The problems behind rapid DeFi growth and Ethereum 2.0 launch

The launch of Ethereum 2.0 is bound to support DeFi growth, but would it be capable of handling the pace at which DeFi is growing?

The “Summer of DeFi” might be over, but a looming event will give DeFi engineers a great incentive to crank up their “lego” innovation model and build more decentralized finance products: the Ethereum 2.0 upgrade.

The imminent launch of Ethereum 2.0 will have a huge impact on one of the most important components of the project ecosystem — decentralised finance. DeFi has already grown tenfold in 2020, but the prices of DeFi protocols have fallen markedly in recent years. According to many experts, the launch of Beacon Chain and the Proof-of-Stake introduction will turn things around on the market.

Steven Becker, president and chief operating officer of DeFi project MakerDAO:

“Eth2 is designed to optimize the network architecture without causing decentralization, security and scalability to suffer. Upgrades should enable Ethereum to scale to thousands of times its current capacity while remaining both secure and decentralized… which will be a boon for DeFi.”

However, one problem remains — DeFi is growing so fast that even the new scalability possibilities after upgrading to Ethereum 2.0 may not cope with the influx of users of decentralised protocols, contracts and applications. This is the opinion of Sam Bankman-Fried, CEO of FTX.

Jay Hao, CEO of the OKEx cryptocurrency exchange:

“We know already that it will be faster than the current chain, but we also know that it will be rolled out in iterations and that, to start with, may only be 100 times faster, perhaps a little more. We are already seeing other many blockchain solutions that can produce a faster throughput than this.”

Vitalik Buterin, the creator of Ethereum, claims that the crypto community is not yet fully aware of the full benefits of Ethereum 2.0. According to him, the upgrade of the cryptocurrency will be a landmark event that will take it to a new level.

Patrick Collins, developer advocate at Chainlink Labs:

“In a way, I see ETH 2.0 staking as a DeFi protocol in itself. It will be interesting to see projects incorporate staking. […] The tricky part would be finding out how to do this without hurting the security of the network since massive pools controlled by single entities is not ideal at all.”

According to the Ethereum website, the capacity of the network will increase, improving the transactional speed by extending the network to 64 blockchains referred to as shard chains. Unfortunately, shards chains at an early stage of their development will not support smart contracts or user accounts, and these are important components for the development of the DeFi ecosystem. There is also the downside of the coin — too rapid development of DeFi a few months ago led to an increase in fees on the Ethereum network and put the ecosystem development a few steps backwards.

The community response to the launch of Ethereum 2.0 is well characterized by the survey on the Twitter page of renowned crypto enthusiast Justin Drake. The survey was completed with 3609 participants, 50% of whom said they would not participate in the launch of Phase 0 of the upgrade and only 4 per cent said they would transfer funds to a deposit contract.

One big problem is the amount of money that needs to be spent on staking. In total, the user will need 32 ETH to become a validator. As of today, this is approximately $14 600 — too much for most crypto enthusiasts.

Another major inconvenience is that the funds will be blocked for up to two years, meaning that users will not be able to withdraw their cryptocurrency for that period. It should be noted that such restrictions will remain in force until the project is fully launched — then the coins will be withdrawn without any problems.

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