Ethereum 2.0 will boost DeFi, but accessibility will send it mainstream
Ethereum 2.0 has been promised for what feels like forever. Delay after reported delay has left even die-hard users struggling to keep the faith — especially those in decentralized finance (DeFi). For those trying to stake, borrow and lend crypto assets through DeFi (the large majority of which resides on Ethereum), a congested, sluggish blockchain and sky-high gas fees for transactions have made DeFi unviable for some inexperienced users with less cash to splash.
Now, it’s important to note that Ethereum 2.0 will not change how DeFi works, which is often not very well; this hugely complex and often risky area is not known for being particularly welcoming to new users. What it will do, though, is make the entire network much faster by splitting the chain into 64 separate ‘shards’ that will increase transactions per second to 100,000, up from the current 15 transactions per second.
DeFi: the catalyst for Ethereum 2.0
For this reason, Ethereum 2.0 is a hugely important development for DeFi, and one that some argue wouldn’t be happening at the current speed without it. Growth in DeFi has been exponential of late, with total value locked (i.e. the amount of money floating around in DeFi), now grazing USD $13 billion — up from $662 million in January, representing a growth of 1,786%.
As such, usage on Ethereum in terms of total gas transactions has grown by 113% in 2020, up from 37.3 billion transactions on 1 January to 79.6 billion by Tuesday 3 November. This has led to network congestion and steep fees, with the average gas fee for a DeFi transaction peaking at an incredible 0.03 ETH (over 500 GWEI) in September, or around $14.40 as the price of the blockchain’s native token ether (ETH) also spiked at $480 a coin.
Waning DeFi interest or technology problems?
Notably, fees have fallen significantly since then, with the average gas fee sinking back to 0.002 ETH (about 50 GWEI), by 1 November. Some commentators claim that this, combined with some reports of lower activity in the space, indicates a waning interest in DeFi, with reports showing that around 642,000 ETH was pulled from DeFi between 20 October and early November. This, however, ignores the continuing overall growth of DeFi, which has not yet seen a meaningful pullback (though some would say the bubble has deflated a little compared to the fervor seen over the summer).
A full picture of DeFi is admittedly hard to paint, but withdrawals and lower activity are understandable in the face of slow transaction times and huge fees. At the gas levels seen in September, for example, DeFi transactions below a value of $1,400 became seriously cost-ineffective, while delayed transaction times were leading to increased slippage (the loss you make as the prices of what you want to sell and buy shift as you wait for a transaction to go through). This reduces the accessibility of DeFi, which is contrary to what most founders and users hope to achieve: namely the opening up of finance to everyone, everywhere.
This has become such an issue, in fact, that challengers to Ethereum have been making serious inroads of-late. Competitors like Polkadot and Tron have been developing their propositions at lightning speed, with Polkadot developing DeFi projects like Polkastarter, a decentralized exchange that allows users to create pools of cross-blockchain tokens (something currently beyond Ethereum’s scope). With these threats on the horizon, then, it is perhaps little surprise that Ethereum 2.0 is making its way to market faster than last anticipated.
Ethereum is dead, long live Ethereum!
Ethereum 2.0 is undoubtedly the blockchain’s biggest development since its launch and will have an enormous impact on DeFi’s future. By hastening their release schedule, Ethereum’s core developers are going all-in and the smallest hiccup during Ethereum 2.0’s deployment could spell disaster for the project’s future. Issues during migration or continually high fees could shift DeFi’s ecosystem away from Ethereum toward faster and cheaper alternatives.
Moreover, what Ethereum 2.0 will not solve is DeFi’s inherent complexity, with users needing to flit between different wallets and dApps and manually enter gas fees to complete transactions. This can lead to big mistakes for even experienced users, with one Uniswap user recently landed with a $9,000 gas fee for a $120 transaction after misplacing some zeros. These sorts of mistakes can only be solved with next-generation DeFi iterations like YIELD App, which bring all DeFi offerings together under one roof without the need to connect various different wallets and applications and tinker with gas.
Accessibility for individual users has to be the central focus of DeFi, as increasing it is the only thing that will push DeFi into the mainstream. With vastly increased transaction speeds and (hopefully) consistently low fees, Ethereum 2.0 will go some way to achieving this. However, the next stage calls for offerings like YIELD App’s that make DeFi as simple as mobile banking or using PayPal, for example; offerings that eliminate the need to hold crypto assets across endless applications that need constant monitoring. This will ultimately be what yanks savers out of loss-making cash accounts and into the new world of digital money.