Decentralized finance is the biggest buzzword in crypto right now, but there are growing fears that this fledgling industry could be stymied.
Why? Because many protocols are being built on the Ethereum blockchain, a network that’s had a long-term scalability problem and has been bursting at the seams for years. (Almost three years ago, a horde of digital cats brought the platform to its knees, sending tens of thousands of transactions into a backlog.)
Now, the DeFi-focused blockchain Algorand is throwing its hat into the ring—and making it clear that it’s determined to seize market share from Ethereum. It has launched cutting-edge smart contract capabilities that will allow DeFi solutions and dApps to be created “that can scale to billions of users and tens of millions of daily transactions.”
Specifically, Algorand is implementing stateful smart contracts within layer-1. These are more flexible than stateless smart contracts, which require all conditions to be met at once before the funds are unlocked. Stateful smart contracts—one of Ethereum’s strengths—can release funds when a sequence of interactive steps have been taken or conditions met, allowing for more sophisticated DApps and DeFi solutions. Algorand already supports stateless contracts, atomic swaps, and Algorand Standard Assets within layer-1.
Of course, the notion of a DeFi protocol attracting billions of users seems rather fanciful right now. But nonetheless, Algorand is making a clear point here: should the industry continue to gain momentum and burst into the public consciousness, its infrastructure is futureproof and can handle whatever’s thrown at it.
Algorand also says that its blockchain provides “negligible” transaction fees—again, a pointed reference to “first-generation” networks such as Ethereum.
This is a hot-button topic right now, not least because the strain of the ETH blockchain is very much beginning to show. Earlier this month, one exasperated Reddit user warned fees were very rapidly spiraling out of control—so much so that he was being charged a “ridiculous” $99 to complete a transaction. His prognosis was clear:
“It has to be addressed for mass adoption.”
Illustrating the timeliness of Algorand’s move, another Reddit user agreed, writing: “We can’t continue waiting for the full deployment of Ethereum 2.0 much longer.”
Algorand said that its technology removes pesky barriers to mainstream blockchain adoption—scalability, transaction speeds, and high fees. All in all, it hopes that this will help DeFi brands to “make the promise of a borderless economy a reality.”
The company’s founder, Silvio Micali, said in a news release:
“DeFi gives the world access to an essentially unlimited number of financial products and services. It’s important for the new generation of dApps not to be stalled by the shortcomings of the first-generation blockchains.”
Micali went one further—and suggested that Algorand’s approach to smart contracts means “they’re functionally advanced enough to rival today’s existing financial services.”
This is an exceptionally big claim. Do bear in mind that Visa, the payments processing giant, claims that it has the capacity to handle 65,000 transaction messages per second.
Also, blockchains—especially Proof-of-Work networks such as Bitcoin—aren’t especially renowned for being energy efficient. According to Digiconomist, a single Bitcoin transaction has a carbon footprint that’s equivalent to a staggering 667,531 Visa transactions. (Just to stress, Algorand bills itself as a “pure Proof-of-Stake blockchain platform,” which does tend to be much more energy efficient than PoW. Indeed, estimates suggest that ETH’s transition from PoW to PoS will reduce power consumption by 99%.)
“The platform of choice”
Algorand is now positioning itself as a no-brainer for DeFi projects that are looking for a home—especially those that want to take on established financial systems that have existed for decades. The company says its blockchain’s consensus protocol delivers “industry-leading transaction times” and “trivial” fees of .001 ALGO—that’s the equivalent of $0.00058 at the time of writing.
Kendrick Nguyen, the co-founder and CEO of the investment platform Republic, explained how his company used Algorand to launch a profit-sharing token “because of the functionality of a cost-effective platform at scale.”
He added: “Since the launch of Republic’s digital asset on the Algorand blockchain, we’ve been impressed by the performance, scalability and strategic value it brought to the Republic ecosystem.”
The future, or a fill-in?
According to Algorand, more than 400 companies have joined its ecosystem since the mainnet launched last year. The DeFi applications it supports include lending protocols and decentralized marketplaces.
The technology company has no doubt capitalized on the delays to the long-awaited Ethereum 2.0. Phase 0 of this network—known as the Beacon Chain—was meant to launch back in January 2020, but it has been plagued with delays ever since and is yet to make its debut. Last month, an Ethereum Foundation researcher warned ETH 2.0 might not launch until January of next year. That prediction was quickly shot down in flames by Ethereum’s co-founder Vitalik Buterin, who suggested he was prepared to launch Phase 0 by November—“regardless of level of readiness.”
Buterin has since gone on to admit in a podcast that “Ethereum 2.0 is much harder than we expected to implement from a technical perspective,” potentially opening the door to further delays.
That said, given how big the ETH blockchain is, and how heavily DeFi protocols have invested in it, there’s a risk that the shine will wear off Algorand when Ethereum 2.0 finally launches.