Why Ethereum Needs Layer 2 Solutions More Than Ever
In the last month, the number of transactions processed per day on the Ethereum network fell from its all-time-highest value of over 1.7 million down to a 6-month low of just 1 million on July 16, 2021.
While this decreased throughput would usually be associated with a drop-off in transaction fees, this isn’t the case. Instead, the average transaction fee has almost doubled in the last month, despite the network seeing a reduction in the average competition for block space.
This begs the question of why? How can competition for block space decrease while transaction fees continue to climb? Well, the answer is closely related to a disturbing change in the decentralized finance (DeFi) space — i.e. the landscape of platforms and protocols that are commonly used to replicate traditional financial solutions, including cryptocurrency lending platforms, yield farms, and decentralized exchanges.
These platforms, which are commonly used as a means to generate a yield on idle cryptocurrencies, are being increasingly restricted to wealthy individuals who are able to tolerate high transaction fees when it comes to withdrawing interest and moving funds between platforms.
After all, for those earning a daily yield of $100+ on their deposit, a $10 withdrawal fee can be considered acceptable, whereas those earning just a few dollars per day will be unable to tolerate the withdrawal fees. As a result, they’ll be unable to maximize their returns through compounding or yield farming by moving their funds between platforms based on APY.
But more than this, well-heeled investors are now in a position to use more advanced tricks to essentially manipulate the blockchain into extracting value from less wealthy users — this includes leveraging advanced bots known as ‘flashbots’ to organize transactions on the blockchain in ways that benefit them.
One popular way is known as ‘front-running’. This is the practice of manipulating the order of transactions in a block to siphon profit from traders on decentralized exchanges by forcing traders to accept a lower than expected return on their trade by changing the ratio of assets in the underlying liquidity pool before their order is added to the block.
This is just one way that highly technical and well-funded DeFi users can extract profit in ways that regular users can’t. Medium blogger Alex Obadia has an excellent write-up of the true scope of the problem and other methods in his blog.
But DeFi might not be a whales game for much longer, thanks to the advent of DeFi-focused layer-2 solutions like layer2.finance. With fees increasing and opportunities decreasing in the DeFi space, layer2.finance leverages the capabilities of Celer’s optimistic rollup technology to essentially allow smaller DeFi users to trustlessly aggregate their funds into a larger whale.
(1/3) 🎉🚀@layer2finance v0.1 launches on @ethereum mainnet taking on two biggest challenges in DeFi: high cost and complexity of use.
You can now use @AaveAave @compoundfinance and @CurveFinance through https://t.co/LO8Diwuaxr completely for FREE. https://t.co/BHTNvPlsMh
— CelerNetwork (@CelerNetwork) April 23, 2021
This helps users benefit from the best rates while moving their funds between supported DeFi platforms (including Aave, Compound, and Curve) to maximize their yields. Since the platform aggregates user funds into a single batch, it dramatically cuts transaction fees for each user, allowing them to move their funds around at will without losing a chunk to the network.
The platform also recently moved one of its other scaling products to mainnet — cBridge. This is a highly-capable DApp that allows true any-to-any token transfers across a range of blockchains (currently supporting Ethereum, Arbitrum, Binance Smart Chain, and Polygon).
With whales increasingly monopolizing DeFi for all its benefits at the expense of regular users, second layer solutions represent an attractive way to level the playing field — ensuring DeFi is accessible to all, just as it was intended. And now, with a range of solutions now up and running, it’s just a matter of time before they are in widespread use.
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