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The outlook for multi-chain and DeFi: Looking forward to the unknown

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What is the status and future of DeFi and the urgent problems of multi-chain in the future

Multi-chain and the Maturing DeFi World

Original source: Unitimes

Scalable blockchains are vying for DeFi market share.

The battle to build scalable solutions inside and outside Ethereum is heating up. In early 2020, ethereum fees were not an issue for most DeFi users; Then DeFi Summer began a year of crazy growth that resulted in higher and higher Gas charges on Ethereum. The high Gas fees on Ethereum are starting to drive every developer and investor to look for faster and cheaper blockchains to lower costs for users. Since then, the race has intensified as dozens of development teams build scalable solutions to appeal to billions of users.

This year, there has been sudden interest in The Ethereum side chain, L2s, and the faster L1s blockchain, although this is nothing new to industry veterans. In fact, over the last five years,The development of faster and cheaper blockchains, and the "Bridges" that connect them,Has been the largest share of Crypto venture capital.

So while bottlenecks were foreseen in the current environment, it was not clear what the future of products on blockchain would look like. Over the past few years, there has been a sense that people have been busy building infrastructure without a clear idea of what will run on top of that infrastructure. However, as the market matures, we now have a clear understanding:The market needs fast blockchains to extend the use cases around staboins, DeFi, NFTs, and DAOs.

The exciting thing now is what all this means for decentralization, ethereum's dominance and regulatory attention.

Scalability Competition & NBSP;

The current scalability race is:

- such asBinance Intelligent Chain (BSC)) and & have spentPolygon Etc.Side chainHas seen rapid growth, but with it, concerns about their decentralization and security. Polygon is currently trying to fix these issues, while BSC is not doing anything about it; In addition, Fantom is on the rise.

- The etheric fang L2s & have spent It's finally here.There have been a lot of unrealistic hopes and release delays, but...Arbitrum, dYdX and Optimism Having proved that the L2s era has really arrived, the total value of locked positions (TVL) in the Ethereum L2s network has passed $3 billion at the time of writing. And these L2s solutions will be followed by more L2s solutions for Ethereum in the coming years, not to mention Eth2 itself.

- Solana The sudden emergence of the most feared "Ethereum killer" has become a favorite of traders eager to tell. Solana has attracted a number of financial stakeholders and validators, subsequently building liquidity and expanding network capacity.

- Terra The establishment of a separate DeFi ecosystem centered on stablesoins, whose stablesoins are integrated into the underlying blockchain network, could also power synthetic assets.Celo Is another blockchain network focused on the mobile payments market that has also had some success recently.

- such as & have spentAvalanche Blockchains compatible with EVM (Ethereum Virtual Machine) have shown that EVM's moat is much wider than Ethereum's, and that well-funded blockchains can use simple bridging interfaces and liquidity mining to develop an ecosystem.

Above: Growth trend of DeFi total lock-up value (TVL) in networks other than Ethereum since 2021. Image source: DeFi Llama

Unlike in past years, the discussion around these competing chains is no longer a hypothetical brawl about transaction throughput per second; Instead, the focus is now on thatCompetitive chain DeFi market share.The DeFi industry is maturing, and for the first time in history there can be a legitimate dialogue between these competing chains about DeFi market share (TVL is a good, if imperfect, indicator in this regard).

Ethereum is still king.

Image above: Ethereum L1's TVL (dark blue area) compared to other networks' TVL. Image source: DeFi Llama

It's easy to overlook how dominant the Ethereum mainnet has been in just a few years. No other smart contract platform has organically created its own ecosystem.TVL growth on almost every other competing chain can be linked to projects and ideas pioneered on Ethereum.

Ethereum's biggest moat is the nearly $500 billion in assets that call ethereum home.On-chain assets are the most precious commodity for any emerging DeFi system, and Ethereum has a large, diverse asset base,This includes ETH, stablecoins, and other ERC-20 tokens -- not to mention NFTs.

These assets are bundled with Ethereum, but most competing chains have found that, compared with retail and institutional investors with little knowledge or experience,These competing chains make it easier to attract money from Crypto diehards and DeFi veterans in the Ethereum ecosystem.Which is why the first piece of infrastructure that any competitive chain should build isBridge to Ethereum.

A bridge is a missing piece of infrastructure.

While investment has been pouring into new (competing) base-tier blockchain and Ethereum capacity expansion solutions, there is little toHow to connect these networks is still less of a concern. However, now that these blockchain networks have found product market matches around financial services, liquidity and capital efficiency become critical. This means they need fast, decentralised and permissionless "Bridges".

Dmitriy Berenzon, research partner at 1KXNetwork, has written an excellent article on blockchain "Bridges" and their advantages and trade-offs.Into the multi-chain era, this article read the blockchain "bridge" and its design tradeoffs"), so we will not repeat it in this article. Here are two follow-up comments: & NBSP;

- Capital efficiency is the most important component of success (second only to safety). It is now clear that large amounts of capital will drive fast, cross-chain Bridges.

- Cosmos was designed for this multi-link era. Cosmos, an older Crypto project with an inter-chain ecosystem vision, is finally coming to fruition. The new cross-chain network communication design looks remarkably similar to Cosmos' IBC (Inter-chain Communication Protocol) design.

Five burning Questions (and early answers) for the future of multichain.

> > 1. Can ethereum mainnet maintain its leading position in DeFi TVL market share?

Currently, ethereum L1 has DeFi TVL, according to DeFi Llama; 75% market share. Even if its Gas bills continue to rise, it's hard to imagine any major liquidity on Ethereum going away. Ethereum-based lending platforms seem firmly rooted in ethereum; Large liquidity pools, including those of AMMs and lending platforms, will likely stay, while liquidity providers continue to offer cheaper services in other low-cost blockchain networks. Here are our predictions:Ethereum will remain the largest chain, but may no longer have the lion's share of the market. By the end of 2022, Ethereum's DeFi TVL market share will be around 35%.

> > 2. Application-specific chains in the future. Composition?

To be honest, we were skeptical of this assumption. But dYdX's runaway success with L2 has changed things. Will composability continue to be the magic wand for blockchain ecology, as everyone claims? Or can the functions of different chains be abstracted from the front end? The success of high-performance trading protocols like dYdX shows how Ethereum's moat extends beyond EVM and is the best response to Solana's encroachment by Ethereum maximalists.

Outside of Ethereum, our forecast is that approximately 15% of DeFi TVL market share will be in application-specific chains (chains based on Ethereum L2 and Cosmos) by the end of 2022; 20% of EVM chains outside ethereum; (including BSC); 15% in Ethereum EVM L2s network; 10% is in the restNon-evm general-purpose computing networks (mainly Solana); The remaining 5% is locatedOther cosmos-based chainsIn the.

> > 3. Will cross-chain transactions be dominated by centralized entities?

For now, most Bridges rely on a small group of validators. While it's nearly impossible to reconcile two different blockchain networks and their consensus mechanisms, there's nothing that a centralized middleman can't solve. Large liquidity providers will use untrusted protocol "Bridges" to charge individual users for quick exit services. Centralised exchanges (CEXs) could act as a "bridge", and one could argue that Binance has already achieved this. Here are our predictions:Yes, centralised entities will dominate cross-chain transactions for a while; Decentralized alternatives will take time to develop.

> > 4. What about cross-chain governance?

Currently, decentralized autonomous organizations. The developed decentralized exchange Swapr has been deployed in Three networks, Arbitrum One, Ethereum Mainnet and xDai. Once the issue of cross-chain liquidity is resolved, the next issue is cross-chain governance. Aave seems to be the furthest along. Here are our predictions:This is a difficult problem to solve and will rely on slow cross-chain communication as governance transactions are likely to be slower. We hope to check back in a year to see if these predictions are close to reality.

A final consideration, and one of the hottest topics of conversation at the moment: regulation. It's unclear whether the multi-chain future will draw the ire of regulators, but what else isn't? It is hard to imagine regulators chasing the bottom chain. Instead, more and more regulatory scrutiny is focused on the front end, so the most successful scalable blockchains may eventually materializeThe most decentralized front end, but also censorship resistant.

This will require a new decentralized technology stack, another stage in the maturation of Web3, showing that DeFi needs more than just a funding channel.