What’s the Best Blockchain for DeFi?
DeFi is one of the most revolutionary ecosystems to come out of the crypto space, and rightly so, allowing those excluded by their traditional financial systems to utilize, and benefit from, credit in its various forms. The space is rapidly developing, and with it are the blockchains that host DeFi services, of which there are now dozens, all with variations in how they work and what they can do.
With so many different DeFi blockchains around we thought we’d take a look at three of the most popular and in demand DeFi blockchains and see if we can answer the question ‘what is the best blockchain for DeFi.
The Issue of Decentralization
When analyzing which is the best blockchain for DeFi we have to consider the meaning of the word DeFi, which stands for ‘decentralized finance’. The latter of the two words isn’t as important as the former, with the issue of decentralization being a huge bone of contention in the blockchain space.
When Bitcoin launched in 2009 it was all there was, and it took a while for other types of blockchain to emerge. Until XRP was launched in 2012 almost every blockchain was completely decentralized, but since then the lines have become blurred. Now decentralization lies on a scale with completely decentralized projects like Bitcoin at one end and the likes of Ripple at the other, entirely controlled by one company.
The issue for us is that most new DeFi blockchains fall somewhere along line rather than being completely decentralized, for the reason that centralization brings with it advantages of speed and throughput. If we were to only feature truly decentralized DeFi blockchains then this piece would include only one name and would not reflect recent shifts in the DeFi space.
We have for this reason decided to include projects that contain elements of centralization in their makeup as well as genuinely decentralized ones given that this is the direction in which the sector is going.
When it comes to looking at the best blockchains for DeFi we need to consider a number of factors. Firstly there are technical considerations which underpin how good the blockchain is at its job. These are:
- Throughput (how many transactions the blockchain can process per second)
- Speed (how long it takes transactions to arrive)
- Scalability (how well the blockchain is set up to manage growth)
On top of that is the functionality and popularity of the blockchain, which means we need to consider the dapps running on the protocol; their popularity; and the blockhain’s total locked value (TVL), or how much money has been locked up on the blockchain through these dapps. These are less quantifiable than the performance aspects, but they can still be analyzed appropriately.
With dozens of DeFi blockchains to choose from but the need to go into detail in order to find a winner, we decided to choose the three that best reflected the ideologies and technological advances of the DeFi space, assessing their credentials and seeing if one stood out as a winner.
Naturally our decisions will upset supporters of other DeFi blockchains, but we’re sure readers will understand the rationale behind them.
The godfather of the DeFi movement, Ethereum has been the home of DeFi since its inception. Indeed the majority of DeFi projects still run off it, which says something considering how many newer and more technologically advanced blockchains have entered the space since. This fact goes to show how much power Ethereum still retains.
The reason for Ethereum’s enduring popularity is not hard to understand – it is a battle hardened blockchain that has been the fulcrum of the decentralized smart contract movement since 2015 and the native ERC-20 token format is ubiquitous in the space.
Ethereum can boast great reliability and an unbeatable reputation, and, crucially, it has the highest level of decentralization among all DeFi blockchains. Ethereum’s transactional consensus is achieved through the 2,500 nodes that currently perform this task, with transactions processed by a network of distributed miners.
From a narrative point of view, then, we can argue that Ethereum is the best DeFi blockchain out there, but this ignores its technological troubles. There is a reason Ethereum is going through a years-long upgrade process – it has become too slow and expensive.
In 2021, simple transactions on Ethereum-based exchanges were setting users back double and sometimes even triple figures, rendering all but the wealthiest or most desperate individuals simply unable to use it.
Currently, Ethereum can only process up to around 30 TPS, with the processing speed of the entire system limited by the speed of its slowest participant. Transactions are added to the Ethereum network every 14 seconds on average, but the length of time they take to be completed depends on how much ‘gas’ the sender is willing to pay – the more you pay (in ETH) the more attractive it will be to a miner and the quicker it will be processed.
Either way, for the average user we’re still talking in terms of minutes here, and users will always have to make sure they have enough ETH in their wallet to cover the gas fees unless they want their coins to be stuck in their wallet.
This network congestion is particularly a problem when it comes to what many see as Ethereum’s bread and butter – decentralized exchanges. Decentralized exchanges require users to complete several steps in order to make a trade, with each step taking time and costing gas fees.
This is challenging in itself, but there is also the chance that a trade will fail if the price moves too much while a user’s trade is going through the system. The kicker is that even if a trade fails the user doesn’t get the gas fees back.
Ethereum has by far the largest collection of top DeFi projects in its stable, with the Ethereum-only projects taking the first 7 spots in the top 10 TVL Dapps, with over $80 billion committed to projects on the Ethereum network. This blows every other blockchain out of the water by a country mile and shows just how much trust the crypto community still has in it in terms of protection of their funds.
Ethereum is fine for those who are parking large sums and claiming the interest, but for more regular transactors Ethereum has become unusable. There is a light at the end of the tunnel however; Ethereum is working hard on upgrading to Ethereum 2.0, an upgrade that will change the entire way its blockchain works in order to better compete with the new chains on the block, with hugely improved scaling, faster transactions, and much more rational fees.
However, this upgrade will see Ethereum fundamentally change the way it works, with miners and traditional nodes removed from the process in place of a new type of node and a network of validators. Critics argue that this move will both reduce security on the Ethereum network and eviscerate its high level of decentralization.
Ethereum is currently riding on its reputation, but if Ethereum 2.0 doesn’t make it competitive enough with the newer kids on the block then we will see projects and users abandoning Ethereum for other blockchains in their droves.
Binance Smart Chain
Binance created the concept of CeDeFi (centralized decentralized finance) when it launched Binance Smart Chain in April 2020. CeDefi was designed to make the most of both CeFi and DeFi, blending the speed and low transaction costs associated with centralized networks with the autonomous nature of decentralized networks.
Binance Smart Chain has just 21 validators who are responsible for securing the network by processing transactions and signing blocks, which is a very low number for a network that claims to have strong decentralization DNA. These validators are chosen on a daily basis by Binance Chain, a network that is itself governed by just 11 validators.
In contrast, Ethereum is on track to have over 280,000 validators when it launches Ethereum 2.0 next year. This has led to concerns over Binance’s level of control over the protocol, which is an issue it cannot easily rebuff.
Where Binance Smart Chain excels is in performance. It takes about 3 seconds to add a transaction to the Binance Smart Chain blockchain, although it can only handle up to around 60 TPS.
This comparatively low number is suggestive, ironically, of a reasonable level of decentralization as centralized blockchains boast much better stats than this, which some have said shows that Binance isn’t as centralized as the numbers suggest.
Binance Smart Chain was built for mass adoption and scalability, and it has never experienced growing pains despite users flooding to it in their droves since its launch. When trades fail to go through it is almost always the fault of the user or a lack of liquidity, neither of which is the fault of the blockchain. Its reliability has never been found wanting.
As well as being fast and reliable, transactions on the Binance Smart Chain are also cheap, although not the cheapest around – over the last year the transaction fee has ranged from $0.25 to $0.50. For Ethereum users these fees are a memory of a bygone time, but more centralized blockchains have fees just a fraction of this. Once more, however, this highlights that Binance Smart Chain may not be as centralized as everyone suspects.
It also has a couple of highly ranked lending options and other exchanges when it comes to user numbers and transactional volume, and it is the second placed blockchain when it comes to TVL.
Overall then we can say that Binance Smart Chain is one of the most widely used exponents of the CeDeFi platform that it created. With its impressive scaling, speed and transaction fees, Binance Smart Chain is a great choice for using on exchanges but there is a reason why it falls so far behind Ethereum when it comes to the big bucks – people don’t trust its centralized element, which could stifle its growth in certain areas.
Avalanche calls itself “the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality”, with that qualifier somewhat ruining the rather impressive initial claim. It’s all for a good cause, however, as we’ll explain.
Avalanche was founded in 2019 by Dr. Emin Gun Sirer with ambitions to be the fastest time to finality for blockchain transactions. Time-to-finality is simply how long it takes for a blockchain transaction to be considered permanent and irreversible, which is pretty important when you know that some transactions fail, such as we have explained with Ethereum.
Avalanche’s ambitious goal is to be the complete DeFi platform, combining scaling with speed but without sacrificing decentralization. As we have already discovered, blockchain developers to date have had to sacrifice speed and scaling if they want high levels of decentralization, but Avalance aims to change that.
Avalanche launched in 2020 and quickly caught the eye of a number of dapps looking to take advantage of its solution. Avalanche isn’t just one blockchain but is in fact three different ones all blended together to form a kind of mega blockchain ready to take on the DeFi world.
The reason why Avalanche has three blockchains under the hood, and why it is able to conduct time-to-finality transactions in a staggering one second, is because each blockchain is dedicated to a single element within the process, meaning that different transaction types can take place in parallel rather than filling up a single linear blockchain.
Avalanche’s scaling solution mirrors those seen by other newer blockchains in that it allows dapps to run on their own off-chain networks, taking pressure off the main chain and ensuring it remains free of bottlenecks.
These side chains, which Avalanche calls Subnets, mirrors the plans for Ethereum’s sharding technology that forms a crucial part of its own upgrade – subnets can create secondary subnets if their initial network becomes full, meaning that, in theory, Avalanche has unlimited scaling potential.
Avalanche boasts on its website that it can process upwards of 4,500 TPS which would be more than double that of VISA…if it were true. It’s not a lie as such, but it is a theoretical throughput based on the optimal conditions on a subnet rather than actual use on the main chain.
Visa could in theory carry over 50,000 TPS, but it has never, and probably will never, get anywhere near that, typically doing around 1,700 TPS. we must be careful not to confuse theoretical performance with actual performance, especially on blockchains that haven’t yet been put through their paces.
We can get a much more realistic idea of Avalanche’s actual throughput by checking its metrics site which, at the time of writing, has the figure at just over 7 TPS. While this number may seem hilariously low, we must remember that TPS figures are about demand as much as they are about speed, and Avalanche is a new blockchain, meaning that demand is going to be low, for now. Still, it’s quite a bit less than 4,500.
To get picked up by this level of DeFi platform is no mean feat for such a new blockchain and bodes well for its reputation early doors. Avalanche also offers customizable blockchains which is something that Ethereum and Binance Smart Chain don’t offer and that will appeal greatly to enterprises over time.
Avalanche uses a consensus mechanism from the same family as that used by Binance (and Ethereum once it upgrades to 2.0), which means it has the same setup of nodes and validators instead of miners to secure the network and build the blockchain.
It also implements a more complex consensus mechanism called a directed acyclic graph (DAG) which allows the parallel processing of transactions crucial to increasing throughput.
Impressively, Avalanche has over 1,200 validators compared to Binance Smart Chain’s 21, which already puts it in a superior position. However, again this is far less than Ethereum’s predicted 280,000+. Avalanche could have a problem soon however as most of these validators got on board when the AVAX token was relatively cheap, but with 2,000 AVAX tokens needed to become a validator, which now carries a six-figure price tag, the number of validators may well stagnate, or even decline as some cash out, especially towards the end of a crypto bull run.
Avalanche has all the ingredients to be a DeFi showstopper, if it can prove its tech. The fact that so many top DeFi dapps have already chosen Avalanche however means that, even though it’s in its infancy, it is already pulling up trees.
And the winner is…
Before anointing a winner, we should also take a moment to mention some of the other candidates that could have featured in our list. Solana, Polkadot, and Polygon are three of the projects that enjoy great support from their respective communities and that nearly made it onto the list, but for various reasons they didn’t quite make the cut.
They do however feature in another of our pieces, What’s the Best Cryptocurrency for dApps?, so we do recognize their role in the DeFi space.
When it comes to the question of what’s the best blockchain for DeFi, we need to remind ourselves of our criteria. Firstly, the winner should be technically sound with a good balance of blockchain speed, throughput, and cost.
We’re not necessarily looking for the fastest, especially if it comes at the cost of decentralization, which it often does, so we’re looking for the best balance of all these metrics.
We also need to consider the level of adoption – the user numbers, TVL, and the amount of Dapps served by the blockchain are key indicators that the blockchain is actively being used within the DeFi community.
With these factors taken into consideration, it’s time to reveal our decision in reverse order.
In third place we’ve gone for Binance Smart Chain. While the technology is absolutely sound, it’s not the fastest of the cheapest on our list, but the real bone of contention is the level of decentralization. Having only 21 validators on the network is an unacceptably low amount of decentralization, even though the project is a CeDeFi by definition.
We also took into account the fact that, PancakeSwap aside, Binance Smart Chain doesn’t have a great deal of use by the DeFi community, especially for finance-related activities, which is telling.
With regards to second and first places, we agonized over the merits of the two remaining protocols until we realized that we simply couldn’t split them apart, at least not without huge caveats. Ethereum dwarfs Avalanche in terms of reputation, usage, TVL, and all such metrics, plus it is a far more decentralized entity.
However, it is a million miles off Avalanche technologically and the current costs make it prohibitive to use on a regular basis. However, if it can scale with Ethereum 2.0 then it probably hands down tops the list…if.
With Avalanche, for all its promises of speed and high levels of decentralization, it hasn’t been road tested to anything like the degree that Ethereum has.
Solana has experienced teething problems with its performance and reliability following usage spikes and we are yet to see how Avalanche performs under the same stresses. Theory is one thing, but it can’t prepare you for the real world. Even Harry Potter knew that.
Of course it’s not Avalanche’s fault that Ethereum has vastly more value locked up in it, but this could only be overlooked if Avalanche’s tech was as battle-hardened as Ethereum’s. Only in this case could we say that it has a good chance of claiming some of that TVL. While the impressive statistics remain theoretical though, we can’t say for sure that it is the DeFi champion of the future.
Given this, we have to say that Ethereum and Avalanche are, in our opinion, equally the best blockchains out there for DeFi usage. If Ethereum can scale or if Avalanche can prove its tech in battle then we may have a different verdict on our hands, but for now we have to chalk this one up as a tie.