Decentralized Finance is one of the biggest boom during the 2020 and 2021.

Decentralized Finance is one of the biggest boom during the 2020 and 2021. In just a few month in the 2021 the total value locked (“TVL”) grew to $52B. Compound being the leading in the TVL with $9.48B at the time of the writing. On top of that a lot of DeFi token has appreciated attracting more investor to join the DeFi space. In this article we are going to talk about the current scaling issue.

Scaling of DeFi

Most DeFi are built on Ethereum due to the robust nature of solidity and the community Ethereum has. The most common solution talked about are the Layer 2(“L2”) scaling and sidechains for Ethereum.

Other solution for example would be moving to another blockchain protocol such as Binance Smart Chain or Tron. We will talk about different protocol in the future post.

What is layer 2?

Layer 2 refers to a secondary framework or protocol that is built on top of an existing protocol or known as the Layer 1. A lot of work done in the Layer 1 now can be moved to Layer 2 to reduce the workload on the main chain thus scaling the blockchain. The main job for layer 1 would be providing security and layer 2 offers high speed of transaction.

What is sidechains?

Sidechains is a mechanism that allows mainchain token to be transfer securely on to a separate blockchain and then be moved back to the original blockchain if needed. The two-way peg enables interchangeability of assets at a predetermined rate between the parent blockchain and the sidechains.

Conclusion

In the case of sidechains it is useful when there are other use case exceeding sending, receiving or exchanging. The main reason being that they are be done on L2 easily and in a more secure matter. When using sidechains it is more often that the user would have to trust the smaller governance with their token, thus having more risk when locking mainchain token to exchange to sidechains token.

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Neukind Hong Kong

Neukind Hong Kong

We are a private fund base in Hong Kong. Visit us at https://neukind.hk

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