The Difference Between POW Defi and POS Defi and Why This Will Give Tezos A Continuing Edge Over Ethereum
POW defi as you probably have guessed is the type of defi that runs on Ethereum. It has proven very effective at raising funds for projects and for seeding the Ethereum network with liquidity. We are all familiar with it, and many folks have made lots of money from it.
The whole system relies on ETH as money, which as the Ethereum network grows increases the money-ness of ETH. Money is money because it is accepted as money (medium of exchange) and because it acts as a store of value. So as the Ethereum network grows so does the use of ETH as money.
Tezos has just introduced a new type of defi, POS defi. Like Ethereum, Tezos defi relies on its native currency as money. As the Tezos nework grows (exponentially as contract calls are up over 100x over the last year) the use of TEZ as money grows exponentially too.
Defi is perfectly suited for crypto because crypto is a great place for financial applications (boring simple ones like Bitcoin to more complex ones like Yearn) and for a permissionless ecosystem (circumventing rent-seeking centralized parties). And defi does both: it focuses on finance and permissionlessness. Because defi is such a natural fit for crypto and because permissionless synergies form quickly — compounding network effects — the use of ETH as money and TEZ as money will be heavily dependent on their success with defi within their native platforms.
Ethereum has had a roaring success with defi and likewise the success of ETH as money has been roaring: these things are co-mingled.
Tezos defi is nascent and as such the use of TEZ as money is nascent too (though improving as the Tezos network expands through the popularity of its #cleanNFT movement).
But Tezos has an ace up its sleeve. POS defi is superior to POW defi. Here is why: with POS defi the native currency of the network, in this case TEZ, can continue to bake (stake) while in use with the defi applications.
That might not sound like much but read it again and think of the implications. The advantages are HUGE. Not just for collecting baking/staking rewards but for the emergence of that network’s native currency as money.
If two systems go head to head, and in one system you collect baking rewards while engaging in defi and in the other system you do not, the system that pays out the baking rewards will have a better case for its native currency as an emergent form of money — due to improved medium of exchange and store of value properties.
Peanut Gallery: So how did this happen?
Answer: In Tezos two POS defi building blocks have now formed a permissionless synergy: Kolibri (a makerdao-like platform) and Quipuswap (a Uniswap-like platform). This synergy is a first in the world of POS defi. And it is with this synergy that POS defi has become especially apparent as the POS defi money legos interconnect and compound the case that TEZ is money.
You can deposit your TEZ in Kolibri and get baking rewards plus take a leveraged TEZ position, and you could now take that leveraged TEZ and add it to Quipuswap and earn trading fees plus baking rewards.
You could do the same on Makerdao and Uniswap but in both places you would be missing out on baking rewards.
If we compare the same Defi legos on Tezos and Ethereum:
Tezos POS Defi = money borrowed from Kolibri + baking rewards on collateral + LP fees on Quipu + Baking rewards on Quipu all done with almost no transaction and smart contract fees. ETH POW Defi = money borrowed from Makerdao + 0 POW rewards + LP fees on Uniswap + 0 POW rewards all done with big transaction and smart contract fees.
POS defi is POW defi on steriods.
Peanut Gallery: So what about when Ethereum goes to POS?
Answer: Tezos should retain this advantage due to the way Ethereum POS is designed with a lockup period. (With Tezos you can move your staked coins anytime.) Non-delegation will make this more difficult too.
Peanut Gallery: Wait Tezos is delegated POS? I knew it! It’s not real POS.
Answer: Not so fast. Tezos is liquid POS. Anyone can bake, it is a permissionless system. But you can also choose to delegate.
Peanut Gallery: How has Tezos pulled this off? Why haven’t those trillion dollar blockchains like Binance or Polkadot created this new superior form of defi?
Answer: Because they copy-paste everything. In contrast, Tezos builds everything from the ground up. When you copy paste there will never be any innovation. Binance will always be a mere faster version of Ethereum. There will never be any innovation. Polkadot will be a derivative of whatever it is running. And on and on and on with Tron, Neo, and you name it. (And what will happen to BSC/AVAX copy-paste solutions when ETH 2.0 lauches or even when layer 2 is more mature?)
For innovation there is Ethereum and there is Tezos. But in the case of defi the innovation on Tezos looks to have built a superior foundation compared to that of Ethereum.
POS defi, only on Tezos!
Disclosure: Not financial advice. Long Eth and Eth tokens, Long Tezos.