Ethereum 2.0 to boost DeFi but a delayed launch can delay the network

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This deposit contract is the first step that would ultimately lead to the launch of Ethereum 2.0. If we consider the launch to be successful, Ethereum will ship the Beacon Chain and introduce Proof of Stake into the ecosystem, which is currently based on Proof of Work, another mining-based consensus algorithm. mining. Fragment Chains would be the next upgrade to follow Beacon Chain.

Ultimately, the eventual launch of Ethereum 2.0 will have an effect on the decentralized finance market. In 2020, the DeFi sector has grown considerably but has already experienced a slight recharge time. For this reason, it has been claimed that DeFi is a bubble that will soon burst. However, Binance CEO Changpeng Zhao said that despite these signs DeFi is here to stay and compared this early speculation to the community’s apprehensive stance on the ICO bubble in 2017.

Ethereum 2.0 launch would be a “boon” for DeFi

The major players in the DeFi market expect Ethereum 2.0 to have a big impact on the community as it is used as the backbone for most DApp DeFi use cases. TBEN discussed this aspect in more detail with Steven Becker, President and COO of the DeFi MakerDAO project. He said:

“Eth2 is designed to optimize the network architecture without compromising decentralization, security and scalability. The upgrades are expected to allow Ethereum to grow to thousands of times its current capacity while remaining both secure and decentralized … which will be a godsend for DeFi.

While Ethereum’s scaling capabilities are set to multiply by several due to the launch of Eth2, it remains to be seen whether it will be able to scale quickly enough to cope with the growth of DeFi markets. Sam Bankman-Fried, CEO of FTX, recently said that he believes the launch of Ethereum 2.0 will not be able to cope with the potential growth that may be seen in the DeFi market. He even chose to build his own DeFi project, Serum on the Solana blockchain, instead of choosing Ethereum, which is the most popular option right now.

The phased launch plan involves a lot of uncertainty about how to deal with the potential growth of DeFi markets in the same time frame, according to Jay Hao, CEO of the OKEx cryptocurrency exchange, who said following TBEN:

“We already know that it will be faster than the current chain, but we also know that it will be deployed in iterations and that, to start, it will only be maybe 100 times faster, maybe a little more. . We are already seeing many other blockchain solutions that can produce faster throughput than this. “

To address these challenges, Ethereum co-founder Vitalik Buterin told a Reddit AMA session on November 17 that the benefits of Ethereum 2.0 would come faster than expected. Hao backs up this sentiment by stating, “As DeFi grows, Eth2 will also increase, and it will become increasingly faster, more scalable and decentralized.”

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In addition, DeFi protocols could also start to implement ETH natively on their platforms, but the downside would be to reduce the decentralizing impact of the network. Patrick Collins, Developer Promoter at Chainlink Labs, told TBEN:

“In a way, I see ETH 2.0 staking as a DeFi protocol in itself. It will be interesting to see the projects integrate staking. […] The tricky part would be how to do this without compromising network security, as massive pools controlled by single entities is not at all ideal.

The next update

Following the Beacon Chain upgrade, Shard Chains would be the next upgrade to follow. According to the Ethereum website, the capacity of the network will increase, improving transaction speed by expanding the network to 64 blockchains called shard chains. Although initially these shard chains did not support smart contracts or user accounts, smart contract support is critical for DeFi platforms due to their use of oracles.

The most significant 2.0 update for DeFi would be Phase 1.5 where the existing Ethereum backbone would be added to the beacon chain as a fragment chain, transforming the network into a PoS consensus network from the algorithm of current PoW consensus. The launch is scheduled for 2021, there is no specific date available for this transformation.

The DeFi boom has crowded the Ethereum network, which has pushed transaction costs to an all-time high. This is seen as another reason for the slowdown in DeFi’s growth. Becker explained how the 2.0 upgrade can alleviate the pressure felt by market players: “The Sharding upgrade alone should bring us back to the days when Dai build and shipping costs weren’t there. cost pennies, not dollars. Low-cost transactions would facilitate increased DeFi adoption and innovation. “

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Kosala Hemachandra, founder and CEO of MyEtherWallet – an Ethereum-based wallet platform – even compared this expected growth to accommodate the transactional levels faced by electronic funds transfer giant Visa, telling TBEN: ‘The’ increased throughput and tiny gas prices due to Eth2 will certainly help DeFi reach the next level. Currently, Visa can process over 20,000 transactions per second; with Eth2, we will be able to reach close to this level. “

The expected drop in network gas prices and increased throughput are sure to increase participation in the DeFi market, as many investors faced this hurdle during the DeFi boom in the summer, which caused them lead to miss lucrative investment opportunities. Current scalability issues that are encountered can be addressed by projects launching Layer Two solutions, which help address this issue. Hemachandra explained how these Layer Two solutions could even help Ethereum 2.0 after launch:

“Initial Eth2 will start with 64 shards, which means it will be able to support at least 64x of the current volume. If we start to have more volume than that, we will run into scalability issues. However, this is also where Layer Two solutions will be extremely useful. With proper two layer solutions and with Eth2 we can easily reach 128 times the current volume. “

DeFi could be the loser of the progressive launch

Even though layer two solutions are capable of solving the scalability issues that Ethereum 2.0 might face, the duration of the different phases of the launch could see the DeFi market grow exponentially, as shown by the triple-digit gains of tokens. DeFi in the middle of the Bitcoin bull. run. All of the benefits offered by Release 2.0 will not be effective until the final phase of Phase 2 arrives, as the shards would be fully operational and include support for smart contracts.

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But that launch phase may only be two years away, as the Ethereum roadmap says it is still in the research phase. Even though most DeFi solutions and DApps use Ethereum as their preferred blockchain, there are other blockchain networks that could be vying for a share of the DeFi market. Simon Peters, senior account manager at eToro – a social trading platform – told TBEN: “Ethereum’s transition to version 2.0 could take a number of years to fully complete, which is why some competing networks, such as Cardano, Tezos, Tron, and EOS, have used this to their advantage and acquired part of the market from DeFi. “

Ethereum’s transition to version 2.0 is taking place in a live environment, as version 1.0 must work seamlessly during the various phases of the launch. Peters hinted at the risks this live transition currently entails for DeFi protocols:

“They do it in a living environment. It’s not easy, especially when Ethereum already supports a lot of DeFi protocols. They also run the risk that any issues with migration or delayed deployment 2.0 will cause developers to build elsewhere or transfer projects to a competing network. “

While there is not just one competitor to Ethereum for DeFi and DApps, Ethereum is set to be critically important to DeFi, and its contribution will only increase as the technology matures. Thus, the interaction between Ethereum and other blockchains that are starting to operate in the DeFi space is of great importance. Hao explained how these solutions are expected to evolve: “The real key is to make these solutions compatible with Ethereum and interoperable with other blockchains. I think this is one of the most exciting things about the DeFi space – the constant innovation that we see.

The Ethereum deposit agreement for Phase 0 of the Ethereum 2.0 launch went live on November 4, announcing the launch of Phase 0 on December 1. Stakeholders would have to deposit 32 Ether (ETH) in the contract to participate. The deposit contract needs to accumulate 16,384 deposits of 32 ETH – or $ 200 million for the launch to be successful.

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