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3 reasons why Cardano’s DeFi will be a threat to Ethereum in 2021

  • Cardano’s DeFi will be cheaper, safer, and simpler than Ethereum.
  • There are no execution fees when transferring native tokens on Cardano.

What will the decentralized finance (DeFi) ecosystem look like on Cardano and what advantages will it bring over top dog Ethereum? Elliot Hill of the Cardano Foundation answered these very questions in a new blog post for the Cardano Forum. As Hill notes, it’s a good time to talk about this topic, as the “Mary” hard fork in February marks another important step in establishing DeFi on Cardano.

The hard fork will make token forging and a multi-asset ledger available on the Cardano blockchain. This in turn will pave the way for decentralized applications (dApps), native tokens, and DeFi applications. Through this, Cardano will be able to address the most serious problems with Ethereum’s DeFi ecosystem, which Hill describes as follows:

DeFi has had a baptism of fire. Spiraling fees, smart contract exploits, and tales of significant user losses have necessitated a focus on improved DeFi infrastructure and processes—ones based around transparency, true decentralization, and high assurance.

Here’s why Cardano is better suited for DeFi

The features of the Cardano blockchain will make it “a highly attractive” alternative for building DeFi applications. For this, Hill cites three fundamental differences with the Ethereum blockchain. First, Cardano’s DeFi will have lower transaction fees to minimize the barrier to entry for new users.

Unlike Ethereum, there are no “gas fees” on Cardano that quickly make processing a single transaction prohibitively expensive for “smaller participants.” On Cardano, transactions between native tokens and assets do not incur execution fees because of the way the blockchain works. Because of this, Cardano has the potential to be much more affordable:

As we know, if we are to attract the biggest potential user group of decentralized finance products—those in emerging economies – we must ensure that we can keep costs low. Similar to paying high fees for banking services, many users who desperately need new financial infrastructure simply won’t explore DeFi solutions if the costs are too high.

Another difference is said to be the security of DeFi protocols and tokens on Cardano. Unlike Ethereum, tokens will not be based on smart contracts, instead they will be “native”. This means that tokens on Cardano will use token logic that runs directly on Cardano’s ledger instead of using smart contracts.

By eliminating the need for smart contracts to provision tokens, Cardano removes the large burden of gas costs associated with interacting with a token smart contract. In addition, security benefits massively, as smart contracts have an inherently high risk of coding errors. Cardano’s native token thus requires minimal custom code to create a token.

The power of the ADA community

Last but not least, Hill points to the Cardano community and Project Catalyst in particular:

Cardano’s community is immensely powerful. Together, we have achieved feats that other protocols have long aspired to—near full decentralization through community led stake pools, a thriving staking and delegation ecosystem, and bustling community channels.

With over 3,000 people already signed-up to vote and US$500,000 in funding available through Fund3, Project Catalyst is one of the largest community-led funding initiatives on any blockchain to date.

With Liqwid Finance, the first DeFi application on Cardano funded by Project Catalyst, has already been unveiled. Version 1 of the protocol is expected to go live along with the full activation of Goguen and will allow users to earn the LQ governance token by providing liquidity. In doing so, ADA holders will be able to do so without losing their staking rewards.

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