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DeFi’s Future Depends on L2 Scaling Despite Ethereum 2.0 Promises

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DeFi's Future Depends on L2 Scaling Despite Ethereum 2.0 Promises

Over the years, Ethereum has been the developmental network for crypto-related projects. With the advent of decentralized finance (DeFi) to Ethereum’s recent hard fork upgrade, we saw that. As a result, Ethereum is becoming the go-to blockchain network for the crypto world. However, there is a lot of work to execute in accommodating future possibilities for the network.

The global adoption of Web 3.0. will only be possible if the offers of ETH 2.0 are spread across the network. Although this will take a lot more to see new decentralized applications (DApps), the answer to this riddle is the layer-two solutions.

ETH 2.0 Offers

Ethereum implemented its London hard fork upgrade in August, which signifies the beginning of Ethereum 2.0 reality. Some important features and processes will make this transition a smooth one.

Although Ethereum was under struggle when the London upgrade happened, this struggle resulted from the DeFi and non-fungible tokens (NFT) spaces boom. The transaction speeds and cost of each transaction made it impossible to use different DApps. As such, the promises of decentralized platforms became ghost promises.

EIP-1559 is one of the apparent features that come with the London upgrade. With this implementation, inflation rates will be better, and transaction fees on the network will experience stabilization. That is, the transactions have base fees that are burned rather than rewarding the miners. Although miners will receive block rewards, users will decide to tip any block of their choice voluntarily.

As a result, each block will witness a percentage of Ethereum (ETH) units dispelled from the network without being returned.

As opposed to Bitcoin’s nature, Ethereum supply multiplies with every block. This open-ended growth has raised concerns about the inflation possibilities in the long run. Although the EIP-1599 will control its supply expansion, it doesn’t guarantee that Ethereum will be deflationary. Thus, the London upgrade is only a start for Ethereum’s scalability.

Is There a Need for 2.0?

One of the significant issues associated with Ethereum’s operation is its inability to become scalable and execute more transactions at intervals. By that, the Ethereum network is designed to complete about 30 transactions in a second. This is low when compared to the number of transactions a conventional payment system like Visa can execute. Visa can conduct up to 1,700 transactions in a second.

Now, there is a challenge for Ethereum to do better if it wants to meet up with global adoption. That is one of the reasons the network is transitioning to a proof-of-stake (POS) mining system from a proof-of-work (POW) system. The efficiency of POS will make it possible for the network to process about 50 transactions in a second.

That may look like a good development, but it is short of a global requirement for transactional purposes.

Recognizing the global need for a payment system, Ethereum 2.0 is leveraging another significant development known as “sharding.” Sharding happens when a block is divided into 64 pieces (known as shards) undergoing a parallel transactional process.

As a result, we can have up to 3,200 transactions executed when we multiply the 64 shards by estimated 50 transactions in a second. In essence, this is way beyond for Ethereum to compete with Visa as a payment platform.

Is Visa Competition Enough?

Sharding may give Ethereum a competitive edge ahead of Visa as a payment system, but that is not enough for the network. Payment systems are always advocates of simple transactions, but we are experiencing new dawn due to the internet and DeFi. Financial innovations are springing up beyond our imagination.

We will witness decentralized exchanges that work round the clock, blockchain gaming networks, NFT markets, and NFT-powered virtual worlds.  Those platforms require systems that function to complete transactions at a high frequency, which conventional payment systems may not execute.

An example is when a blockchain game player conducts multiple transactions and pauses the game for each transaction to complete. This will not work well for global adoption. Plus, DeFi’s possibilities of diving into the finance sector will outweigh the network’s operations.

Although this upgrade may help, it won’t serve the global demand efficiently. But the incorporation of scaling solutions such as rollups and sidechains will help Ethereum scale execute up to 100,000 transactions in a second. As a result, we will see the adaption of DeFi promises in our everyday applications.

Tomorrow Depends on Scalability

The future of DeFi depends on Ethereum’s scalability. This scalability will enable the Ethereum network to execute loads of transactions without users waiting for one transaction to complete before moving on to the next one.

One of the solutions that can make this a reality is the “rollup.” Rollups are solutions that help the Ethereum network execute transactions off the chain and write cryptographic proof that validates these transactions. Then, this proof is uploaded to the chain when completed. This increases the network speed because there is free space on the main chain.

The next solution is the “sidechain.” Sidechains are also regarded as “second layer” solutions. They are parallel secondary blockchains that interact with the main chain. They handle several processes such that there is little pressure on the base layer. Likewise, sidechains serve as interoperable “bridges” that connect chains.

Now, envision a cryptocurrency future where the transaction speed on primary chains such as Ethereum is fast, and the transaction fees are low. This possibility resulted from the entire blockchain ecosystem leveraging scalable solutions such as rollups and sidechains. These solutions allow transactions to happen off the chain and are recorded for validity while being uploaded to the main chain after completion.

With those, we are implementing the original DeFi vision. We are creating an accessible and affordable financial system for anyone across the world.

Keywords:

  • DeFi
  • Ethereum
  • Blockchain

Ridwan is a digital nomad. He is an experienced crypto writer that writes across blockchain and cryptocurrency topics. He buries his head in books' leaves, playing games and networking if he is not writing. He believes you will be happy if you appreciate the little things that matter while working for more.