step toward bringing DeFi into the mainstream, moving beyond the network issues currently faced by Ethereum-based platforms." He added: "We can bring not just Ethereum DeFi to Polkadot, but all DeFi to all peers on all platforms."
Another project, StaFi (short for Staking Finance), is a protocol that lets users unlock liquidity from staked tokens. Similar to Yearn.Finance or Compound, it issues synthetic rTokens that represent staked assets in a pool and can be used in other protocols. Besides receiving funding from the Web3 Foundation, the project is also supported by B-Tech, the tech accelerator of the Bitmax exchange.
DEX and Liquidity Solutions
Polkastarter serves as Polkadot’s answer to Uniswap—a decentralized exchange enabling interoperable token pools via cross-chain swaps. Projects can list their tokens and use the platform for decentralized auctions and fundraising. The development team has already created a proof-of-concept on Ethereum, with plans to migrate to Polkadot in early 2021.
Equilibrium, another project, migrated from the EOS blockchain to Polkadot. It began as a MakerDAO alternative but, with the move, plans to expand its offerings to include a decentralized exchange, synthetic assets platform, and a new interoperable stablecoin.
A Bridge to Ethereum DeFi
Moonbeam is a Polkadot parachain that serves as a bridge to Ethereum, enabling developers to build Ethereum-compatible smart contracts. Through Moonbeam, DApps can integrate with other blockchains, including Bitcoin. This also means existing Ethereum-based front ends can connect to Moonbeam to interact with Polkadot-based DeFi applications.
Derek Yoo, CEO of PureStake, the development firm behind Moonbeam, elaborated: "Moonbeam allows ERC-20 tokens to transfer between Ethereum and Polkadot, which is essential for cross-chain deployment where an application has instances on both platforms."
Moonbeam has found synergy with Ethereum-based DeFi projects looking to expand to Polkadot. It has announced partnerships with several well-known DeFi projects, including SushiSwap, BetProtocol, and Linear Finance, with more in the pipeline, according to Yoo.
DeFi Infrastructure
Ethereum DeFi has matured, with continuous innovation building upon earlier projects. However, many initiatives on Polkadot see an opportunity to establish foundational infrastructure layers for cross-chain asset and transaction transfers using parachains.
Rio DeFi’s RioChain is a Polkadot parachain built with Substrate, offering a ready-made toolkit for DeFi DApp builders. This includes the RIO generic asset bridge, which supports simultaneous cross-chain transfers of multiple assets. All of Rio’s core tools are accessible via the project’s web interface, including the Rio wallet and block explorer.
The team behind RioChain anticipates numerous cross-chain DeFi use cases, including Bitcoin lending platforms, Bitcoin savings accounts, and instant stablecoin loans backed by crypto portfolios. Additionally, RioChain believes that cutting out intermediaries like PayPal—which take a significant cut from merchant payments—could disrupt the global e-commerce payments market.
Bithumb Global has also launched its own parachain, Clover, on Polkadot. To boost DeFi, Clover will leverage cross-chain capabilities and include some of Bithumb Global’s internal applications, such as a decentralized exchange, wallet, and lending protocol. Norelle Ng, Executive Partner at Bithumb Global, told Cointelegraph that infrastructure layers like Clover will ultimately enhance the user experience in DeFi: "The modules available in Clover will significantly lower the technical barriers for upper-layer applications."
Akropolis, a project originally built on Ethereum, provides open-source protocols for DeFi DApp developers—essentially a DeFi operating system. In the context of Polkadot DeFi, it has received a grant from the Web3 Foundation to offer platform-as-a-service for Substrate nodes. It also provides a staking portal as a front end for the Polkadot chain. Akropolis has already integrated with Ethereum DeFi DApps like Compound and Aave.
The Road Ahead for Polkadot DeFi
Based on development activity, Polkadot DeFi looks promising. Many projects are already leveraging the interoperability the system offers. Polkadot is also making strides in attracting developers from other platforms.
However, full interoperability will take time, especially due to the current lack of composability between Ethereum and Polkadot applications. For example, it is not yet possible to execute a flash loan on one platform and use it for arbitrage across different decentralized exchanges on another. Mauric acknowledged that achieving cross-chain composability is a critical development phase:
"Cross-chain composability is essential for DeFi and Web 3.0. We've already seen strong demand for trustless, pegged Bitcoin in Ethereum DeFi—an early sign that cross-chain connectivity and composability are on the horizon. Solving this is a major milestone."
Until cross-chain composability becomes a reality, many DeFi DApps on Polkadot might simply replicate existing Ethereum applications. This has already happened on Binance Smart Chain, where DApps like BurgerSwap and BakerySwap have chosen to copy Ethereum-based SushiSwap.
The value of merely replicating existing applications is questionable. Therefore, Polkadot DeFi will need to offer more innovative products to attract users away from Ethereum’s composable and liquid DeFi ecosystem.
Ultimately, whether Polkadot can take the DeFi crown from Ethereum remains to be seen. A more pressing question may be whether Polkadot can improve upon DeFi to boost adoption and make it more user-friendly and accessible for everyday investors and consumers. Beyond interoperability, that seems to be Polkadot’s ultimate goal.
Frequently Asked Questions
What is Polkadot?
Polkadot is a multi-chain blockchain platform that enables different blockchains to interoperate and share security. It aims to create a fully decentralized web where users have control over their data and transactions.
How does Polkadot’s DeFi differ from Ethereum’s?
Polkadot emphasizes cross-chain interoperability, allowing assets and data to move between different blockchains. Ethereum currently operates largely within its own ecosystem, though bridges are being developed. Polkadot also uses a nominated proof-of-stake consensus mechanism, which offers scalability benefits.
What are parachains?
Parachains are independent blockchains that run in parallel within the Polkadot network. They can have their own tokens, governance models, and use cases while benefiting from the shared security and interoperability of the Polkadot relay chain.
Can I use Ethereum DeFi apps on Polkadot?
Yes, through bridges like Moonbeam, users can interact with Ethereum-based DeFi applications from the Polkadot ecosystem. This allows for the transfer of assets and data between the two networks.
Is Polkadot more scalable than Ethereum?
Polkadot’s architecture is designed for high scalability through its parachain structure, which processes transactions in parallel. Ethereum is working on scaling solutions like sharding and layer-2 protocols, but Polkadot currently offers higher throughput.
What are the risks of using Polkadot DeFi?
As a newer ecosystem, Polkadot DeFi may face risks such as smart contract vulnerabilities, lower liquidity compared to Ethereum, and regulatory uncertainties. Users should conduct thorough research and use trusted platforms. 👉 Explore secure DeFi strategies