Even with Ethereum 2.0 underway, L2 scaling is still key to DeFi’s future

Over the past few years, Ethereum has made great strides. The network has been a compelling attempt to create a “world computer” through everything, from Decentralized Finance (DeFi), to the London upgrade. But there is still much to do.

The Eth 2.0 upgrade will provide the benefits necessary for global adoption. It will take more to scale up for the new wave of decentralized apps (DApps), and layer-two solutions might be the only way to do it.

Related: Do you want to improve the blockchain infrastructure? Work under layer-two solutions

Eth 2.0 promises great things

In August, Ethereum witnessed the successful implementation of its London upgrade. This fork is the first step on the road towards Ethereum 2.0. It also implemented several important updates to the network in preparation for the transition. London arrived, as Ethereum continued to struggle with the recent booms on the DeFi (and nonfungible token NFT) markets. Many DApps have been unable to handle transaction speeds or costs, which has made them less effective in delivering the benefits decentralized systems are designed to provide.

London’s EIP-1559 is a notable feature. It aims to increase inflation rates and stabilize transaction fees on its network. It is creating a system in which base fees for transactions are burned and not paid to miners. To encourage priority, miners can still get block rewards and users can voluntarily add “tips” to their transactions to increase their value. However, every block will now see a certain amount Ether (ETH), removed from the network for good.

Ethereum does not have a hard cap like Bitcoin. Instead, its total supply grows with each block. Many have been concerned about the long-term inflation caused by Ethereum’s open-ended growth. Although EIP-1559 does not make Ethereum deflationary it does control how fast the supply expands.

London was a crucial first step in scaling Ethereum, but it is only the tip of an iceberg.

The call for 2.0

Most of Ethereum’s operational problems stem from its inability to scale. This means that the network’s native transaction speeds can be slowed down. The Ethereum network currently processes around 30 transactions per second (30 tx/s). Visa, a traditional payment system, can handle 1,700 transactions per second (tx/s).

Ethereum must catch up. That’s why Ethereum 2.0 was created. One thing is that the network will move from proof-of work (PoW), to proof-ofstake (PoS), meaning that instead of computers competing to solve complex math problems, nodes will stake assets to validate blocks. Although PoS is more efficient than PoW and improves network speeds by around 50 tx/s it still falls far short of what’s needed for a global payment system.

Another important feature of Ethereum 2.0 is sharding. The process of sharding takes every block and splits them into 64 “shards”, which can then be processed in parallel. This basically means that we can multiply the 50 tx/s estimate by 64 to get a little more than 3,000 tx/s. This would be well ahead of Visa, and enough to compete with other payment networks.

Related: Ethereum 2.0 updates aren’t the game changer that could bring in more users

It’s not enough to beat Visa

Although sharding could allow Ethereum to beat or match the legacy payment infrastructure, it might not be enough. Traditional payment systems focus mainly on relatively simple transactions. While this has been useful for many years, the internet and DeFi are pushing the boundaries of what is possible.

We’re now looking at 24/7 decentralized markets, NFT market, NFT-powered virtual realms, and blockchain gaming. These systems require more complex transactions than traditional payment systems can handle. One player may make multiple transactions per minute in a blockchain-based game. This means that halting play to wait for each transaction is completed will not work. Combine that with DeFi’s ambitious vision to subvert the traditional finance industry, and you can see how much weight the Ethereum blockchain may need to bear.

Even if there were 3,000 tx/s, these services wouldn’t be available to everyone unless they had global adoption.

Ethereum can reach 100,000 transactions per second if it incorporates additional scaling solutions such as rollups and sidechains. This would bring Ethereum in line with DeFi’s high-throughput applications. But what are these answers?

Tomorrow’s scaling

Rollups are the first. Rollups come in a variety forms including Optimistic and Validium, Plasma and ZK. Rollups can be used to scale transaction loads. They execute transactions off-chain, and then write a cryptographic verification of validity to the chain. This reduces the need for main chain resources and increases overall speed.

Sidechains are also known as “second layer” solutions. These are basically secondary blockchains that can interface with the main one. They can be deployed multiple time and can handle different processes. This takes a lot of pressure off the base layer. Sidechains also serve as interoperable “bridges”, which allow for increased liquidity, throughput, and cross-compatibility between connected chains.

Imagine a future cryptocurrency where all primary chains (e.g. Ethereum) interact with each other via a variety of side chains. While different networks may be used for specific purposes, cryptographic techniques will ensure that data is always secure. This could finally allow for the speed and affordability required to implement DeFi’s true vision, which is a financial system that is affordable and accessible to all.

This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Polygon is the platform for Ethereum scaling. Since his infancy, Sandeep has been involved in many tech companies. To solve the problem of scaling, he co-founded Polygon with Jaynti Kanani & Anurag Arjun. His primary responsibilities are to lead the branding, marketing and operations, as well as partnering with key stakeholders in order to realize the Polygon vision. Sandeep is a graduate of the National Institute of Industrial Engineering, India’s top school.

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