Decentralized finance (DeFi) has been widely successful, growing exponentially in the last few months in terms of locked-up assets and user adoption. While this might be a cause for celebration, we can’t ignore the fact that it is also pushing Ethereum’s network capacity to its limit.
Most major blockchains like Bitcoin and Ethereum haven’t experienced network congestion since the 2017 market boom. That is until DeFi came along and made Ethereum popular again. Most of the popular DeFi platforms like Compound, Maker, Synthetix, Balancer, Uniswap, Aave, etc. are built on Ethereum.
As such, the more people using these platforms the higher the demand for gas. This exerts an upward pressure on gas prices, which users are now having problems with.
DeFi Needs Ethereum 2.0
As stated before, the success of DeFi ultimately rests on the shoulders of Ethereum. For DeFi to continue to grow and proliferate, the network where it runs need to scale.
Right now, the Etheremu network can handle about 15 transactions per second (tps). Once Ethereum 2.0 is fully functional, it could potentially reach 100,000 tps or more.
The problem is, Ethereum 2.0 won’t be fully functional for a few more years. And DeFi badly needs to scale in the next few months or so.
Off-chain Scaling Solutions Are Already Available
Meanwhile, off-chain scaling has seen tremendous development in the last year despite not being as heavily reported. In fact, Ethereum devs have been successfully testing off-chain setups for a long time now.
Basically, the setup is similar to Bitcoin and the lightning network. Several users lock up ETH on the base layer but transact on a second layer. That way, the base blockchain won’t be congested and transactions would execute fast.
Plasma is one popular example of a layer-2 solution that is being used by popular Ethereum-scaling projects Matic Network and OMG Network. Other scaling platforms include Celer Network, Raiden Network, State Channels, Perun Network, etc.
The most promising off-chain scaling protocols are rollups.
Zero-knowledge rollups (ZK rollups) allow hundreds of token transfers to be joined in a single transaction.
The problem with ZK rollups is that they are a bit more complex. Therefore, they cannot scale general-purpose smart contracts on Ethereum in the short term.
However, there is an alternative type of rollup that can do the job well enough. And that is Optimistic rollup.
Optimistic rollups are the most adopted scaling solution by DeFi platforms. They offer similar structures with proof of stake but with off-chain aggregators functioning like validator nodes.
Unipig, a pilot implementation of rollups, was built by the Plasma Group and Uniswap, one of the hottest DeFi platforms in the space.
As stated by the exchange, Optimistic Rollups allows them to scale. Unfortunately, not all platforms have adopted this off-chain scaling solution.