This year we need to get comfortable with the reality of decentralized finance (DeFi) in a multi-chain world. This is following the emergence of alternative layer-1 chains — including Avalanche, Cosmos and Solana — that took advantage of Ethereum’s scalability issues to quickly gain ground and build their developer ecosystems in 2021. The Ethereum ecosystem did respond and we saw it shift to a layer-2 roll-up centric future, with optimistic rollups, zero-knowledge (ZK) rollups and side chains, such as Polygon Hermez, all launched in order to help Ethereum increase scalability and reassert itself as the go-to place for retail DeFi users.
Yet even though we expect layer-2 applications to provide users with a much cheaper and user-friendly Ethereum experience, it’s clear that the alternative chains are not going away. Why?
Because while Ethereum may stake the claim on being the most decentralized smart contract platform, users will migrate to blockchains that offer them a variety of different tradeoffs depending on their needs. It’s in this environment that layer-2 applications will help to connect these blockchains together.
A multi-chain environment
As the crypto industry rapidly develops and new chains enter the market, it’s clearly no longer a case of “winner takes all.” In the next 12 months, this trend will continue and we’ll see an ecosystem of multiple blockchains all working together. Cosmos and Polkadot, for example, offer an interesting look at what the future could be like in a multi-chain environment.
In the case of Cosmos, there is a central hub that connects specific blockchains to it through the Inter-Blockchain Communication Protocol (IBC). Assets can move seamlessly between different chains and all interoperate in terms of providing security to each other. For example, you can trade USD stablecoins from Terra for ATOM on the Osmosis chain. Those LP (liquidity pool) tokens from Osmosis can then be transferred to other chains and used in several ways, including liquid staking.
Similarly, Polkadot has a central hub with many application-specific chains (parachains) built on top, each with different properties. For example, you can use an EVM (Ethereum Virtual Machine) compatible parachain called Moonbeam or another parachain that might be optimized for private transactions.
The advantage of this central hub model from Cosmos and Polkadot is that interoperability between these chains is at a protocol level and each chain is enhanced for specific use cases, while still sharing the same security.
Likewise, we expect layer-2 Ethereum DeFi applications to be connected to each other through a central hub, with seamless inbuilt bridging to other blockchains. This central hub model will provide an ordered and consistent experience for users on all chains (be they on alternative layer-1 chains or Ethereum layer 2) and allow them to easily move their assets around the ecosystem.
To do this, a focus on optimization of transactions is underway. Through bridging and connecting with other ecosystems, we can facilitate a much more connected world that links layer 2s on Ethereum and the wider multi-chain space.
Another way that the multi-chain world can thrive is if we improve accessibility. At present, onboarding through layer-1 solutions is clunky and expensive. One of the ways people often get involved with crypto is through centralized exchanges and by adding a native connection to various layer-1 and layer-2 platforms, users will be able to dive deeper into DeFi no matter the chain.
The coming year is going to be an important one for the advancement of layer-2 scaling and DeFi. If we work together to improve interoperability and accessibility, it could reignite the interest in DeFi that we saw during “DeFi Summer” in 2020. How the ecosystem proceeds now could, ultimately, see a more connected world between layer 2s on Ethereum and the rest of the multi-chain ecosystem.