How is Layer2 DeFi developing and how is interoperability solved?

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Gas fees are still the favorite topic of DeFi enthusiasts . By expressing surprise at the price of more than 300 gwei, or discussing gas prices at different times of the day, we can easily establish contact with liquidity miners.

As long as the transaction on Ethereum can obtain huge economic value, the gas fee will be very high. It is difficult to imagine any situation where the Ethereum block space loses value in the short term.

For the scalability of Ethereum, the impact of high gas fees may be good news. It may make ETH2.0 “coming soon”. Almost every DeFi project is exploring some expansion solutions. Each solution has a series of trade-offs around security, EVM compatibility, and speed.

Composability is DeFi’s favorite hot word, but it only exists in Ethereum Layer1, which allows a transaction to call multiple contracts at the same time.

DEX expansion plan

The fees for transactions on Ethereum may not be the most expensive, but the transactions they conduct may be the most frequent. Market makers must submit and cancel orders when prices change, an operation that is expensive on Ethereum . The first generation of DEX (0x, IDEX, dYdX) tried to solve this problem through off-chain order submission and cancellation.

Considering their scalability requirements, DEX has developed farther than other DeFi applications in the process of migrating to Layer 2 . In January, I studied IDEX (Optimized Optimistic Rollup), Loopring (ZK Rollup) and 0x/Diversifi (ZK STARKS) expansion solutions. This article (mostly) will introduce them and give easy-to-understand technical explanations for each option. Let’s take a look together.

Generally speaking, compared with other parts of DeFi, order book DEX has unique requirements. Composability is not very important , and the design is also optimized for high-frequency traders. At the same time, there will be withdrawal costs and time delays in and out of Layer2, but I hope that the experience will be better than that of a centralized exchange.

Loopring is currently the most viable option (locking $19 million) because it has the security properties of Ethereum. The challenge to it and other DEX rollovers is how to encourage other complementary economic behaviors in development.

xDai: The hottest project right now

xDai has been around since 2018, and perhaps it can be more accurately described as a sidechain because it relies on a limited set of validators to ensure security. Its STAKE token guarantees the security of the network through autonomous proof consensus, which is like proof of authority. But for DAO, transferring assets from Ethereum to xDai requires a credible bridge. If a bridge is attacked, any passing assets may be stolen.

Although it lacks strong security properties, it does have two key advantages :

  1. Fully compatible with EVM -any existing contract can be deployed on the xDai chain with almost no code modification. For the team currently struggling with gas fees, xDai is the fastest way to get rid of it.
  2. Supporting MetamaskBlockchain wallet is a difficult business, especially for Web3 wallets that require native browser integration. I guess that 90% of DeFi users have at least the Metmask browser plug-in.

Ameen Soleimani has a longer article supporting the benefits of xDai. Both he and MetaCartel are loyal supporters of xDai. Gnosis also announced a big collaboration with xDai last week, and a series of projects are planned to be launched on xDai.

Optimism

Last week, the big news in the Layer 2 field was the announcement of the Optimism testnet. Synthetix announced the Layer 2 demo of its popular Mintr App on the same day. Optimism is regarded by many as the ultimate scaling solution because it has the security properties of Ethereum and the Optimism Virtual Machine (OVM) is compatible with EVM . It has also been supported by some heavyweights in the industry.

People have high expectations for it, but the testnet shows that there is still some way to go.

The fraud proof comes from the ZK Snark structure of OVM, which is a core part of its security profile. This testnet should be a test before the official testnet , and we still need at least 6 months before the real liquidity of Optimism official website . Uniswap founder Hayden Adams is a fan, but is the launch plan of Uniswap v3 consistent with the plan of Optimistic Network?

Silos of mobility

Ethereum’s high gas fees have created an urgent need for scalability in the market, but the market to meet this demand is surprisingly fragmented . There are some programs, but their effects are limited, while other programs provide technical capabilities but no security guarantees. The new programs are not yet ready to enter the true golden age. This means that the DeFi pattern is still based on Ethereum, but it pushes expensive transaction fees to some Layer 2 or side chains. These solutions are only composable within their respective platforms, but the withdrawal and interaction with other expansion solutions are not. Very troublesome .

There may be other Ethereum Layer2 solutions. The ZK and rollup revolutions may have just begun , but other public chains, such as NEAR, Solana, Cosmos, and Polkadot, can position themselves as similar to the “Ethereum” side. chain. They will need to focus on their bridge to Ethereum.

The real question now is, how do these Layer 2 or side chain solutions interoperate? Of course, cross-shard communication will eventually solve this problem, but at the same time, their security attributes will be inconsistent and cannot be easily transferred . Will a centralized company facilitate its rapid transfer? Spacefold of Connext is studying the cross-chain interoperability of EVM compatible chains.