Part 2: Layer 2 Scaling on Ethereum

As Ethereum continues to scale, more use cases are unlocked. Find out how the scaling revolution is evolving Ethereum

DeFi Slate Fam:

While most of the attention, and rightfully so, of Ethereum layer 2 has been on the direct impact for users, lowering fees and speeding up transactions; an underrated side of L2 is that it it enables applications that did not work as efficiently on Layer 1, due to their need for high frequency transactions.

Today we will take a brief look at the types of applications that will most benefit from this transition.

Enjoy!

- Roshi, DeFi Slate DAO Contributor


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Impact of L2 on Ethereum-Based Applications 

Guest Post: Roshi, DeFi Slate DAO Contributor

Decentralized Derivatives Exchanges 

MCDEX is a prominent decentralized derivatives exchange set to benefit from L2

No need to get too detailed about the ins-and-outs of derivatives markets here, but for those totally unfamiliar, derivatives are *basically* the gamification of finance. While derivatives definitely do have some real world purposes, when it comes to crypto the majority of those looking to currently trade derivatives on Ethereum are just advanced traders. 

For a derivatives exchange to work, there typically are a lot of transactions involved. Likely 10x more than a typical exchange like Coinbase or Uniswap. This is because most assets on a derivatives exchange are only meant to serve a short to medium term function. If you wanted long term exposure to an asset you would simply buy it (in most cases). 

Additionally, how derivatives systems work in general is what causes the most transactions. For example, with options, a key pillar of derivatives, contracts are only set for a certain period of time, usually monthly. That means for options alone you need to pay a gas fee every month just to hold the asset. 

One interesting aspect of how on-chain derivatives could impact the market as a whole is that it is another huge capital source to onboard into crypto.  The derivatives market as a whole is estimated to be around 10-12 Trillion USD, and if derivatives markets work more efficiently on-chain than off-chain, it is possible we see segments of that capital turn towards crypto rather quickly. 

For those interested in learning more about derivatives, we will have a complete primer on derivatives and how they work on Ethereum coming out soon. 

Games 

Axie Infinity is a leading game built on Ethereum

This is an exciting one. With game developers only recently catching on to how blockchains can transform in game economies, in the next couple years we will see an explosion in blockchain based games. There are already pioneers like Axie Infinity, but they are the first of many. 

However, just like with derivatives, for the system to function there is going to be a lot of transactions. Currently games built on top of Ethereum face a high barrier to entry that drives away the target audience. Once that price to enter disappears it is likely that the space will gain significant traction. The concept of actually owning your in-game assets is so much better than the alternative once you’ve actually tried it. 

In the same way that derivatives can help onboard capital to crypto, games can help onboard people to crypto. Games that allow you to earn cryptocurrency will inevitably lead people to learn about cryptocurrency. And as we all know, once you go down that rabbit hole there is no going back. As more and more young people learn about it and it becomes second nature to them, that will play a huge function in the standardization of Ethereum and other networks. 

NFTs 

Beeple’s “Everydays” piece that sold for $69 Million

While it may seem like NFTs have already had their moment, for their future development it is necessary that they are not reserved for creators that are selling their work for thousands of dollars. Currently prospective NFT creators are hit with both a gas fee to mint the NFT and sell it. For creators who are financially struggling even this can be unfeasible. 

The future of NFTs looks like every creation that a creator releases to the public being minted as an NFT. Right now only those who are already successful are capable of doing this. An artist on the come-up might be leaving many sales on the table in current conditions because the price to buy it doesn’t exceed the cost to create and send it. For example a beginner might be able to sell several NFTs for $20 but none for $150. Well if the cost to mint and send the NFT is $150 then it doesn’t make sense for the creator to participate in the marketplace. This pretty much flies in the face of the entire ethos of crypto. 

Conclusion

While the application types we have highlighted here are the most prominent examples of how applications can transform with L2, we will likely see the effects of L2 pull at how every current application functions. For example, will non-existent fees cause more day traders to start using Uniswap? How will that affect the application as a whole? Like I said, these scenarios can be thought up for basically all applications. It will be incredibly interesting to see how it all plays out. 


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⚠️ DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. At certain points throughout this post, we might get commission for promoting certain projects, if this is the case we will always make sure it is clear. We are strictly an educational content platform, nothing we offer is financial advice. We are not professionals or licensed advisors.


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