The DeFi revolution: Cost down, diversity and endless opportunities up as ETH L2 scaling gets hotter
This week, the remarkable and ever advancing decentralized finance (DeFi) world has become even more comprehensive, and even more of a multi-faceted rival to the traditional and even institutional financial markets structure, with the arrival of the launch of the official production version of the ‘layer two’ (L2) scaling protocol for Uniswap v3 on Optimistic Ethereum (OE)’s mainnet.
Whilst that may appear overtly technologically complex, and could be considered just an organic upgrade, therefore evolutionary rather than revolutionary, there is an important point to note, that being the common ground between L2, which is a protocol that integrates into blockchains, in this case Ethereum as separate, secondary layers built to increase transaction throughput and reduce transaction costs.
The massive leaps forward in the development of DeFi are becoming increasingly clear, and the seemingly boundless nature of the possibilities for performing multiple functions in a far more comprehensive manner than any traditional financial markets ecosystem has ever done before are now very much understood by developers and users alike.
Although developers consider this new version to be a relatively early release, and have stated that it requires substantial real-world testing, it has moved the game forward and emphasizes the ingenuity of L2, which is quite simply an outstanding scaling methodology on the basis that aside from the important aspect of reducing operating costs, L2 scaling solutions increase throughput without tampering with any of the original decentralization or security characteristics that are integral to the original blockchain.
Thus, centralized exchanges also perform similar functionality to L2s, therefore can be used to expand the scope of accessing L2 decentralized ecosystem via routes such as being able to exchange fiat currency in order to then participate at L2 level, therefore performing the function of a ‘fiat on-ramp’. For example, one of the most common places for new users to get their first coin is an exchange. Not all exchanges allow direct fiat purchases, however CoinMetro is able to provide this function very comprehensively.
Back in May, the imminent launch of Uniswap v3 began to be mooted via various sources close to the matter. One of the main advancements with the introduction of Uniswap v3 is that liquidity providers can provide liquidity with up to 4000x capital efficiency relative to Uniswap v2, earning higher returns on their capital, and given that this is an intrinsic part of the incredibly empowering and sophisticated DeFi world, it would require a decentralized approach unless a user has access to a L2 via a fiat on-ramp such as CoinMetro.
In terms of liquidity diversity, Uniswap v3’s pool interface now supports the creation of Uniswap v3 positions with multiple fee tiers and concentrated liquidity ranges. Each position is represented as an NFT and comes with a unique piece of on-chain generative art which is very on-trend, and adds a charismatic edge to the user experience.
This all makes for an absolutely integrated experience, when transacting fiat currency to crypto in order to then access the new protocol, and it is perhaps assisted by the basic notion that Ethereum is especially renowned for having a vast array of decentralized applications developed on it, which sparked one of the booms in the development of DeFi.
Energy prices have been one of the concerns which have been central to the need to develop further methods of reducing costs, largely because the more applications and services that are developed and the more token launches that take place, the higher the energy cost.
On that basis, trading at decentralized exchanges (DEX), which are based on Automated Market Makers (AMMs), has become relatively expensive. AMM- based DEXs operate in a framework of smart contracts, that automatically send the tokens to the liquidity pool and then exchange them for the counterpart token from the pair.
The structure of blockchain allows to process the transactions off-chain, and then record data on the main Ethereum chain in a compressed way, and the structure of the scaling protocols is that Ethereum L2 runs on top of Ethereum L1 which supports the running of the network.
Operating on L2 then causes the L1 protocol to be less heavily burdened as it removes transactions from the main chain, offloading it to another layer, in this case L2, enabling them to interact, and then recording the remainder of the whole transactions back to L1. Due to transactions being processed off-chain on L2, they benefit from higher transaction processing capacity, faster confirmation times, and lower energy consumption.
This is the genius of the development of DeFi: the continued move toward far higher output, greater diversity of applications and use cases, and a will to strive toward lower costs.
If ever there was a time at which it is becoming clear that DeFi is an endless hotbed of opportunities which has no glass ceiling and is outpacing the traditional financial world by a long way, now is that time.