The Ethereum L2–L2 revolution, is it the end of L1-L1 cross blockchains trading and why should you care?

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Are we witnessing a revolution in cross blockchain trading?

Are we at a major turning point in cross blockchain trading and will L1 to L1 be replaced by L2 to L2?

The L2 to L2 Narrative

  • If you listen to Ethereum Maximist Podcasts lately you probably heard a lot news about Ethereum Layer Two Solutions finally being finished.
  • Arbetrum
  • Optimism
  • And others
  • These Ethereum second layer projects are meant to be solutions to the cost and scaling issues of the Ethereum network and these solutions include dApps for :
  • decentralized banking
  • decentralized exchanges
  • decentralized yield farming
  • And they are also interconnected with the smooth and easy flow of assets between them
  • And perhaps most importantly as Layer 2 solutions on Ethereum, they enjoy Ethereum’s legendary security.
  • ‘This has lead to the idea that all defi could come back to Ethereum now, because L2-L2 on the Ethereum L1 solves all of DeFi problems, or at least that is the narrative.

Why is this narrative important?

  • This narrative is important because cryptocurrency is risky
  • The biggest threat to investors isn’t low returns on their investment
  • It’s the theft of their investment
  • Or the loss of their investment moving between L1 blockchains.
  • This is an inflection point, a fork in the road so to speak; shall DeFi continue to be concentrated on different L1 blockchains and will investors continue to move investment capitol between them?
  • Or are we witnessing an evolutionary development, where DeFi moves to the L2 to L2 level of one blockchain, the Ethereum blockchain, where L2 solutions provide speed and lower costs, while Ethereum provides it’s legendary safety, security and decentralization?

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Okay this sounds big, let’s briefly review select parts of Ethereum and the history of DeFi and Ethereum!

  • In the beginning of DeFi there was Ethereum a unique blockchain.
  • Developers and investors love ethereum for its safety, diversity of opportunities and many of the first defi apps and the biggest defi financial tools were born there.
  • The safety of Ethereum and the large developer and investor community made Ethereum successful and synonymous with decentralized finance.
  • However, Ethereum’s success led to so many transactions that the cost of transactions went up, as demand chased a fixed supply.
  • Additionally Ethereum’s success led to so many transactions that the time to completion went up, as demand chased a fixed transaction processing speed.
  • Ethereums problems were created by its code and a code fix was thought to provide a fix to its problems; Ethereum 2.0.
  • Unfortunately despite the ability of Ethereum 2.0 to lower costs and provide greater transaction capacity, it is now clear that it won’t be enough.
  • Decentralized Finance has grown from millions of dollars to billions of dollars in one year. It is expected to reach trillions of dollars in the coming years.
  • That’s a thousand fold increase in assets invested in one year, and a potential 1000x again in the years after that…
  • Ethereum 2.0 is a wonderful technological achievement, but it’s not a 1000 times faster, and in a few years it won’t be a million times faster either.
  • So it can’t deal with the 1000x of 2020 to 2021, when DeFi went from millions with six zeros 1,000,000,to billions with nine zeroes 1,000,000,000
  • And it certainly won’t keep up when DeFi goes from billions with nine zeroes to trillions with 12 zeroes 1,000,000,000,000.
  • But multiple L2 solutions which scale up over time in size, and number of L2 solutions may solve this crisis.
  • L2 solutions bring faster blockchains, with more capacity and cheaper fees, with all transactions eventually settling on the Ethereum blockchains.

Next a brief discussion of what L1 and L2 mean

  • Ethereum is a blockchain, also referred to as a level one
  • Many of the newest projects recently finished are second layer solutions or L2s
  • Arbetrum, Optimism, and several others
  • Second layer or L2s are essentially side chains of the L1 blockchain like Ethereum and are constructed to take advantage of L1 security.
  • An example of an L1 is Ethereum or Bitcoin or Hive.
  • An example of a L2 is Arbetrum, Lightening and Hive-Engine.
  • These L2 use the same token as the L1 Chain and conduct transactions on the L2 level which are eventually recorded in the L1 level.
  • So for example transactions involving the L1 Hive blockchain token Hive are performed on the L2 Hive-Engine, a layer two or L2 of L1 Hive blockchain but eventually recorded on the L1
  • This safety characteristic of L2 solutions where they inherit much of the safety of the L1 blockchains, has given rise to the narrative, that L2 to L2 cross block chain trading on Ethereum gives you the safety of Ethereum with the speed and low costs of Level Two solutions.
  • Many investors and developers on Ethereum feel L2 to L2 on Ethereum is therefore safer then any L1 to L1 cross blockchains trading.
  • If you accept that assumption, and…
  • Every type of DeFi solution present on non-Ethereum L1 blockchains are present on Ethereum L2 chains…
  • Why trade anywhere else?
  • Do these L2 solutions represent the best of all worlds?

L1 to L1 cross blockchains trading is challenging and risky

  • One only has to experience the technological hoops investors jump through to move assets from Ethereum to Binance and to Polygon, and look at the inherent risks of this trading to consider limiting ones trading to one L1
  • Plus the technological solutions to cross blockchains solutions we have been waiting for like Thorchain…
  • Have proven themselves tricky to implement even after 4 years of research and development.
  • A loyal and supportive community is wonderful.
  • But two huge hacks and a full stop on the Thorchain blockchains later…One has to wonder, is there a better solution?
  • In capitalism the pursuit of the dollar drives innovation.
  • Some would argue that, that innovation is L2 to L2 trading on one L1. Ethereum
  • Now that the L2 solutions are a reality on the Ethereum blockchain, L2 to L2 cross chain trading looks easier, safer and cheaper the most L1 to L1 trading, to those who are involved in L2 to L2 trading on Ethereum now.
  • Here on Hive, we have L2 solutions like Leofinance and Proof of Brain. It is easy to trade Proof of Brain tokens for Hive, and Hive for Leo, and it is safe too.

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So this idea that if L2-L2 on Ethereum solves the transaction cost issue, and solves the scaling issue, but allows you access to all the same types of DeFi tools found on other L1 blockchains, along with the legendary security and decentralization of Ethereum, this raises some important question;

  • why bother with L1 to L1 at all?
  • Why not focus on L2 to L2 cross chain trading
  • Has technology moved on from the inherent challenges of L1 to L1?
  • Is L2 to L2 the way of the future?
  • If we can we have the safety, stability and comfort of Ethereum at much lower prices?
  • And with much faster speed…do we need L1 to L1 capabilities

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This is the technological fork in the road … I think

We may well go down both of them, but only time will tell.

  • Ethereum has a huge first in class advantage
  • Ethereum is widely perceived to be safer then other L1 blockchains
  • Ethereum is widely perceived to be the model of decentralization
  • If L2-L2 is safer, faster and cheaper then L1-L1 … and it’s on Ethereum…will L1 -L1 trading cease to exist? Probably not.
  • Humans are irrational beings, driven by a myriad of factors, but the rise of Binance Smart Chain, and now Polygon suggests that large numbers of humans are very pragmatic. And for this and other reasons we may see the rise of L2-L2, on Ethereum, and it could become the dominant ecosystem for DeFi .
  • Even more then it is…. LOL

What do you think?

Let me know in the comments below.

@shortsegments

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About @shortsegments

Shortsegments is a writer focused on cryptocurrency, the blockchain, non-fungible digital tokens or NFTs, and decentralized finance. He has been a community member for more then three years.

Read more of shortsegments articles here:

/@shortsegments/new-methodology-for-cyber-security-tokenization

/@shortsegments/hive-surround-yourself-with-people-smarter-then-yourself

/@shortsegments/i-was-wrong-about-the-no-loss-lottery

/@shortsegments/complexity-of-defi-depressing-you-easy-defi-fixes-this
He is also a builder, with two current projects:

The first is the No Loss lottery, a prize linked savings account here on Hive, which awards more the 100 Leo in prizes weekly, and which recent surpassed 1000 tickets sold. @nolosslottery

His second project is Easy DeFi, which creates a community investment pool allowing community members not yet confident enough to invest on their own, a chance to easily invest in yield-farming and staking on Cubfinance. @easydefi

Yield Farming
Cubfinance is the Hive communities home grown Yield Farm and is audited by CertiK, a third party which certifies DeFi projects on Ethereum, Binance and polygon ecosystems.

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