Focus on Decentralized Finance (also known as DeFi) within the blockchain and cryptocurrency industry has increased markedly. Decentralized Finance is on a mission to disrupt many banking, finance, and other transaction-based applications. The potential of DeFi in the financial ecosystem is huge but, to date, it is still only used by crypto experts. This is because we are still using DeFi 1.0, which often comes with either slow, expensive, or single blockchain transactions.
This article will explain the meaning of Decentralized Finance, where DeFi 1.0 currently stands, and what we need for DeFi 2.0.
What is Decentralized Finance?
Decentralized Finance, or DeFi for short, is an umbrella term for a variety of blockchain-based financial applications aimed at disrupting traditional financial institutions.
DeFi applications are decentralized versions of traditional financial products and services — such as trading exchanges, bank lending services, fundraising platforms, etc. As DeFi is blockchain-based, it has meant that not only does it reinvent how these traditional financial products can work but also hugely increases their efficiency, and lowers the barrier to entry. Think of trading or lending/borrowing but without a middleman or bank.
DeFi 1.0
From the very start, the development of DeFi has experienced huge growth and brought disruptive change to the financial and blockchain industry. This is a fact!
The initial growth of DeFi mainly occurred on the Ethereum blockchain. The reason start-ups and existing crypto projects began building DeFi applications on Ethereum was that Ethereum’s Smart Contracts were ideally suited to accommodate the first and most important use cases: Lending/Borrowing and related applications, plus Decentralized Exchanges (DEXs) like Uniswap.
As demand for DeFi and, thus, Ethereum rapidly increased, the negative outcome has been times during which Ethereum gas prices (“gas” is the network fee paid by the user per transaction) have escalated dramatically. During those times, some trades or transactions took many minutes, hours, or even days or cost up to a couple of hundred dollars in gas or network fees. For example, people looking to trade $10 worth of ETH for TXL (or vice versa) on a Decentralized Exchange like Uniswap had to pay $200 worth of gas or network fees to force the transaction to be executed without delay. As a result, the exchange could only be used by people who had a lot of money or time.
The gas fee and speed challenges that came with Ethereum led to other blockchains opening up for DeFi developers. One example was (and continues to be) Binance Smart Chain. This quickly found developers copying open-source DeFi applications previously native to Ethereum and deploying them on Binance Smart Chain. Together with Binance’s marketing power these, and other, DeFi applications quickly became popular because transactions were instant and cost mere cents in gas or network fees.
So that is the status quo in the summer of 2021 — we have DeFi applications on different networks. All of them work to an extent, but each has limited outreach because they generally only serve tokens from one or a small number of networks. If a DeFi user wants to switch applications, networks, or blockchains, he or she has to repeatedly use token bridges — which can be time-consuming and costly.
We can conclude that the DeFi ecosystem has produced incredible products and solutions, but has also resulted in a cluttered construction site. According to Christian Eichinger, Co-Founder of the German Tixl Organization, there is no way that DeFi applications can achieve mainstream adoption while being limited to Ethereum’s or other single-blockchains. He believes the only way to achieve mass adoption is full interoperability — with DeFi 2.0.
DeFi 2.0
To make DeFi easier and more accessible, the whole DeFi ecosystem needs to be connected. That is the definition of DeFi 2.0: Fast and affordable transactions in an ecosystem where everything is connected. As an example: If you have Ethereum’s ERC20 tokens, you may want to lend them to somebody else via a DeFi lending protocol deployed on the Polygon network. After you receive them, you might want to trade them for a different token that was initially minted on the Binance Smart Chain. In DeFi 1.0 this would require two bridge transactions with resulting bridge fees and a lot of administration. In DeFi 2.0, this can be done without that hassle and inefficiency.
Christian Eichinger’s German Tixl Organization is trying to solve this. The key products that Tixl offers are the Cross-Chain Bridge and their “Autobahn Network” (named after the high-speed, toll-free German highway) — a high-performance layer 1 network that also provides a scaling solution for all other blockchains. “High-performance” means providing tiny-fee, instant transactions as well as 100% interoperability & scalability.
Any token from any blockchain can be used on the Autobahn Network and developers can build any DeFi application for the Autobahn Network.
The Autobahn Network is still in its infancy, with the first 0.2 version having been launched. However, Tixl has already achieved Proof of Concept with the Bitcoin and Ethereum Mainnets — which is demonstrated in the fully working Tixl Wallet v0.2. In addition, the first Smart Contracts have already been deployed in the Testnet. The Autobahn Network v1.0 is close and its release will mean a huge step forward towards the next version of DeFi. Christian Eichinger says:
The capacity to easily move value between different blockchains will reveal the next growth cycle in decentralized finance and create immense value for the whole financial ecosystem.