Polkadot Parachains: New Era of DeFi Micro-Fees Imminent
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A class chasm is coming into view in the blockchain space. Ethereum has been heralded as the infrastructure for Finance 2.0, one in which everyone with internet access can become their own bank. With record-low interest rates on traditional banking savings accounts, the demand to become a liquidity provider is high. Yet, if you were to try to simply swap tokens on Ethereum's Uniswap, you can expect to see prohibitively enormous ETH gas fees.
Thankfully, the competition to Ethereum is heating up. From the onset, the Polkadot project was envisioned to tackle core issues Ethereum now faces — scalability and interoperability. Polkadot doesn't have to undergo a slow, perilous process to become a Proof-of-Stake (PoS) blockchain. It already is one.
Specifically, Polkadot uses Nominated Proof-of-Stake (NPoS) consensus consisting of four network agents — nominators, validators, collators, and fishermen. Built on the open-source Substrate framework, Polkadot can just as easily build any type of smart contract system, from NFT marketplaces, token minting, to DeFi's farm yielding.
Moreover, Polkadot already has a capacity of 1000 tps (transactions per second), unlike Ethereum's pre-upgrade 13.4 tps. However, the stars of Polkadot's smart contract show are parachains. These are Polkadot's interconnected blockchains that can host their own tokens, making it easy to scale up the blockchain economy, without incurring wealth-draining transaction fees.
Without going into too much detail, this means that Polkadot's key advantage over Ethereum is its capability to process transactions across multiple chains in a parallel manner. Presently, on its testnet, Polkadot has over 500 projects heading for deployment. The mechanism by which this is accomplished is also unique to Polkadot.
Polkadot's Parachain Auctions
Presently, there are two parachains deployed on Polkadot's mainnet: staking liquidity protocol Bifrost Kusama (BNC) and Kusama’s multichain smart contract layer Shiden Network (SDN). The latter is very important for the Polkadot ecosystem.
Before any parachain is launched on Polkadot, first it is tested on Kusama, which is why it has been dubbed as the 'canary network.' While Kusama and Polkadot are independent blockchains, Kusama too uses Substrate to build and host blockchains, bridging Polkadot parachains with the likes of Ethereum or Bitcoin.
Befitting the spirit of the crypto space, open and permissionless auctions is how new parachains link up with either Polkadot or Kusama Relay Chains. Specifically, Polkadot uses a variation of open auctions called candle auctions. When launched, bidders submit bids that get higher with each one until the highest bid wins when the auction is terminated at a time determined by a random number, as further explained by Dan Reecer, VP of Polkadot Growth.
At the moment, there are 15 Polkadot projects in the auction stage. Among the most interesting ones we can find Moonbeam (GLMR) and Acala (ACA), Parallel Finance (PARA) and Astar Network (ASTR). Let's briefly recap what they are all about:
- Moonbeam (GLMR) — Although Ethereum is slow and expensive, connecting to an ecosystem with over USD 100 billion total gross value (TGV) is a must! This is precisely what Moonbeam does. With its utility token Glimmer (GLMR), it bridges Ethereum and Polkadot, enabling cross-chain smart contract transactions.
- Acala (ACA) — A fully-fledged DeFi protocol offering multi-collateralized stablecoin (aUSD), based on the Honzon protocol. Furthermore, Acala is an automated market maker (AMM) decentralized exchange (DEX) similar to Uniswap, using a trustless staking derivative (L-DOT). With Acala's microtransaction fees, Finance 2.0 can truly begin!
- Parallel Finance (PARA) — Could this be the backbone of DeFi moving forward? Parallel Finance builds a full suite of financial services, from margin staking, money markets, to insured staking. This is on top of being an AMM and facilitating auction loans with additional rewards.
- Astar Network (ASTR) — Astar Network (ASTR) is closely related to the already deployed Shiden Network and was formerly known as Plasm. This is a powerful Substrate library module allowing developers to add Plasma functions as Layer 2 scalability solutions. This combo could potentially make any blockchain within the Polkadot system infinitely scalable!
Suffice to say, Polkadot is bringing us exciting DeFi innovations. One could wonder whether if Polkadot manages to gain sufficient network effects to push its sails, we will see the birth of a DeFi ecosystem that is much more accessible than the one we got with Ethereum.