Scalable blockchains are competing for DeFi market share.
In Ethernet Square inside and outside the building scalable solutions to fight is heating up. At the beginning of 2020, Ethereum’s fees were not a problem for most DeFi users; then, DeFi Summer began a year of crazy growth, resulting in higher and higher gas fees on Ethereum. The high gas fees on Ethereum began to prompt every developer and investor to find a faster and cheaper blockchain to reduce user costs. Since then, as dozens of development teams build scalable solutions to attract billions of users, this battle has become more intense.
This year, people suddenly became interested in Ethereum sidechains, L2s, and faster L1s blockchains, although for industry veterans, this is nothing new. In fact, in the past five years, the development of faster and cheaper blockchains , and the ” bridges ” that connect them , have always accounted for the largest share of Crypto venture capital.
Therefore, although the bottleneck in the current environment has been foreseen, it was not clear at that time what the product prospects on the blockchain would look like. In the past few years, it feels like people are busy building infrastructure, but there is no clear idea of what will run on these infrastructures. However, as the market matures, we now have a clear understanding: the market needs a fast blockchain to expand the use cases around stablecoins, DeFi, NFTs, and DAOs .
What is exciting now is what all this means for decentralization, the dominance of Ethereum, and the attention of regulators.
The current scalability competition pattern is:
- Side chains such as Binance Smart Chain (BSC) and Polygon have experienced rapid growth, but at the same time, concerns about their decentralization and security have also increased. Polygon is currently trying to solve these problems, but BSC has no relevant actions; in addition, Fantom is also on the rise.
- Ethereum L2s has finally arrived . Although there have been many unrealistic hopes and release delays before, Arbitrum, dYdX, and Optimism have proved that the L2s era has really come. At the time of writing, the total value of locked positions (TVL) in the Ethereum L2s network has exceeded 3 billion. Dollar. And after these L2s solutions, Ethereum will have more L2s solutions in the next few years, let alone Eth2 itself.
- Solana suddenly appeared as the most frightening “Ethereum Killer” and became the favorite of traders eager to tell. Solana has attracted many financial stakeholders and validators, and subsequently established liquidity and expanded network capacity.
- Terra has established an independent DeFi ecosystem centered on stablecoins. Its stablecoins are integrated into the underlying blockchain network, which can also provide power for synthetic assets. Celo is another blockchain network focused on the mobile payment market, and it has also recently achieved some success.
- Blockchains compatible with EVM (Ethereum Virtual Machine) such as Avalanche have shown that the moat of EVM is much wider than that of Ethereum. A sufficiently funded blockchain can use simple bridging interfaces and liquidity mining. Develop an ecosystem.
Above: Since 2021, the total lock-up value (TVL) of DeFi in networks other than Ethereum has grown. Source: DeFi Llama
Unlike the past few years, the discussion surrounding these competitive chains is no longer a hypothetical dispute about transaction throughput per second; instead, the focus is now on the DeFi market share of these competitive chains . The DeFi industry has matured, and for the first time in history, these competing chains have been able to have a legitimate and reasonable dialogue on DeFi market share (in this regard, TVL is a good indicator, although the indicator is not perfect).
Ethereum is still king
Above: Comparison of the TVL (dark blue area) of Ethereum L1 with the TVL of other networks. Source: DeFi Llama
It is easy to overlook the dominance of the Ethereum mainnet in just a few years. No other smart contract platform has organically created its own ecosystem. Almost all TVL growth on other competing chains can be linked to projects and ideas pioneered on Ethereum .
The largest moat of Ethereum is the nearly $500 billion asset that makes Ethereum its home . For any emerging DeFi system, on-chain assets are the most precious commodity, and Ethereum has a huge and diverse asset base, including ETH , stablecoins and other ERC-20 tokens—not to mention NFTs .
These assets are bundled with Ethereum, but most competitive chains have found that compared with retail and institutional investors who lack knowledge or experience, these competitive chains are easier to get from the diehard Crypto fans and DeFi in the Ethereum ecosystem. The veteran attracts funds . This is why the first infrastructure that any competitive chain should build is the ” bridge ” to Ethereum .
“Bridge” is the missing piece of infrastructure
Although investment has been pouring into new (competitive) base-layer blockchains and Ethereum expansion solutions, there is still less attention to how to connect these networks . However, now that these blockchain networks have found a product market match around financial services, liquidity and capital efficiency have become critical . This means that they need fast, decentralized, and permissionless “bridges . “
1kxnetwork research partner Dmitriy Berenzon has written an excellent article on blockchain “bridges” and their advantages and trade-offs Its design trade-offs), so we won’t go into details in this article. Make two follow-up comments here:
- Capital efficiency is the most important component of success (second only to safety). It is now clear that a large amount of capital will promote the realization of fast, cross-chain bridging.
- Cosmos is designed for this multi-chain era. Cosmos is a veteran Crypto project with a vision of an inter-chain ecosystem. This willingness will finally be realized. The new cross-chain network communication design looks very similar to the design of Cosmos’ IBC (Interchain Communication Protocol).
Five urgent problems (and early answers) for the multi-chain future
1. Can the Ethereum mainnet maintain its leading position in the DeFi TVL market share?
Currently, according to DeFi Llama’s data, Ethereum L1 has a 75% market share in DeFi TVL . Even if its gas fees continue to rise, it is difficult to imagine any major liquidity on Ethereum will be lost. Ethereum-based lending platforms seem to be firmly rooted in Ethereum; large liquidity pools (including AMMs and lending platforms’ liquidity pools) will likely continue to stay, and at the same time, liquidity providers will continue to be in other markets. Provide cheaper services in a low-cost blockchain network . Our prediction is: Ethereum will still be the largest chain, but it may no longer occupy most of the market share. By the end of 2022, Ethereum’s DeFi TVL market share will be approximately 35%.
2. Will it be composed of application-specific chains in the future ?
To be honest, we were skeptical of this hypothesis before. But the great success of dYdX at L2 changed a few things. Will composability continue to serve as a magic wand for the development of blockchain ecology, as everyone has said? Or can the functions of different chains be abstracted through the front end? The success of high-performance transaction protocols like dYdX shows how the moat of Ethereum extends beyond the EVM, and is also the best response to the erosion of Solana by Ethereum maximalists.
Our prediction is that : in addition to the Ethernet Square, by the end of 2022, about 15% of the market share of DeFi TVL will be located in the application-specific type chain (based on Ethernet L2 and Square Cosmos chain); 20% located outside Ethernet Square EVM chains (including BSC); 15% are in the Ethereum EVM L2s network ; 10% are in other non-EVM general computing networks (mainly Solana); the remaining 5% are in other Cosmos-based chains .
3. Will cross-chain transactions be dominated by centralized entities?
Currently, most “bridges” rely on a small group of verifiers . Although it is almost impossible to reconcile two different blockchain networks and their consensus mechanisms, there is nothing that a centralized middleman cannot solve. Large-scale liquidity providers will use trustless agreement “bridges” to charge individual users for quick exit service fees. Centralized exchanges (CEXs) may act as a “bridge”, and one might say that Binance has already done this. Our prediction is: Yes, centralized entities will temporarily dominate cross-chain transactions; alternatives to decentralization will take time to develop .
4. What about cross-chain governance?
At present, the decentralized exchange Swapr developed by the decentralized autonomous organization DXdao has been deployed in the three networks of Arbitrum One, Ethereum mainnet and xDai. Once the problem of cross-chain liquidity is resolved, the next issue is cross-chain governance . Aave seems to have gone the furthest in this regard. Our prediction is: This is a difficult problem to solve and will rely on slow cross-chain communication, because governance transactions may be slower .
We hope to check again in a year to see if these forecasts are close to the real situation.
The last thing to consider is also a hot topic that people are talking about: regulation . It is unclear whether the future of multi-chain will arouse the anger of regulators, but what else will not be? It is hard to imagine that regulators will chase the underlying chain. On the contrary, more and more regulatory review is aimed at the front-end. Therefore, the most successful scalable blockchain may eventually achieve the most decentralized front-end while also being censorship-resistant.
This will require a new decentralized technology stack, which is another development stage in the maturity of Web3, indicating that DeFi requires more than just funding channels.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/multi-chain-and-an-increasingly-mature-decentralized-world/
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