The rapid growth of the decentralized financial sector (DeFi) was taken by surprise after the recent 17.5% drop in Bitcoin (BTC) prices. However, The DeFi sector is likely to continue to grow as Bitcoin rebounds, especially if users continue to pursue high-yield strategies to generate interest in their Bitcoin and crypto holdings.
If the sector continues to grow as in the first half of 2020, The Ethereum network is located between a rock and a hard place. Recently, the network has shown various symptoms of congestion and scalability.
These symptoms include an exponential increase in gas consumption resulting in higher rates and slower confirmation times. This, in turn, has made some smart contracts too expensive to use and also poses significant challenges for leveraged DeFi investors and borrowers who cannot quickly adjust their collateral to avoid liquidations.
Clear, There is a need for viable solutions that can support DeFi’s growth. The emerging sector is arguably one of the most promising facets of decentralized blockchain technology and undoubtedly the largest use case of the Ethereum blockchain right now. So much so that Uniswap is the largest gas consumer on the network, followed by Tether (USDT), according to the on-chain data source ETH Gas Station.
To scale the network and ensure its long-term success, the Ethereum development team worked on Ethereum 2.0. This would make an entirely new version of Ethereum a reality, turning it into a proof-of-stake network with multiple sidechains that can work concurrently to improve transaction performance and scalability.
What are Layer 2 solutions and how do they work?
Ethereum 2.0. recently started testing the Medalla testnet, but after a bumpy start, there is still a long way to go before it can be used. Vitalik Buterin recently stated that the project turned out to be more difficult than expected.
While Layer 2 solutions are often cited as one of the possible solutions and many are already available for use, they are often overlooked and difficult to understand.
Layer 2 solutions act as an additional blockchain that saves space in connection with the main network. In these “second layers” transactions can be bundled before they are transmitted to the Ethereum network, which saves fees and space.
Layer 2 solutions are currently available but not widely used by the community. Ilya Abugov, Open Data Leader at the analytics platform DappRadar, told Cointelegraph:
“There doesn’t seem to be a lot of acceptance for these Layer 2 solutions. I think the market is waiting to get clear on Ethereum 2.0. If there are more delays, the DeFi dapps may be more involved. Otherwise, they will advocate the integration of Ethereum 2.0. “
What are the current options?
There are several Layer 2 solutions available or in the works with some of the most popular iterations like OMG, Loopring, and ZKsync. Although these projects operate on the same premise, they use the concept in different ways.
The OMG network is transaction-oriented and enables up to 4,000 transactions per second (TPS), while the security of the Ethereum blockchain is ensured through intelligent contract technology.
The OMG network is aimed at developers and companies and offers significantly reduced trading costs for operation on Ethereum.
Tether recently integrated into the OMG network and this development was followed by a strong rally in the OMG / USDT pair. Stephen McNamara, COO of OMG Network, told Cointelegraph:
“The OMG network supports the fast, inexpensive and secure transfer of values from ETH and all ERC-20 tokens. By moving token transfers into the OMG network, other more experimental and expensive smart contract services can still run on Layer 1. The integration into the OMG network enables transaction fees of just a few cents and a validation time of a few seconds while at the same time safeguarding security at Ethereum level. “
Daily performance of the OMG. Source: CoinMarketCap
The OMG token is the native network token and is required to interact with the network. After integrating Tether, the OMG / USDT pair saw a massive spike in August as Ethereum fees hit record highs. According to data from CoinMarketCap, OMG hit its all-time high of $ 7.37 on August 21, a rally of around 340%.
Loopring, on the other hand, focuses on increasing the transaction throughput in the Ethereum blockchain for decentralized exchange and enables 2,500 TPS. The network uses zkRollup technology to power its protocol, and the native LRC token is also an ERC-20 token that holders can use to earn protocol fees. LRC has also done well lately, climbing from $ 0.13 to $ 0.25 in August.
Investors might conclude that the strong performance seen in each of these tokens in August is significant as it coincides with the peak of DeFi activity.. This shows the growing demand for cheap transactions on the Ethereum network, which in turn creates a demand for these Layer 2 tokens.
DeFi scaling is the next frontier
While Layer 2 solutions can certainly help scale Ethereum, there are still many challenges ahead and it will take time for users to interact with these options. However, As the DeFi sector resumes its parabolic growth rate, there is an urgent need for solutions, and this can spur the use of protocols like OMG and Loopring.
As Ethereum co-founder Vitalik Buterin in a Tweet Lately the options are there, they should just be used. Buterin said:
“For those who say ‘gas rates are too high’ my answer is ‘good, so more people should be accepting payments directly through zksync / loopring / OMG.’ Seriously, the escalation to over 2500 TPS for Simple Payment Apps is here, we just have to … use them. “
However, there are still challenges for these projects, namely adoption and ease of use. McNamara said to Cointelegraph:
“Our main focus right now is the growth of the B2B market, including helping exchanges, wallets and market makers integrate into the OMG network. Right now, the end-user takeover rests with the exchanges themselves, as they need to ensure that the UX for transitioning to and from Layer-2 is seamless. “