Is Layer 2 solutions the future of DeFi?

is-layer-2-solutions-the-future-of-defi

The crypto market has exhibited tremendous growth over the last year or so, as is highlighted by the fact that an increasing number of institutional players have continued to enter this ever-evolving space in recent months.

From Michael Saylor-led Microstrategy purchasing over 92,079 Bitcoin to Elon Musk-led Tesla investing a cool $1.5 billion into the flagship crypto, the digital asset market as a whole has showcased an extremely high level of maturity recently.

In a similar vein, it also bears mentioning that since the start of 2020, the total market capitalization of this space has increased from a sizable $190 billion to a staggering $$1.6 trillion, thereby showcasing a growth of more than eight times over.

If that wasn’t enough, during the above-stated time window, the Decentralized Finance (DeFi) market has surged leaps and bounds, with the total capital locked within this space growing from a little over $690 million to around $60 billion.

is-layer-2-solutions-the-future-of-defi

That said, even though the DeFi sector has continued to flourish, one can see that in recent months, rising gas costs on the Ethereum network — a platform that houses a bulk of all DeFi solutions in existence today — have made it increasingly difficult for users to facilitate their day to day transactions.

To provide a bit of context in this regard, during February, the avg. The cost of processing a transaction on the Ethereum ecosystem lay around $40. By the second week of May, this figure had risen to as high as $62.77, making the network practically unusable for most smaller layers.

Layer 1 and 2 solutions explained

As the name seems to quite clearly allude to, the term ‘Layer-1’ talks about the central framework — i.e., the setup and operational setup — of any blockchain system. In contrast, a second layer (Layer 2) solution refers to a technological addendum deployed on top of an existing network.

The setup is best explained via the help of an illustration. Say, for example, we think of Ethereum as being a Layer-1 solution. A project like Metis is best viewed as a second-layer solution that is placed atop the former’s digital infrastructure.

In its most basic sense, Metis is a DAO protocol that affords users several benefits related to low gas fees, high scalability, rich functionality, and much more.

Additionally, the platform features an easy-of-use UX/UI, enabling decentralized companies (DAC) to use a blockchain-based ecosystem. Lastly, thanks to its unique operational design, Metis makes it easy to manage collaborations/ business operations — using a DAC-oriented structure — in a highly decentralized, transparent manner.

Layer 2 options are important for multiple reasons

Simply put, Layer 2 solutions are designed to help mitigate some of the most pressing issues impeding the growth of the DeFi sector today. For example, it becomes possible to reduce high transaction fees and minimize network congestion through their use.

They achieve this by sending any existing data to multiple processing channels, allowing for faster computation and delivery.

Not only that, most layer-2 platforms are set up in such a way that they leave the primary blockchain protocol entirely unaffected, thereby making multiple microtransactions a reality — without people having to waste their time with issues relating to miner verification or exorbitant txn charges.


Looking ahead

As the crypto market continues to evolve, it seems as though an increasing number of investors are beginning to view Ether as the base layer of the digital asset universe.

This notion is best exemplified by recent data, which clearly shows that the ETH network currently processes monetary transactions worth $25 billion daily. To put things into perspective, we can see that this number is 80% more than Bitcoin.

Thus, as we head into a future that looks increasingly decentralized, it stands to reason that problems of growing congestion, low throughput rates, and high processing charges will become progressively more prevalent within the DeFi market.

As a result, moving forward, layer-2 solutions should continue to garner an increasing amount of mainstream traction and developer support.

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