Decentralized finance (DeFi) is one of the largest sectors in crypto. The applications within the DeFi space consist of decentralized trading, borrowing and lending, and many more financial services. However, even with its rising popularity, the sector has many obstacles to overcome before mass adoption is possible.
The rise of DeFi
The growth of DeFi’s popularity was volatile and quick, which follows suit with the overall development of the crypto industry. During the peaks of 2021, the sector saw almost $180 billion in total value locked in the many protocols that still exist today. Of course, the DeFi space also got hit by the crypto winter.
Recently, DeFi stood out in the market upturn during the first quarter of 2023. The DeFi space rose $29.6 billion in value, making the sector stand out against the performances of major asset classes like gold and oil.
The popularity of DeFi can be attributed to the increasing amount of decentralized applications (DApps) and the flow of users from centralized to decentralized exchanges, among other reasons. However, while the increasing popularity is a positive development, there are some caveats.
Rise in transaction costs
One of the caveats is the rising transaction costs once more users start using a network. Investors experienced this during the bull market in 2021; the Ethereum ETH $1,874 network saw a large influx of transactions, mainly happening within the DeFi space. The result was steeply rising transaction costs on the network. Sending crypto became so expensive that users faced a significant barrier to interacting with DeFi DApps.
Another risk is that of vulnerabilities such as smart contract back door keys, massive centralization on single contracts, and counter-party risks of custodial stablecoins. With numerous bridge hacks plaguing the space, and failures of algorithmic protocols such as Terra, using DeFi DApps is certainly not without risk. However, the industry keeps evolving, with many new platforms aiming to improve the issues and challenges current DApps deal with.
DeFi on Bitcoin Cash
Thanks to the continuous development since its foundation in 2017, Bitcoin Cash BCH $121can also perform as a vibrant environment for smart contract deployment and the creation of DeFi DApps on its UTXO mainchain. One new project that has recently launched is BCH Bull.
With the help of the AnyHedge protocol, BCH Bull lets users create long or hedge positions on several assets, such as the United States dollar, Bitcoin BTC $27,637and gold. Users can even add leverage to their on-chain trades. Roger Ver, a well-known Bitcoin Cash supporter and early investor in AnyHedge, said about this use case: “Allowing people to permissionlessly lock the value of their Bitcoin Cash to the price of external legacy currencies is an incredibly useful tool for people who don’t want to deal with cryptocurrency price volatility. That’s why I chose to invest in AnyHedge.”
Scalable and no centralized smart contract risks
The main difference between comparable apps on Ethereum is that each trade has its own independent smart contract. Once two traders agree on the terms, the smart contract is initiated. This eliminates centralized security risks for smart contracts.
Furthermore, the UTXO-based protocol of Bitcoin Cash prevents high transaction fees and makes the chain scalable, meaning fees don’t increase even if the transaction volume on the network increases.
Since October 2022, BCH Bull has been in beta, in which it has already created and redeemed over 3,000 smart contracts. The project has now been released into full production mode this month. Its growing user base can now initiate up to 90-day-long contracts at 2~3x the previous contract size, enjoying the security and scalability that Bitcoin Cash offers.