Solutions that better balance of composability, security and speed will be a key innovation in future as many users must currently weigh tradeoffs, executives say
Multicoin Capital managing partner Tushar Jain revealed that his firm has a big bet on layer-1 Solana
Layer-1 blockchains are currently more reliable than the layer-2s built on top of them, argued Multicoin Capital managing partner Tushar Jain, but there exist tradeoffs between all these solutions.
“The biggest trade-off of the approach that Ethereum is taking is that it breaks composability…when you go to different shards, or if you go to different rollups,” said Jain, speaking at Blockworks’ Digital Asset Summit (DAS) in New York City this week.
Layer-2 is a term for solutions built to scale an application by handling transactions off the layer-1 Ethereum mainnet while utilizing the decentralized security model of that mainnet. But Jain argued that in times of high market volatility, it can be hard to move assets this way.
“The throughput of the entire sharded system, or the entire layer-2 ecosystem, gets bottlenecked down to the throughput of that base layer that is actually communicating everything,” Jain said. “You have some ideas of cross-chain layer-2-to-layer-2 bridges, but those are not great…Those types of bridges are not reliable when you need them the most.”
Protocols like Hop are designed to solve this problem by allowing users to move assets between Ethereum’s layer-2 ecosystem and the layer-1 mainnet quickly and in a trustless manner.
The Investment Case for DeFi
Jain was joined on the DAS panel, called “The Investment Case for DeFi,” by Michael Shaulov, CEO and co-founder of Fireblocks; Ben Forman, founder and managing partner at ParaFi Capital; and Jonathan Steinberg, founder and CEO of ETF issuer WisdomTree.
Speaking to tradeoffs between the competing solutions, Forman said that certain financial applications may require more scalability and less trust, while others demand a higher level of trust.
“You’re probably more comfortable holding significant amounts of value — so hundreds of millions, billions — secured by the very decentralized and secure Ethereum L-1 versus having it on an L-2 environment,” he explained. “Then there are applications like lending and borrowing that may not require as many transactions per second versus trading, that likely do, so it just depends on which type of DeFi application you’re looking at.”
A report published by Galaxy Digital on Friday about the layer-2 ecosystem noted that layer-1 blockchains have not been able to scale significantly without sacrificing decentralization, a feature that defines the value proposition for the entire crypto economy.
Whether for scaling payments through state channels like Bitcoin’s Lightning Network or computation through rollups like Ethereum’s Arbitrum, Galaxy argues in the report that a layered approach to scaling brings the most benefit with the least compromise on base-layer security, resiliency and decentralization.
“There’s this triage of composability, the speed and the trust and so far we see that people give up on one or two of those to achieve the third or two out of three,” Shaulov said during the panel. “Eventually we somehow need to find the solution that satisfies all three.”
Avalanche, Cosmos and Solana, oh my
Meanwhile, competition within the layer-1 space alone has heated up of late amid a higher demand for transaction prices and throughput that are lower and faster than what the Ethereum network provides. Such platforms include Cardano, which now has the third-largest coin by market capitalization, as well as Solana, Polkadot and Avalanche.
“We’re seeing a lot of different layer-1 chains out there, and they’re all choosing different tradeoffs,” Jain said during the panel. “These things aren’t just better than the other.”
The Multicoin Capital managing partner called Solana one of his firm’s “big bets in this space,” noting that its maintaining composability is critical for a successful DeFi ecosystem.
The Solana blockchain suffered a major outage on Tuesday, but recovered the next day. Its native token, $SOL, was priced at $144.50, which was down 8% in the last 24 hours, as of 1 p.m. eastern on Friday, according to CoinGecko.
John Wu, president of Ava Labs — the company behind the Avalanche blockchain — said at DAS that the new generation of layer-1 protocols competing with Ethereum will be “where the economies will be” due to the transaction speeds and lower costs.
Avalanche announced Thursday that it had closed a $230 million token sale in June, led by Singapore’s Three Arrows Capital and Polychain.
The future of DeFi?
The innovation and efficiency of traditional financial services on the blockchain will transform the industry, but it will require staying within the bounds of responsible regulation, Steinberg said.
Steinberg in 2006 founded the ETF issuer, which now has about $75 billion in assets under management. The executive compared the digital assets space to the ETF market, which he noted in 1999 had $40 billion assets and today approaches $9 billion.
WisdomTree’s CEO added bringing assets such as Treasurys and gold to the blockchain within the foundational regulatory principles of traditional finance will be a “transformative moment.”
“If we are able to create the innovations and the efficiencies possible on distributed ledger, we will I believe pick up the users, because it will be the better investor experience,” he said.
Forman said the term DeFi will disappear in ten years as crypto banks, traditional banks and fintech companies build on top of blockchains to provide access to all types of financial products.
“Everything will just be finance,” he said. “You’ll go to Compound to do your lending and borrowing, you’ll go to Uniswap to do your trading, you’ll go to Nexus Mutual to do your insurance, and the complexity of all that is abstracted away from the end user.”
Amid recent high NFT volumes, Shaulov highlighted the immense potential of monetizing digital creations.
“You can just sort of imagine how anyone can upload a TikTok movie, get an NFT, go to Compound and leverage that to borrow against what they just recorded,” he said.
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