The rapid growth of the decentralized finance sector (DeFi) suffered a setback after the recent 17.5% decline in the price of bitcoin (BTC). However, it is likely that the DIFI sector will continue to grow as Bitcoin recast, especially as users look for high-yield strategies as a means of earning interest on their bitcoins and crypto holdings.
If the area continues to grow as it did in the first half of 2020, the Ethereum network will find itself between a rock and a hard place. In recent times, the network has shown many signs of being overloaded and unable to scale.
These symptoms include an exponential increase in gas use that leads to higher charges and slower confirmation times. This in turn has made some smart contracts too expensive to use and causes significant challenges for leveraged DFI investors and borrowers who are unable to quickly adjust their collateral to avoid liquidation.
Clearly, viable solutions are needed that can help sustain Daffy’s growth. The nascent sector is undoubtedly one of the most promising aspects of decentralized blockchain technology and certainly the largest use case for the Ethereum blockchain at the time. So much so that Uniswap is the largest gas geysler on the network, followed by Teether (USDT), the onchain data resource, ETH Gas Station.
To scale the network and ensure its long-term success, the Ethereum development team is working on Ethereum 2.0. Will bring a completely new version of Ethereum to reality, transforming it into a proof of steak network with multiple side chains that can work together to improve transaction throughput and scalability.
What are layer 2 solutions and how do they work?
Ethereum 2.0. Has recently started testing on Medla TestNet but there is still a long way to go before using it after a blunt launch. Vitalik Butyrin has also recently stated that the project revealed it to be harder to execute than anticipated.
While Layer 2 solutions are often referred to as one of the possible solutions and many are already available to use, they are often overlooked and difficult to figure out.
Layer 2 solutions act as an additional blockchain that work together with the main network to save space. These “second layers” include fees and space savings, transactions can be bundled before they are transmitted over the Ethereum network.
Layer 2 solutions are currently available, but they have not been widely used by the community. Ilya Abugov, lead data lead on analytics platform DappRadar, told Cointegraph:
“It does not feel that there is a lot of adoption of these layer 2 solutions. I think the market is waiting to get clarity on Ethereum 2.0. If there are more delays then there may be more engagement with Daffy Daps, otherwise they will spend their efforts on Ethereum integration. “
What are the current options?
There are many layer 2 solutions available or some of the most popular iterations are being worked on with OMG, Looping and ZKsync. Although these projects work with the same premise but they employ the concept in different ways.
OMG focuses on network transactions and allows up to 4,000 transactions per second (TPS) through smart contract technology while maintaining the security of the Ethereum blockchain.
The OMG network caters to developers and companies, significantly reducing the cost of trading to work on Ethereum.
Teether recently integrated with the OMG network and this development was followed by a sharp rally from the OMG / USDT pair. OMG Network COO, Stephen McNamara told Cointectref:
“The OMG network supports fast, cheap and secure value transfer of ETH and any ERC-20 token. By transferring token transfers to the OMG network, other more experimental and expensive smart contract services can continue to operate at layer-1. Integration with the OMG network allows transaction charges for as little as a few seconds and a verification time of a few seconds while maintaining Ethereum-level security. “
OMG Daily Performance. Source: CoinMarketCap
The OMG token is a native network token and must interact with the network. The OMG / USDT pair saw massive growth in August after the Tether integration as Ethereum fees reached record numbers. According to data from CoinMarketCap, OMG reached its all-time high of $ 7.37 on August 21, a nearly 340% rally.
Looping on the other hand focuses on increasing transaction throughput on the Ethereum blockchain for decentralized exchanges, allowing for 2,500 TPS. The network uses the zkRollup technology to run its protocol and the native LRC token is also an ERC-20 token that can be stolen by holders to earn protocol fees. Recently, LRC has also performed well, increasing from $ 0.13 to $ 0.25 in the month of August.
Investors can conclude that the strong performance seen from each of these tokens in the month of August is significant as it coincides with DIFI reaching peak activity. This reflects the increasing demand for cheap transactions on the Ethereum network, which in turn creates demand for these layer 2 tokens.
Daffy scaling is the next frontier
Although Layer 2 solutions can certainly help the Ethereum scale, there are many challenges ahead and users will take some time to interact with these options. However, if the DIFI region resumes its parabolic growth rate, the solution will be urgently needed and it can kickstart the use of protocols such as OMG and looping.
As Ethereum co-founder Vitalik Butirin recently stated TweetThe options are there, they just need to be used. Buterin said:
“The number of respondents with gas charges is very high”, my answer is “well then more people should accept payment directly via zksync / loopring / OMG”. Seriously, here is the scaling of 2500+ TPS for simple-payment applications, we just need to use it… “
Nevertheless, there are still challenges for these projects, namely ease of adoption and use. McNamara told Cointecleriff:
“At the moment our primary focus is on growing the B2B market, including helping exchange, wallet and market makers to enable integration with the OMG network. At the moment, end users sit with adoptive exchanges because they need to ensure that UX is smooth to transition in and out of layer-2. “