Why Stellar is the Perfect Blockchain for DeFi
We want to touch on why we chose to build our DeFi protocols on Stellar. As a base network, Stellar excels in network efficiency, capital efficiency, asset flexibility, and decentralized consensus (this last point seems obvious, but we’ll expand on it more later). On top of all that, Stellar’s layer 2 TSS(Turing Signing Server) solution is pretty close to an ideal decentralized smart contract engine. Finally, we felt like Script3’s DeFi protocols would provide significant value in the Stellar Ecosystem.
Network Efficiency on Stellar
Stellar is well known as one of the most efficient blockchains in the space. Performing an operation on Stellar currently costs 0.00001 XLM, a fee that can be lowered if XLM’s price increases. Additionally, the Stellar Network can currently process 1,000 TPS(transactions per second), and tests of the SCP(Stellar Consensus Protocol) have found it capable of processing over 10,000 TPS.
Network efficiency is incredibly important in the DeFi space. DeFi’s key improvements over the traditional financial ecosystem are increased efficiency gained by removing intermediaries and increased accessibility due to the decentralized and open nature of DeFi protocols. The efficiency improvement isn’t valid when a DeFi protocol is built on an expensive network. For example, traditional financial derivatives cost over $0.24 to process because of the intermediaries involved in execution and trading. Facilitating derivatives using a DeFi protocol removes this cost, but the efficiency gain is irrelevant if the DeFi protocol incurs more than $0.24 in network fees to process a derivative. The diagram below exhibits this by showing the efficiency differences between Ethereum-based DeFi derivatives, traditional derivatives, and Stellar-based DeFi derivatives.
Network efficiency is also crucial for realizing the increased financial ecosystem accessibility offered by DeFi. DeFi protocols don’t make finance more accessible when high fees make it economically nonsensical for potential users to participate in a protocol. Someone with $500 to invest won’t put it into a lending protocol if it costs them $80 to deposit or withdraw the money. Stellar’s minuscule fees ensure that DeFi protocols built on it will avoid this economic exclusion.
Capital Efficiency on Stellar
Excellent capital efficiency is crucial for improving yields and lowering slippage for DeFi protocol users. Stellar has an underappreciated advantage here over other Blockchains in the form of its central DEX. Having one central place for decentralized trading concentrates liquidity, lowering slippage for traders and improving yields for market makers and liquidity providers.
Stellar also outperforms many other networks in capital efficiency simply because it does not use a PoS(Proof of Stake) consensus model. Recently PoS has become the go-to consensus model for blockchains that want to move away from the crazy inefficiency of Proof of Work. An often-overlooked downside of PoS is the need for network validators to lock up capital simply to prove their trustworthiness. This makes Stellar baseline more capital efficient than PoS networks since the SCP can verify the trustworthiness of validators without having to rely on staking. Stellar’s validators can allocate their capital in ways that create value in the ecosystem rather than having to use it to prove their trustworthiness.
Asset Flexibility on Stellar
While trading meme-coins is fun, we all know that DeFi’s real value will come from using traditional assets in its protocols. Doesn’t generating interest by lending your Apple shares using YieldBlox sound incredible? Stellar was designed to make this possible. The anchor system enables the issuance of any asset on the network and makes it easy to verify that a trustworthy organization issued it. On top of this, Stellar has asset controls that allow anchors to control what accounts can hold their issued assets, how their issued assets can be used, and, with the introduction of clawback, even delete issued assets from accounts. These controls are crucial to allow anchors to perform KYC and comply with regulations. Stellar’s asset flexibility has already started to show results, DSTOQ anchors a variety of equities on Stellar, and Franklin Templeton is issuing a mutual fund on Stellar. Stellar-based DeFi protocols can support all of those assets.
Decentralized Consensus on Stellar
A blockchain network’s ability to ensure decentralized consensus is crucial for DeFi protocols built on it. While it might seem like a given that all blockchains guarantee decentralized consensus, this sadly isn’t the case. True decentralization is one area where many blockchain networks struggle. Some networks are reliant on a central group of nodes run by the same organization. If all the nodes ran by that central organization were to go down at once, the blockchain would stop running. Uptime is critical for DeFi protocols as any network downtime can be disastrous for protocol users. Stellar recently proved, through trial by fire, that the network is truly decentralized. On April 6th all of the Stellar Development Foundation’s Tier 1 validators went down along with the validators of LOBSTR, nevertheless the network remained online and continued processing transactions. While some exchanges had issues, this was because they failed to switch their horizon endpoint from the one hosted by the Stellar Development Foundation. Decentralization is also crucial to achieving the financial inclusion that DeFi protocol’s offer. One central organization cannot be responsible for deciding who can access the blockchain. The decentralization of Stellar nodes and the ease of adding new ones ensures that this will never be the case.
A blockchain capable of maintaining consensus is arguably even more important for DeFi protocols than a decentralized blockchain. Thankfully, most blockchains are pretty good at this. However, the SCP still gives Stellar a leg-up on most chains. Due to the design of the SCP, it isn’t possible for Stellar to hard-fork. This is critical to anchors’ ability to issue traditional financial assets on the Stellar Network. Imagine issuing an equity token on a blockchain that experiences a hard fork; there will now be two copies of that equity token. How do you decide which one is legally the “real” equity token? The easy answer is that the issuer will decide, but what if the equity token owners disagree with the issuers decision? Hard-forks invite a whole host of legal issues, and thus it’s ideal for traditional financial asset issuers to avoid blockchains that can hard-fork. This makes Stellar a natural choice, making Stellar a great option for DeFi protocols that want to support traditional assets.
The TSS smart contract engine is another excellent reason to build DeFi protocols on Stellar. It’s a simple yet ingenious reinvention of the smart contract engine. In the traditional EVM(Ethereum Virtual Machine)-based model, smart contracts are stored and executed on-chain. As a result, every time a smart contract is run, each node must run the contract and store all inputs, intermediary variables, and outputs forever to ensure blockchain replayability. As you can imagine, this is incredibly inefficient and slows down the entire blockchain. The Ethereum community realized this and is attempting to use Layer-2 solutions like Optimistic Rollups to move much of the computation off the main network. The TSS solution took this a step further by deciding that there isn’t actually a need to have smart contracts on-chain at all. TSS smart contracts (called txFunctions) are instead uploaded to a network of servers that run them by using multisig to build and approve transactions according to the uploaded contract’s specifications. This results in a secure, cheap, and flexible system, making it ideal for DeFi. As a bonus, smart contracts can be coded in any WASM-compatible language, making development much easier.
The Value Script3 brings to Stellar
Finally, before deciding to build on Stellar, we considered the value our DeFi protocols would add to the Stellar ecosystem beyond just bringing more participants into the ecosystem.
YieldBlox’s Value Add
Stellar’s DEX currently severely lacks liquidity. One reason for this is a lack of on-chain lending tools. YieldBlox will help improve liquidity by allowing traders to trade with leverage by borrowing from lenders. It will also provide Stellar ecosystem participants with an easy way to generate yield on their idle tokens. This is especially exciting when you consider Stellar’s popularity in developing countries where people often don’t have good access to interest-generating investment vehicles.
OptionBlox’s Value Add
Stellar is striving to serve the remittance and currency exchange markets. On-chain currency derivatives make this goal significantly easier to achieve as they are crucial to currency exchange markets. OptionBlox will offer these as well as many other kinds of derivatives. In addition, on-chain derivatives will help the DEX become more efficient as derivatives are crucial for driving market efficiency, especially in smaller markets.
Overall, Script3 had a huge number of reasons to build our DeFi protocols on Stellar. Stellar is an incredible Blockchain Network, and we expect to see more projects like ours materialize in the future.
Next Blog Post:
We wanted to include a section about some of the design choices we made when building the YieldBlox protocol, but this blog was already very long. Look out for another blog post covering that next week!
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