Current problems hindering the accelerated growth pace of the DeFi landscape
The current trajectory of the decentralized finance — DeFi landscape suggests an even more parabolic movement judging by how open-source protocols like Aave, Compound, Uniswap and many others are not showing any signs of slowing down. From total value locked (TVL) crossing $130 billion according to recent data from DeFillama, protocol user numbers, revenue generated or even capital raised from conventional VCs and angel investors, DeFi is here to stay. Decentralized finance is extremely liquid, very composable, and completely digital, decreasing running costs to a few cents. Once a development team has built a product, they don’t need to build agencies around the world or allocate a marketing budget.
Source: DeFillama as of August 12th, 2021
Users get the best rewards for their money because middlemen are essentially eliminated from the equation. But beyond the progress registered by this sector that seeks to upturn the traditional finance sector using smart contracts and open source codes, there are noticeable challenges straining this sector and hampering its accelerated growth. In a nutshell, we can say DeFi has been a victim of its own success. In a case where the industry experiences an influx of newer entrants and the older stakeholders seek to participate even deeper, DeFi falls short by not being able to handle massive transaction loads or the clunky user experience associated with using DeFi protocols.
Chief of the problems facing DeFi is scaling. For an industry that is barely up to five years since it started gaining mass appeal, Ethereum, home to most DeFi primitives, keeps falling short in the aspect of scaling. As more users try to use native DeFi protocols on Ethereum which could only accommodate up to 15 transactions at once at peak times, network charges shoot up leading to unimaginable gas costs for even micro DeFi transactions. The normal response is for dapps and protocol developers to either migrate or seek ways of connecting to other chains like Binance Smart Chain, Solana, Avalanche etc., with cheaper transaction costs and faster settlement times. But this comes at some other expense. For example, even though Binance Smart Chain offers faster settlement times for DeFi transactions at an insanely cheaper cost, a significant portion of dapps layered on it have faced hacks and other vulnerabilities owing to the nascency of that network.
But the bigger problem stems from the ensuing liquidity fragmentation from most protocols migrating from Ethereum or even newer chains. To further keep their dreams alive, DeFi developers and dapp builders have adopted Layer 2 solutions like Polygon or Arbitrum to keep transaction costs low and settlement times faster without necessarily sacrificing decentralization. Transactions are bundled off-chain and submitted to main chains in batches to help offset the huge loads of having to always transact directly on-chain. This is what Layer 2 technologies afford DeFi users. Yet, there’s still the problem of always trying to bridge assets on Layer 2 protocols like Polygon before they are available for use on the chain.
Typically, Polygon bridges take about 8 minutes to bridge assets while the conventional Plasma bridge takes even longer. An approach that could dramatically revolutionize asset bridging across chains and smoothening the user experience for DeFi users would be to adopt the liquidity mirroring approach. Pontoon Finance is focused on this approach whereby DeFi protocols can achieve cross-chain composability using Pontoon’ decentralized Relayer Chain.
How Pontoon’s Relayer network works
Using the same incentive approach for Liquidity Providers across most DeFi protocols whether AMMs or a newly launched lending protocol, Pontoon incentivizes LPs to provide liquidity and in the process mine $TOON token, the native token powering Pontoon network. Now for a DeFi user looking to bridge his asset, Pontoon’s cross-chain relayer network gets this done offering an almost immediate unlock of the same asset value on the chain of their choice as long as it’s supported by Pontoon network.
Just like we illustrated in our previous blog using Ethereum and Polygon, the LP’s asset bridging transaction through liquidity mirroring on Pontoon’s Relayer Chain would follow the iteration below:
Using Ethereum and Polygon as a reference, DeFi allows for pool staking on both chains for LPs. So now let’s say
User A has ETH on Ethereum
User B has ETH on Polygon
User A can simply stake his ETH on Pontoon and earn rewards in $TOON tokens as a liquidity mining incentive.
User B on Polygon can also stake his ETH on Pontoon to enjoy the same APY Pontoon protocol offers LPs. User B’s action just like User A also gives him the TOON tokens as a liquidity mining incentive.
With both LPs on Ethereum and Polygon, they have now formed staking pools for anyone seeking to bridge their assets on any of these chains; Ethereum or Polygon with Pontoon now easily mirroring liquidity across both chains.
Now, for any DeFi user who already has ETH on Ethereum but would like to bridge it with Polygon’s commit chain, all he has to do is simply stake his ETH on Pontoon and immediately, he unlocks the same asset on Polygon. The DeFi user is able to do this through Pontoon’s seamless relayer network feature allowing gas-less cross-chain transfers. The same thing goes for any user who has ETH on Polygon and would like to bridge it and claim it on the Ethereum chain.
As with any decentralized relayer network, DeFi dapp developers can build protocols where they pay directly for their users’ transactions on the relayer chain. This is where the concept of gas-less transactions takes its roots. Essentially, in this scheme, users sign messages (not transactions) containing information about a transaction they would like to execute. Relayers (like Pontoon) are then responsible for signing valid Ethereum transactions with this information and sending them to the network, paying for the gas cost. A base contract preserves the identity of the user that originally requested the transaction. In this way, users can interact directly with smart contracts without needing to have a wallet or own Ether.
DeFi dapp developers looking to allow gas-less transactions need to or leverage a decentralized relayer network like Pontoon’s Relayer Chain. And what this means is that dapp users do not need to hold Ether to pay for gas, significantly easing the DeFi protocol onboarding process.
Cross-chain composability among DeFi protocols is becoming a hot topic and would gain even more traction as DeFi progresses in the coming years. Pontoon’s decentralized Relayer Chain facilitating liquidity mirroring for liquidity providers could be the missing puzzle that DeFi needs so badly to scale and go further mainstream.
About Pontoon Protocol
Pontoon offers users One-click liquidity mirroring across ETH, BSC, HECO Chain, xDAI, POLYGON, OPTIMISM with incentivized Relayer Network and Liquidity Mining for Liquidity Providers across the chains. We solve the prevalent fragmented liquidity problems across chains employing a decentralized and trustless approach.