Layer 2 solutions can revive DeFi trading

Layer 2 solutions are breathing life into Ethereum’s quest for mass adoption by making the network more scalable, faster, and more affordable than ever: a welcome relief for DeFi traders whose transaction fees have risen significantly over the past year.

In fact, layer 2 solutions are creating conditions that fulfill the entire financial world’s theoretical dream: a nearly frictionless market. The synergy of layer 2 solutions and the rise in nearly fee-free crypto trading could mark a renaissance in DeFi’s short but storied history.

Ethereum’s Layer 2 is an umbrella term for a series of scaling innovations like ZK rollups, Optimistic rollups, state channels, and side chains. These protocols increase the efficiency and capacity of Ethereum’s main network by taking work off the mainnet and doing it elsewhere.

For example, rollups process computations away from Ethereum’s main chain, and then the verifiable data from these computations is added to the main network in bundles. By doing work elsewhere, bundling the necessary data, and inserting the results onto Ethereum’s ledgers more efficiently, users can avoid multiple transaction costs.

This is tremendous news for things like smart contracts, which can cost tens of thousands of dollars to create. It is also estimated that if everyone switched to using rollups today, Ethereum’s network speed would rise from 15 to 3,000 transactions per second.

Layer 2 solutions Optimism, Polygon, xDai and Loopring

Nearly everything that can be done on layer 1 can be done on layer 2 with infinitesimally lower costs, higher transaction volumes, and much higher speeds. This opens Ethereum to all sorts of new, transaction, and data-heavy use cases. Projects that were once unjustifiable due to block space restrictions and fees can develop quickly and cheaply on layer 2.

One of the major players in layer 2 solutions is Polygon (formerly Matic). Polygon’s mission is to build “a protocol and a framework for building and connecting Ethereum-compatible blockchain networks” by integrating several layer 2 technologies, as this easy-to-follow video explains.

According to Polygon’s co-founder Sandeep Nailwal, mass adoption is a pipedream in Ethereum’s current state, but Polygon will change all that. Nailwal remarked in an interview that, “[If] I have to pay 20 cents or half a dollar to just make a tweet, I’m not going to use that,” indicating that Polygon’s solutions are so cheap and scalable that a project like Twitter is possible on a layer 2 network.

If layer 2 can allow a transaction-heavy project like Twitter to exist on Ethereum, this means big things for crypto trading where high transaction costs have made day trading prohibitive for the average user.

Fortunately, the launch of QuickSwap in February, running on Polygon, enables users to trade cryptocurrency instantaneously and for pennies on the dollar. QuickSwap traders can follow crypto prices in real-time and make thousands of trades in an instant, for almost zero fees. This has revived the possibility for day trading in DeFi, and it costs next to nothing.

Layer 2 solution Loopring arguably has even bigger ambitions, as it uses its ZK rollup protocol solely for building its own line of customer-facing services. Loopring is attempting to carve its own space in layer 2 “where you use, trade, grow, and store your assets,” effectively allowing users to create their own DEXs.

The hotly anticipated Uniswap v3 — the latest release of the world’s largest decentralized exchange — will go even further, offering users the ability to set their own fractional market spreads using NFTs via the layer 2 solution Optimism (the project responsible for Optimistic rollups).

Sadly Uniswap v3 is rolled out on May 5th, but will only operate on Ethereum’s main chain, meaning it will still be expensive to use, until the official release of Optimism. Uniswap v3 will be available on both chains, giving users more options for the world’s most popular DEX.

As the growing number of use cases for blockchain technology becomes apparent, so has the need for scaling to allow them to achieve their potential. Vitalik Buterin, co-founder of Ethereum, introduced the idea for layer 2 years ago, and by late 2020, as DeFi began dominating space on the network, Buterin urged users to move towards layer 2 solutions.

Buterin’s enthusiasm for layer 2 solutions persists today, and layer 2 continues to be an important step in Ethereum’s roadmap to Ethereum 2.0, and long-term success. Arguably, traders who haven’t sought out layer 2 solutions are not only eating into their costs but potentially missing out on the opportunity to help Ethereum grow and evolve.

Layer 2 scaling solutions negate the market friction that is potentially slowing DeFi’s shoot to the moon: the fewer barriers that exist to trading, the more people will trade. This also comes at a time when mainstream media outlets continue to report on the record prices set by cryptocurrencies, attracting the attention of potential new users.

It’s tempting to imagine hordes of adopters entering a DeFi market where cryptocurrency can be traded freely and instantaneously, and layer 2 solutions make this possible — right now. These solutions also take the pressure off Ethereum’s main network, and the combination of these factors should usher in some exciting developments for the world of DeFi trading.

YIELD App offers the easiest way to invest in DeFi using crypto or traditional currencies, regardless of your financial or technological level of expertise.

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