With DeFi’s explosive activity over the last month, Ethereum users have been struggling under the weight of transaction fees. Consequently, expert crypto traders are forced to rethink strategies and newcomers have more than likely thought twice about participating.
You can try to grow sustainable crops in volcanic soil, but you won’t get very far while it’s still smoking. Reflecting on the recent period of high Ethereum transaction fees gives us an opportunity to talk about ways that networks and DeFi services that rely on them can meet the challenges of the future we are all striving to build.
How We Got Here
In 2017, the meteoric rise of Bitcoin resulted in ever-rising fees and the contentious Bitcoin Cash fork. On Ethereum, one fast-forwards past the Cryptokitties craze to the DeFi age, and observes that simply making a deposit to a farming pool pushed transaction fees (“gas”) closer to $80 or more. With DeFi participants chasing ever-newer projects and more spectacular yield promises, transaction fees inevitably increased as traders one-upped each other for transaction priority. Even “gas futures” tokens like CHI and GST2, which enable users to “prepay” for gas by locking up ETH at current rates, appreciated about 15x over the last two months.
DeFi right now is both exciting and expensive. On the high end, users were paying large transaction fees to deposit stablecoins and provide liquidity on Curve Finance. Multiply this by two when users inevitably want to withdraw, add on several more transactions for converting wallet assets to stablecoins (and back again), approve contract interactions, and the costs add up quickly. Such costs are minimal for the six-or-seven figure whale, but the fish swimming upstream in DeFi often find themselves in an unwinnable situation. The $200+ round-trip ticket does not scale according to position size and a relatively small position is not likely to recover those costs.
There are a few solutions available, which fall into the broad categories of “Better Networks” and “Better DeFi Services.”
Some speculate that Ethereum’s DeFi frenzy is dangerous at its core, inspiring commentary from leaders and evangelists of other smart-contract-capable networks. In essence, over-crowded blocks coupled with over-leveraged loans could prove disastrous in the face of a flash crash or even modest-but significant drops, as Avalanche Labs CEO and IC3 co-director Emin Gün Sirer recently described.
There are already a number of existing and upcoming blockchains that similarly support the Ethereum Virtual Machine. The highly anticipated Avalanche blockchain is right around the corner, as is the Polkadot project. Algorand’s announcement of its DeFi plans was rewarded by a 20% jump in the ALGO token.
All of these innovations are fascinating to examine and have a lot to recommend them. That said, even amid all of this interest in new high-performance blockchain networks for DeFi, Ethereum still persists as DeFi’s home. This is likely to continue. As Yearn Finance founder Andre Cronje recently argued, DeFi exists on Ethereum simply because that’s where the ecosystem is built — it has the assets, tooling, and infrastructure. This is to say nothing of a passionate enthusiast media, popular user groups, and so on.
So, DeFi isn’t moving off of Ethereum any time soon. What options are on the table?
Ethereum 2.0 — The state-of-the-network should serve as a call-to-action for the completion and deployment of the long-awaited Ethereum 2.0 upgrade. This network upgrade will integrate the current Ethereum blockchain into a Proof-of-Stake consensus model optimized for performance and also feature sharded chains, which represent multiple blockchains running in parallel. We can also rest assured it will be well-tested — if it’s not ready, it’s not ready. (Vitalik Buterin recently commented that Ethereum 2.0 deployment is proving “much harder” than originally thought.)
Data Layer Improvements — In the meantime, there is a growing ecosystem of data layers deployed on top of and alongside the Ethereum network with the purpose of improving scalability.
Vitalik recently recommended Loopring along with zkSync and OmiseGo as a solution for addressing high gas prices. Loopring and zkSync, in particular, utilize a technology called ZK-Rollups. Under the ZK-Rollup model, users move coins through the on/off ramp, and once they are on, can send transactions and perform activities off-chain. Several hundred token movements are bundled and broadcast as a single transaction to settle the payments.
Another data layer improvement is the xDai sidechain, which has received praise throughout the Ethereum community recently. The project boasts five-second transaction times and 500 transactions per every $0.01 in fees. The downside to xDai is that only DAI can be bridged over to the platform.
There’s also the Raiden Network, a layer-two network of payment channels designed for off-chain distribution of ERC-20 tokens. In essence, it’s “Lightning Network for Ethereum.” However, the major shortcoming to state channel solutions, Raiden or otherwise, is the uptime requirement to use them — users must open payment channels and keep an active node to utilize them. The infrastructure cost arguably overshadows the transaction savings.
Better DeFi Services
But eagerly awaiting improvements in smart contract networks does not mean that we should focus any less on improving the DeFi services themselves. Again, there’s another important lesson when you look back at when Bitcoin fees were at an all-time high. For example, exchanges compensated for high transaction fees by batching transactions and taking on other strategies to cut their footprint drastically, even as fee-saving protocol improvements like SegWit emerged. In short, the services available on DeFi have to improve while reflecting the reality of the network that currently exists.
DeFi is presently the domain of passionate enthusiasts who tolerate — or even pride themselves on the mastery of — labyrinthine user experiences. But meaningful decentralization requires adoption beyond these enthusiasts.
Ironically, the answer might lie in looking at storied financial institutions (“CeFi”) like Vanguard and Fidelity. As any U.S. citizen who has held a 401k retirement plan has experienced, your fund choices very often state the objective and asset category right there in the name (e.g., “Global Opportunity Aggressive Equities Growth Fund” or “Low-Risk Municipal Bond Fund”). You deposit your money (often mechanically) and are maybe moved to check it once a year while a group of computer-assisted fund managers handles the rest.
Similarly, we should be looking at automated lending pools where the steps are:
- choose objective (“low-risk”),
- choose pool, (“WBTC”) and
- send ETH.
In such a scenario, a user doesn’t need to know DAI from Aave or even what roles they play in that user’s goals — everything is boiled down to objective and asset. Further, instead of footing a $200 gas bill, users send one transaction in-and-out. Funds in the pool are combined and utilized in the same umbrella process. No more DIY DeFi’ers one-upping each other to get their dozen-plus transactions confirmed first, thus further improving network congestion This “World of Funds” would also deliver a better and more welcoming surface area for DeFi integration into wallets and other edge components of the crypto ecosystem. Result: The further expansion of both DeFI and the cryptocurrency category writ large. (Worth noting that Zapper’s strategies dashboard and Yearn’s vaults are early players in this regard, but they are very much run-and-gun approaches. That crypto-analogue to the “Vanguard-like” experience is still sorely missing.)
At Bloq, we’ve been investigating what we now call “DeFi” since the 2017 introduction of Metronome ($MET). As our core business of blockchain infrastructure expands and grows, DeFi remains an area of intense interest and development. The gifts of pricey gas accrue to far more participants than Ethereum miners. They will inspire services and products that advance the category as a whole. Building on today’s networks, creaking as they are under the strain, can only mean that today’s DeFi products will run better — and yet-unimagined capabilities will be developed — when advances in scalability and user experiences emerge.