In the latest episode of Blockchain and Booze, Adam Levy from Draper Gorem Holm sits down with three leading companies in the blockchain industry to talk about Layer Two solutions on the Ethereum network. Levy is joined by Stani Kulechov from Aave, Jack O’Holleran from Skale and Antonio Juliano from dYdX. What began as a discussion of high fees quickly turned into a larger commentary on the potential power of decentralized funding.
The Ethereum riddle
For those unfamiliar with the Ethereum situation, it becomes prohibitively expensive to send chain transitions. At the time of writing, the average cost to send an Ethereum transaction is just under $ 20. Complex smart contracts, such as those found in decentralized financial logs, can easily cost over $ 100 as the network becomes increasingly congested. Layer two solutions are protocols that lighten the load and enable much faster and cheaper transactions.
As Aave’s Kulechov explains, the disruptive potential of Layer Two solutions is enormous. Not only are they incredibly promising, but they’re also an emerging technology that hasn’t been fully implemented:
“Many of them [layer-two] Developments on Ethereum are not even implemented. We’re still very early on to scale, but the large number of people running at level 1 is a problem. “
All three guests are advocates of layer two solutions, as they can bring advantages to decentralized systems. But how do these protocols actually work? O’Holleran has an elegant example: He compares the Ethereum settlement level with a poker game and layer 2 solutions as a record of profits and losses.
Layer two, explained
Imagine a group of friends arriving to play poker. After a full night of play, players do not go away with their winnings. Instead, they record them in a ledger at the table. Participants can play a range of games, record their winnings and losses and only “cash out” or use the accounting tier when they no longer wish to play. Similarly, Layer Two solutions like Polygon allow users of Ether (ETH) and ERC-20 to use the Layer Two network until they want to “cash out” their tokens on Ethereum.
Layer two networks expand the range of application and open up the DeFi area for those who cannot or do not want to pay high fees for a single transaction. According to O’Holleran, the focus is on financial inclusion in the development community, which drives the adoption of cost-effective solutions. The more people can participate in DeFi, the stronger the DeFi network becomes.
Towards the end of the conversation, Levy asks the group what the “end goal” of DeFi is or what’s next after DeFi has been “solved”. After a break, O’Holleran talks about the potential that DeFis systems offer the world as a whole:
“The performance of these systems goes beyond DeFi. Marketplaces, social media, games: all of these can be disrupted by decentralization. Ultimately, we want to democratize finances. “
Juliano agrees with this sentiment, adding:
“The goal is really big. The financial system is the most legal and trusted system in the world. We can build something parallel in DeFi – small at first, but ultimately it might be more profitable to use DeFi due to better interest rates. “
To insiders, the DeFi space may appear mature and huge, having recently surpassed a total of over $ 100 billion in total. For the financial world, however, this is a very small, almost curious rating. While traditional finance is currently “interested” in DeFi, according to Juliano, much remains to be done behind the scenes. O’Holleran agrees with this feeling and predicts the future overlap between centralized and decentralized financing:
“The CeFi smart business will start figuring out how to fit in with DeFi and the DeFi space will improve as a result.”
Layer two solutions may not be as flashy as the latest non-fungible token or bitcoin hitting a new all-time high, but if our panel of experts is to be believed, they may be just as important.