Why Layer 2 is difficult to save Ethereum: limited composability, decentralized liquidity and friction

Since Ethereum has been plagued by high gas fees caused by its network overload, many people claim that the second layer will be omnipotent: it will always solve the gas problem that Ethereum hates.

Frankly speaking, I thought so until a few weeks ago-once layer 2 transactions on Ethereum reach a critical mass, Ethereum will become an absolutely perfect encryption platform.

However, when I started to delve into the solution of layer 2 and started to participate more in the in-depth conversations around layer 2 on Twitter and Discord, I began to realize that although layer 2 is a very important extension of Ethereum Need and reasonable solutions, but they also have their own potential problems that may prevent the platform from achieving its true vision as a world supercomputer.

Why Layer 2 is difficult to save Ethereum: limited composability, decentralized liquidity and friction

Layer 2 has its own potential problems, and few people are aware of or talk about these problems.

Nonetheless, Tier 2 is definitely a step in the right direction , and they will be needed even in the event that ETH 2 is finally merged later this year . The throughput and speed they provide is purely impossible on the layer 1 network of Ethereum 2.0.

But they are far from perfect. Maybe this is the way, there are so many solutions to expand Ethereum: sidechains, subchains, payment channels, roll-up…

The following are some potential issues/unresolved issues that I have seen from the current second-tier scaling solution.

Limited composability

Yesterday, I talked about the true power of decentralized finance is composability-derived from the open source nature of technology.

I personally think that composability is the most powerful aspect of DeFi.

Yes, open finance is great-to allow unprecedented access to financial services, something that nearly 2 billion people in the world cannot get.

Equally great is that for the first time since the rise of Web 2.0, individuals have regained control of their finances, data, and property from intermediaries such as Facebook and banks.

But for me, the increased composability is really important. It has created a new financial product that has never been seen before, and has changed the way we look at finance.

I saw DeFi in my heart, and saw a never-ending innovation network. Just like how the Internet created companies we never thought of in the 90s: Netflix, Postmates, Zoom.

Unfortunately, with the implementation of layer 2, composability may be limited-or disappear altogether-because layer 2 is not currently interoperable.

In other words, a layer 2 application cannot easily communicate with another layer 2 application-destroying the power of composability.

On L1, a transaction can interact with multiple DeFi protocols to create a brand new financial product.

On L2, transactions can only interact with the DeFi protocol that exists on its own chain.

For example, Aave is only available on Polygon, and Uniswap is only available on Optimism. We cannot make a transaction that calls Aave and Uniswap smart contracts at the same time.

Due to this fragmentation, composability is limited, so the magic of DeFi is greatly limited.

This can be remedied by an interoperability layer like Polygon, which is seeking to connect all L2 solutions in a standard framework. However, it will be a long process for all solutions to be built in accordance with Polygon’s standards and platforms.

fluidity

Another problem with the fragmentation of Dapps on different L2 chains is that their related liquidity is also dispersed.

Liquidity is very important in any financial market because it provides a healthy market where buyers and sellers can meet and exchange goods on the open market without making too many compromises on the buying and selling prices, nor Will cause crazy price fluctuations.

At present, all liquidity exists in Ethereum-which provides a healthy and deeply liquid market for all financial products and tokens on the platform.

With the shift to L2, we will see that existing liquidity is split into Ethereum L1 and different scaling solutions-instead of providing all liquidity on Ethereum.

friction

Finally, as we are approaching the final state of the multi-chain L2 world on top of Ethereum, in order to interact with DeFi, there will be severe friction in moving between each L2.

We may see a lot of bridges between L2, so when we try to move funds between chains, expect a long transfer time.

It is also expected to have multiple accounts-one or more for each L2 chain. From a user experience point of view, tracking funds for these scaling solutions will be a headache.

For example, we have AAVE on Polygon, and we want to use Uniswap on Optimism to change it to UNI .

Not only must we transfer AAVE from Polygon to Ethereum, we must also transfer AAVE from Ethereum L1 to Optimism.

Concluding remarks

Of course, these problems are definitely solvable, and they may be resolved shortly after all major L2 scaling solutions are publicly released-due to the powerful firepower of the Ethereum developer community.

I think we will eventually see some integration in the L2 field-based on the strengths of each technology, a few winners will stand out.

I hope that there will also be a strong interoperability agreement between them to maintain composability and liquidity-whether through the Polygon framework or through a strong L2 bridge network.

Anthony Sassano put it best:

You can think of what is happening in the second-tier ecosystem as the “adopt and innovate” phase, where many different solutions are being tried and tested at the same time. Of course, not all solutions will be successful in the long term. In the end, I don’t think any solution will “win” the scalability war. As I said, every scalability solution has its own advantages and disadvantages. Some are very good for payment, some allow EVM compatibility, and some provide greater scalability at the cost of decentralization.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-layer-2-is-difficult-to-save-ethereum-limited-composability-decentralized-liquidity-and-friction/
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