The DeFi ecosystem has seen tremendous growth in the last two years and has been considered Ethereum‘s “killer app” by many. However, it appears that a notable DeFi personality thinks that its growth may hit a plateau, which can only be bypassed by scaling solutions promised in Ethereum 2.0.

DeFi’s Invisible Ceiling

The DeFi economy may be subject to a few “invisible ceilings”, according to Kyle Samani, managing partner of Multi Coin Capital, a fund that is invested in the DeFi space.

Samani explains that although it’s still too early to tell, DeFi systems might already be hitting these limits at present.

DeFi has vast uses across the financial world but Samani has identified the major uses case to be trading (decentralized exchanges) and acquiring leverage (borrowing DAI from Maker, margin trading, etc.).

When it comes to acquiring leverage, it has to be capped due to its inferior block time of 10-19 seconds. This is exacerbated by the massive volatility of crypto assets.

These two obstacles discourage the offer of highly leveraged products. At best, 10x leverage would likely be the hard limit.

DeFi may grant traders more control and sovereignty over their assets, but they also have a few major drawbacks that have prevented decentralized exchanges from taking over the market share of centralized exchanges.

high latency and low throughput

Once again, it boils down to Ethereum’s high latency. The block time isn’t fast enough to enable traders to know their position with 100% precision in real-time, which forces them to be more conservative in their trading.

Not to mention Ethereum transactions are slow (a measly 15 tps) and cost a lot of gas. This dampens a DEX’s ability to run high-volume trades.

Furthermore, there’s also the added difficulty in creating fiat gateways to decentralized exchanges, which their centralized counterparts have managed to do rather well.

Ethereum 2.0 Will Bring DeFi to New Heights

Joe Lubin

To overcome its low transaction throughput and low latency, the Ethereum network needs to ditch its proof-of-work consensus protocol to a faster and more efficient system that is suitable for running Dapps. This is set to occur in the implementation of Ethereum 2.0, which will be deployed in multiple phases.

Ethereum co-founder Joseph Lubin had said in May 2019 that Ethereum will become 1,000 times more scalable within 18-24 months. This includes the rollout of both bottom-layer and second-layer solutions like Solana and Skale, respectively.

It’s uncertain when we can see the scaling benefits of Ethereum 2.0 as it is still in its very early stages. What we do know is that the vast majority of DeFi ecosystems are built on Ethereum. As a result, the success of DeFi is highly tied to it.