Decentralized finance (DeFi) has become one of the most promising and exciting applications of blockchain technology. It allows people to access financial services without the need for intermediaries, such as banks or financial institutions. Ethereum was the first blockchain to introduce smart contracts, and it has become the most popular platform for DeFi Applications (dApps). In the meantime, the emergence of Cosmos also created new potential for DeFi applications. In this blog, we will explore the differences between Cosmos DeFi and Ethereum DeFi.
Ethereum introduced "smart contracts," which are self-executing contracts that are written in code and can be executed automatically. These smart contracts enable developers to create decentralized applications that can perform complex functions, such as lending, borrowing, and trading, without the need for intermediaries.
Ethereum DeFi applications are built on the Ethereum blockchain and mostly use the ERC-20 token standard. ERC-20 tokens are fungible, which means that each token is interchangeable with another token of the same type. Some of the most popular Ethereum DeFi applications include Uniswap, Aave, and Compound.
Learn more: What are Token Standards?
Advantage of Ethereum DeFi
One of the biggest advantages of Ethereum DeFi is its network effect. Ethereum has a large and active developer community that is constantly building new dApps and creating new money lego use cases. Additionally, Ethereum has a large number of users, which makes it easy for developers to get their applications in front of potential users.
Disadvantage of Ethereum DeFi
Ethereum's high gas fees and slow transaction times can make it expensive and slow to use. Additionally, Ethereum's limited block space means that it can only handle a limited number of transactions at a time.
Vitalik Buterin, the creator of Ethereum, came up with the blockchain trilemma theory. It explains that for any blockchain system, it involves a design tradeoff to achieve the most scalability, decentralization, and security.
Today, Ethereum's competitors understood the design sacrifices made by Ethereum on scalability to maximize decentralization and security, and they offered alternative solutions. Let’s learn Cosmos’ approach to it.
Cosmos is a blockchain ecosystem that aims to solve some of the scalability and interoperability issues that plague existing blockchain platforms, such as Ethereum. Cosmos uses a unique architecture called the hub-and-spoke model, which is a multi-chain ecosystem that enables interoperability between different blockchains.
Cosmos DeFi applications are built as app-specific blockchains, and they use the Inter-Blockchain Communication (IBC) protocol for interoperability among the Cosmos chains. IBC enables different blockchains to communicate and exchange information with each other, which means that Cosmos DeFi applications can interact with other blockchains.
Some of the most popular Cosmos DeFi applications include Umee, Osmosis, and Juno.
Umee is the most programmable, safety-first, autonomous lending algorithm built as a blockchain. Umee is replicating the $200 trillion global debt capital markets using open source code, crypto primitives, and Web3 technology.
Osmosis is a decentralized exchange that enables users to trade IBC tokens.
Juno is a global, open-source network that allows anyone to create and use inter-chain applications.
Advantage of Cosmos DeFi
One of the biggest advantages of Cosmos DeFi is its scalability. Cosmos can handle a much larger number of transactions than Ethereum and can process transactions faster and at a lower cost. Additionally, IBC enables Cosmos blockchains to have interoperability and money lego potential on the blockchain level instead of only on the smart contract level for most DeFi applications built upon isolated blockchains.
Disadvantage of Cosmos DeFi
Cosmos is a relatively new ecosystem, which means that it has a smaller developer community and fewer users than Ethereum. Additionally, Cosmos' multi chain ecosystem allows each application to run as a blockchain, which can involve more work than simply building a smart contract.
In conclusion, both Cosmos and Ethereum offer unique advantages and disadvantages to DeFi applications. At the time this blog was written, the total value locked in DeFi was $95B, and Cosmos owned about 17% of that. The Cosmos ecosystem has been growing rapidly, and Umee is working to solve several key challenges in the DeFi space, such as the IBC token focused money market, liquidity fragmentation, capital efficiency, and interoperability. By leveraging the power of the Cosmos ecosystem, Umee is well-positioned to become a leading player in the DeFi space.