Defi is here to stay and dominate the financial markets. It is currently reinventing the world’s financial system, causing a paradigm shift. Defi is facilitating this transformation into trustless and transparent protocols by redefining traditional financial models and their components. The vision for Defi is clear: create a borderless ecosystem and help every user have an alternative financial service.
Right now, the most significant Defi ecosystem belongs to Ethereum, and it is no doubt that they have built a booming digital economy with the support of an ever-expanding dev community.
When Ethereum launched smart contracts, it introduced a new element of innovation for a decentralized blockchain network that expedited the process for others to create more leaderless applications.
As they say, “With great power, there must also come great responsibility,” and now that responsibility is on Ethereum to be the anchor or the best settlement layer in the entire ecosystem.
While the potential for Defi to change the financial landscape is unquestionable, it still lacks in many aspects to aim for global adoption. High transaction fees, network congestion, and low disk space are limiting Ethereum.
These issues are not only creating friction in the ecosystem, but they are also restricting new users from experiencing the interface of a smart contract transaction.
In a country like India, where the demand from new users is always high, it becomes incredibly challenging to access such Defi applications, as a high gas fee is their only barrier of entry.
This year, we have seen a massive increase in new entities in the Ethereum network, leading to network congestion and insanely high transaction fees. When the network congestion increased multifold in the last few months, we observed the average transaction fee on Ethereum skyrocket. Currently, that number is at a six-month low, mainly because of the decline in market volumes and network interaction.
Apart from the market correction, the main reason for Ethereum fees to drop nearly 90% is Layer 2 scaling solution Polygon. The daily transactions on the Polygon network went from 1.5 million to almost 7.5 million. If you compare it to Ethereum’s network, that is over five times.
We also see new developments from several smart contracts platforms like BSC and Solana, which are trying to provide a more flexible system for small traders that are new to the crypto space. The statistical analysis between BSC and Ethereum also proves that people are tired of paying half of the transaction volume as a gas fee. In the middle of February, we saw ten smart contracts built on Ethereum, and there were 40 on Binance, which only supports how cheap gas costs are on BSC.
The low transaction fee on BSC is sure as hell attractive for many people, but it comes with its downsides. We see countless rug pulls taking place every day, where token owners disappear with millions of dollars, leaving all investors in agony. Binance Smart Chain is responsible for most exit scams this year, and the rise in fraud volume is due to its lack of audits and authentication of Defi projects. This is also why we need layer two solutions to help scale networks and secure users from frauds.
With Eth 2.0 taking so long, there is an increase in demand for other protocols to help with the scalability issue. This also creates more opportunities for Ethereum Layer 2 protocols to shine and prove how they can help solve the trilemma problem.
Rise of Ethereum Layer 2
The value proposition of layer 2 solutions is simple- cheaper fees, high throughput, and faster confirmation times. With more development taking place on L2, it takes some load off the main chain and increases the ecosystem’s overall interoperability. Some experts also believe that L2 solutions will be the main reason for Ethereum to win long-term. As Ethereum prioritizes programmability, someone else has to take care of throughput and scalability.
Scalability for each node is still a question mark, but the throughput is expected to increase to 2000-4000 per second when processed in layer 2. With Layer 2 providing solutions to each problem concerning Ethereum’s scalability, it is more confusing to build an interoperable system. What is happening right now is- each layer 2 ecosystem is individually testing its solutions with zero interconnectedness. There is no proper L2-L2 bridge to facilitate protocols with their weaknesses. To address this issue, we are seeing many L2 scaling techniques beyond solving just the scalability problem.
The value proposition of layer 2 solutions is simple- cheaper fees, high throughput, and faster confirmation times. With more development taking place on L2, it takes some load off the main chain and also increases the overall interoperability of the ecosystem. Some experts also believe that L2 solutions will be the main reason for Ethereum to win long-term. As Ethereum prioritizes programmability, someone else has to take care of throughput and scalability.
L2 Scaling Techniques
Payment (State) Channels
When it comes to state channels, the first name that comes to our mind is Lightning Network. With the help of this technique, they have successfully offloaded a majority of transactions from the main chain of the bitcoin network. These state channels also involve another subset called Payment channels, which facilitates data broadcast. Proper implementation of payment channels can allow networks to reduce transaction fees significantly and also lower on-chain stresses. These two factors can create many use-cases in the coming years.
Sidechains are another L2 scaling solution, providing an alternative for users to transfer mainchain tokens to the sidechain and then complete their transactions. This technique is implemented at scale in the Matic Network. The throughput increases vastly, reduces congestion, and doesn’t change the protocol of the main chain. Another advantage of a sidechain is that one can assign specific applications to match network demands, increasing efficiency.
This is one of the latest scaling solutions being built by having fundamentals associated with ZK proofs. In cryptography, we use these ZK proofs to record whether one entity has knowledge of owning a piece of particular information without revealing the actual information. In a way, this is similar to Plasma, a framework that allows the creation of child chains, as it allows side chains to be processed off-chain.
But it varies in terms of the number of transfers per transaction. Unlike Plasma, ZK Roll up can combine hundreds of transfers into one single transaction. As a result, we see many protocols follow gasless transfers from L2-L1.
Why so much confidence in Polygon?
Polygon made huge strides in this bull run, all thanks to its rise in popularity in India- it is now in the world’s top-15 crypto tokens. This multi-chain ecosystem gained nearly 1102% in terms of total value locked. And at the time of writing this article, it stands at $10.3 billion. Polygon’s growth is mainly attributed to its interoperability and scaling framework for blockchains that are in congruence with the Ethereum ecosystem.
Every major DeFi protocol- from Aave to Sushiswap is adopting Polygon because of its interconnected landscape. It allows developers to tailor certain characteristics of their blockchain networks, which then enables them to overcome some of their individual limitations.
Polygon’s Four-Layer Architecture
This four-layer system is composed of the Ethereum layer, security layer, networks layers, and execution layer.
The Ethereum layer is the first layer of the Polygon platform and is responsible for implementing smart contracts. It also takes care of communication between the Ethereum network and various other Polygon chains.
The security layer is another non-mandatory layer, taking control over a set of validators and making sure (periodically) they meet certain standards. Being an additional layer of security, it also takes care of chain validation, rewards, and shuffling.
Polygon Networks Layer
This is a mandatory layer in Polygon’s four-layer architecture, as it is responsible for sending and receiving arbitrary messages. It also has other functions- transaction collation, local consensus, and block production- to handle each community.
Once a smart contract is agreed upon, the execution layer is responsible for final implementation. Execution is based on a sub-layer called Execution logic, which includes a state transition function built specifically for polygon networks.
Even though Polygon is leading in the race of interoperability solutions, we still have not seen it go fully live with ZK-rollups and optimistic rollups. With that being said, Polygon will be a fascinating project in the future because- it is currently not having any trade-offs in terms of EVM compatibility, payments, and cost of decentralization.
Cryption Network is a new-age Defi product aiming to provide user-friendly products and help retail investors be a part of mass crypto adoption. Cryption mainly addresses three problems in the current Defi space-
- Lack of good UI
- Complexity of Crypto & Defi space
- High gas fees & Scalability
The team working on the Cryption Network is planning to leverage Polygon to build a POS bridge that could facilitate asset/data transfer to the Ethereum chain. The exciting thing about Cryption Network is that users can swap their assets and get output tokens either through L2 or directly L1. This indeed emphasizes the power of interoperability between L1 and L2.
Cryption enables users with a multitude of features that allows them to have a great user experience. Some of the main Defi-products offered are:
- PolyDEX- L2 Swap
- Seer Prediction market
- Ether Rush
- Cryption Mobile App
- Defi Stack.
PolyDEX is a feeless exchange with an innovative type of yield farming called elastic farming. With the help of elastic farming, liquidity providers will never have to face the devaluation of their tokens. The distribution is done to increase the number of farm tokens when their value decreases to overcome a negative feedback loop. The same can be said when the token value increases.
Seer Prediction Market
The seer prediction markets will allow CNT holders to perform high-frequency trades with nominal gas fees. This is crucial to bridge the gap in Defi space, as other prediction markets rely on Ethereum to execute such trades, resulting in high gas fees for the user. The type of farming adopted by Cryption also solves the liquidity problem. You see, in most cases, prediction markets fail to settle the bets with timelines constantly shifting. That is not a problem with Cryption, as farming solves the need for liquidity.
The team is also planning to launch an app to provide a seamless user experience for new investors in the crypto space. It will be available on both Android and IoS platforms. Users can use the app to manage their portfolio and use it as a wallet. A dApp browser is also included for both Ethereum and Polygon networks.
Ether Rush will be an On-Off Ramp facilitating buying and selling digital assets at optimal times using in-depth algorithms to determine the best price. The team at Cryption considers Ether Rush as one of their most coveted products, and it aligns with their core values perfectly. The POC for this product is accomplished, so regulation and compliance needs are left to launch Ether Rush.
Why we are excited about Cryption
At GravityX Capital, we constantly support projects that have significant competitive advantages to take over a market sector. At the moment, we believe there are many gaps to be filled in the Defi space, and the only promising solutions that can get the job done are L2 platforms.
The team behind Cryption brings a lot of validity with their tech experience, and they truly understand what it takes to scale for mass retail adoption. The founding members have vast experience in dealing with blockchain projects. They have heavily contributed to the development of several crypto projects: OpenDAO, StackOS, and Bondly. With their background, we believe they have what it takes to unlock the full potential of Defi.
The platform also leverages new technologies to minimize or eliminate all kinds of barriers to entry. Cryption is also enforcing a mobile application to help users navigate in the most straightforward manner. NFTs will also be launched on Cryption, so it will be a full-featured DEX on L2 to provide staking, farming, and other collectible features.
With that being said, we at GravityX expect Cryption network to play a huge role in Defi space and mass crypto adoption in the coming years, especially in developing countries like India.
With L2 solutions like Polygon expanding in terms of liquidity and user growth, we will need a network like Cryption to provide products that elevate the overall experience on a crypto platform. We rarely see a project allocating over 60% of total tokens for the community, which shows us they follow sound tokenomics principles to ensure sustainable growth. We have also seen blue-chip assets like Aave launching on Polygon, helping with liquidity and partnerships, so the L2 ecosystem will keep extending its limits to fulfill market demand, and Cryption network will play a vital role.