In the past period of time, DeFi has shown us the congestion of Ethereum, and the gas fees are incredibly high. This is just a superficial phenomenon from the perspective of user experience. Its deeper meaning is that different DeFi protocols are competing for Ethereum's block space, which is a zero-sum game.
When the blocks are full, the increase in transactions of any protocol means the decrease in transactions of other protocols. As newcomers increase, competition becomes more and more fierce, and finally some mining transaction fees reach hundreds of dollars. In the first few months of the popularity of DeFi, Ethereum's transaction fees have surpassed Bitcoin to rank first in the crypto circle. Even if DeFi cools down today, its annualized transaction fees are not far behind Bitcoin.
In the case of a hot market, the entire DeFi market will be very competitive. Since the transaction throughput is fixed, the value of the DeFi market as a whole cannot continue to rise. This is because it will limit the transaction volume of the overall DeFi project, thus affecting its sustainability.
If DeFi’s Maker, Uniswap, Zerone, Compound, Curve, Synthetix, etc. cannot be combined, then how can aggregation protocols help people get higher returns? How can DeFi innovation be promoted?
Without composability, DeFi loses its original meaning. Even if it achieves extremely high transaction throughput and extremely low fees, its value will be greatly reduced without interoperability.
This situation means that, in the end, only a few Layer 2s are meaningful, which is similar to the winner-takes-all network effect of the public chain. Because projects using the same Layer 2 technology are more likely to interoperate. This means that most of today's Layer 2 technologies will eventually be short-lived, so when investing in this track, it is very important to consider how to bet and when to exit.
If mainstream DeFi projects all adopt some kind of layer 2 technology, this layer 2 technology may become the de facto layer 2 technology, and other layer 2s may gradually withdraw from the stage of history (game layer 2 may be an exception). This is similar to the public chain. Composability and liquidity itself force other projects to make choices. If projects such as Maker, Uniswap, ZERONE, Curve, Synthetix, Aave, Compound, etc. all adopt some kind of Layer 2 technology, then other projects will have to stand in line. Even if these projects will not adopt the same layer 2 solution at the beginning, they will eventually go on the same path over time. In the adoption of Layer 2 technology, the choice of DeFi Lego, which has a liquid foundation, is decisive.
Although there are many Layer 2 technologies, each with different trade-offs, the most important point is still security. If there are too many trade-offs in this regard, it will eventually become a transitional Layer 2 technology, or even no transitional opportunity.
