Understand the relationship between Ethereum 2.0 and DeFi in one article

Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

, Author: Haseeb Qureshi, Compilation: Overnight Porridge, published with permission.

Ethereum is very crowded today, even more so than at the height of the ICO bubble, which is impressive, but also worrying!

We are still some way away from ushering in Ethereum 2.0, but today the island of Ethereum 1.0 is already overcrowded.

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(Picture: Ethereum 1.0 as depicted by the artist)

Let's talk about this idea.

Ethereum 2.0 will create a set of shards that work like a loosely connected blockchain. But all DeFi applications will end up on a single shard because they all want to cohere together.

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(Picture: DeFi shards will also be crowded islands, but now they are bigger)

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Cities, Suburbs, and Farmland

Imagine that one day, Ethereum 2.0 launched a complete smart contract function. On the first day it will be empty, like a fresh and untouched landscape. Then eager Ethereum 1.0 settlers will be dispersed to various shards.

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(Picture: The first day of full implementation of Ethereum 2.0)

In cities, people live and work together because they benefit from coordination and proximity. And as a price for increased productivity in urban life, these settlers pay higher rents and suffer from increased congestion (in Ethereum, high gas prices).

But it's worth it! These early cities were centers of commerce, which may have been too expensive for most people, but that was okay, those who benefited most from being near a center of commerce were incentivized to go there.

Therefore, the first city in Ethereum 2.0 is likely to be a DeFi shard.

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This DeFi shard will be where the main DeFi protocol settles. Maybe there will be a major financial shard, like London, or two city shards with their own specialties, like New York City and Chicago. My hope is that if there is a second city shard, it will be used for centralized transaction settlement, separate from DeFi and all its chaotic components. City shards will be expensive and high throughput, carrying high value transactions (otherwise the gas cost would be too high).

But isn't that scary? Isn't that what we want to avoid? Now normal people can't afford this kind of DeFi sharding at all!

But wait, the other shards won't be empty either, most people will live on the outskirts of the city. You don't need to live in Manhattan or make the occasional trek to Manhattan when you want to buy something exotic. Most of the time, you'll be fine living on another shard, and when you really need a DeFi shard, it's just a few minutes of cross-shard transactions.

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Where do most people live?

Suburbs are places where many people live at a relatively low cost and have access to decent services, and while it’s not as good as a city, it’s good enough for most people’s needs. If you want to do something fancy like take out a flash loan to refinance a multi-million dollar Maker vault to enter a recursively leveraged Compound position, well, you probably have to take the train to the DeFi shards. Make it happen.

But if you want to do something simple like swap ETH for DAI or buy some WBTC at your local corner store, it's easy. Almost every ERC-20 will be tokenized across shards and available on the outskirts, and there will be local MMs for the most popular tokens and simple applications. Like in real suburbs, most suburban shards look pretty much the same.

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(Picture: Blockchain suburbs will be where ordinary people live)

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(Image: This is perfect for storing my homomorphically encrypted supply chain data!)

If there is uneconomical polluting activity in a city or suburb, then bring it to the country. There are no DeFi services, and no exchangeable tokens. No one will bother. Farmland sharding can achieve the high throughput you are satisfied with, and it can carry low-value transactions.

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If so, the idea of ​​DeFi in Ethereum 2.0 tells us two things.

First of all, there will be congested shards on Ethereum 2.0! And the most congested shards will be the DeFi shards with high value due to composability. Nonetheless, DeFi will also scale across shards so that it can provide some ancillary services in suburban shards, similar to a local branch of a national bank.

But sharding does not mean that activity will be evenly distributed among the shards. Not only is it impossible, but it's also economically stupid. Let high-value businesses move to cities, bored families move to the suburbs, let farmland do its thing, away from valuable real estate.

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(Graph: Heterogeneity = Economic Efficiency)

(This also gives you an idea of ​​why programmatically load balancing across shards is ill-advised! Let's assume the protocol and contract deployers are making reasonable choices about where to live. Moving businesses out of city centers, It would then be a catastrophic mistake to port it to farmland to “balance the load on cities.”) You can think of sharding as offering a similar vision of interoperability to Cosmos or Polkadot. There are many different blockchains, each specialized to achieve a particular economic balance, with highways connecting them all. In the case of Ethereum 2.0, all shards will speak the same language, share the same tools, and benefit from the large community Ethereum has built.

Ethereum 2.0 will be a huge and challenging vision, and it will face a lot of execution risk. But at this point, I don’t think it’s possible for Ethereum to lose its status as the “biggest city in DeFi”. It's already the Wall Street of the cryptocurrency world, and it doesn't look like any contender can challenge its dominance.

In the meantime, are we pinning our scaling hopes on Layer 2? I see these as shopping malls built on top of Ethereum.

They help, but probably not enough. Impatient builders may build makeshift suburbs and farmland around Ethereum 1.0 via bridges to other blockchains. In other words, if Ethereum 2.0 is taking too long, you can choose to outsource your small city to another Serum-like blockchain, or wait for the Cosmos/Polkadot interoperability story to materialize.