The fast growth of the decentralized finance sector (DeFi) took a shock after the recent 17.5% drop in Bitcoin (BTC) price. Nonetheless, it’s doubtless that the DeFi sector will proceed to develop as Bitcoin recovers, particularly as customers proceed to search for high-yield strategies as a method to earn curiosity on their Bitcoin and crypto holdings.

If the sector continues to develop because it did within the first half of 2020, the Ethereum community will discover itself between a rock and a tough place. In latest instances, the community has proven a number of signs of being overloaded and unable to scale. 

These signs embrace exponential will increase in fuel utilization which lead to higher fees and slower affirmation instances. This in flip has made some smart contracts pretty too expensive to use and likewise causes vital challenges to leveraged DeFi traders and debtors who’re unable to rapidly modify their collateral to keep away from liquidations. 

Clearly, there’s a want for viable options that may assist maintain the expansion of DeFi. The nascent sector is undoubtedly one of the crucial promising aspects of decentralized blockchain expertise and is definitely the most important use case for the Ethereum blockchain on the time. A lot in order that Uniswap is the most important fuel guzzler on the community adopted by Tether (USDT), according to onchain information useful resource, ETH Gasoline Station. 

In an effort to scale the community and guarantee its long-term success, the Ethereum improvement crew has been engaged on Ethereum 2.0. which might carry a totally new model of Ethereum to actuality, turning it right into a proof of stake community with a number of facet chains that may work concurrently to enhance transaction throughput and scalability.

What are layer 2 options and the way do they work?

Ethereum 2.0. has recently begun testing on the Medalla testnet however after a bumpy launch there may be nonetheless a protracted solution to go earlier than it may be used. Vitalik Buterin has additionally recently stated that the undertaking has revealed itself to be more durable to execute than anticipated. 

Whereas layer 2 options are sometimes called one of many potential options and plenty of are already accessible to make use of, they’re usually ignored and exhausting to understand.

Layer 2 options work like an extra blockchain that works in tandem with the primary community as a way to save house. In these “second layers” transactions will be bundled earlier than being broadcast to the Ethereum community, saving on charges and house. 

Whereas layer 2 solutions are currently available, they have not been extensively utilized by the neighborhood. Ilya Abugov, open information lead at analytics platform DappRadar, advised Cointelegraph:

“It doesn’t really feel like there may be loads of adoption of those layer 2 answer going down. I feel the market is ready to get readability on Ethereum 2.0. If there are extra delays then there could also be extra engagement from DeFi dapps, in any other case they’ll spend their efforts on Ethereum 2.Zero integration.”

What are the present choices?

There are a number of layer 2 options accessible or being labored on with a number of the hottest iterations being OMG, Loopring and ZKsync. Though these initiatives work with the identical premise they make use of the idea in several methods. 

The OMG network focuses on transactions and permits as much as 4,000 transactions per second (TPS) whereas nonetheless sustaining the safety of the Ethereum blockchain by way of good contract expertise. 

The OMG community caters to builders and firms, providing considerably lowered enterprise prices to function on Ethereum. 

Tether has just lately built-in with the OMG community and this improvement was adopted by a pointy rally from the OMG/USDT pair. OMG Community COO, Stephen McNamara advised Cointelegreaph:

“The OMG Community helps quick, low-cost and secure worth switch of ETH and any ERC-20 token. By shifting token transfers to OMG Community, different extra experimental and costly good contract providers can proceed to run on Layer-1. Integrating with the OMG Community permits for transaction charges as little as a number of cents and validation time of some seconds whereas sustaining Ethereum-level safety.”

OMG each day efficiency. Supply: CoinMarketCap

The OMG token is the native community token and it’s required to work together with the community. After the Tether integration the OMG/USDT pair noticed an enormous enhance in August proper as Ethereum charges reached file numbers. In response to information from CoinMarketCap, OMG reached its all-time excessive of $7.37 on August 21, roughly a 340% rally.  

Loopring however focuses on growing the transaction throughput on the Ethereum blockchain for decentralized exchanges, allowsing for two,500 TPS. The community makes use of zkRollup expertise to energy its protocol and the native LRC token can also be an ERC-20 token that may be staked by holders to earn protocol charges. Recently, LRC has additionally carried out properly, rising from $0.13 to $0.25 within the month of August.

Buyers may conclude that the robust efficiency seen from every of those tokens within the month of August is important as this coincides with DeFi reaching peak activity. This exhibits the rising demand for affordable transactions on the Ethereum community, which in flip creates demand for these layer 2 tokens. 

DeFi scaling is the subsequent frontier

Whereas the layer 2 options can definitely assist Ethereum scale, there are nonetheless many challenges forward and it’ll take a while for customers to work together with these choices. Nonetheless, if the DeFi sector resumes its parabolic progress charge, there might be an pressing want for options and this will likely kickstart the usage of protocols like OMG and Loopring. 

As Ethereum co-founder Vitalik Buterin said in a latest tweet, the choices are there, they only should be used. Buterin mentioned:

“To these replying with “fuel charges are too excessive”, my reply to that’s “properly then extra folks must be accepting funds immediately by way of zksync/loopring/OMG”. Significantly, scaling to 2500+ TPS for simple-payments functions is right here, we simply must… use it.”

Nonetheless, there are nonetheless challenges for these initiatives, specifically adoption and ease of use. McNamara advised Cointelegreaph:

“Our main focus for the time being is on rising the B2B market, that features serving to exchanges, wallets, and market makers to allow integration with the OMG Community. For the time being, finish consumer adoption sits with the exchanges themselves as they should make sure the UX is clean to transition into and out of Layer-2.”

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