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L1 and L2 Battle for DeFi Dominance

L2 solutions have been the stuff of dreams since Lightning Network first proposed improving Bitcoin payment transaction speeds. Despite still not coming to fruition, the idea itself was valuable. The notion behind L2 is to leverage the security of the main chain while adding higher transaction throughput at lower costs.

For Ethereum, the DeFi boom created problematic congestion levels on a network that can only process tens of transactions per second instead of thousands. This catalyzed enormously high gas fees for single transactions that temporarily took the wind out of DeFi’s sails.

The result has been dozens of proposed scaling solutions and the implementation of different methodologies, among them Plasma, Sidechains, Rollups, State Channels, Validium, and hybrid solutions. Yet, the vastness of these dozens of solutions have exposed a critical weakness: interoperability.

L2 solutions aren’t highly interoperable, meaning that the composability component, or ability of different protocols to communicate with each other seamlessly, can be lost in the L2 ether. L1 solutions, by comparison, can communicate between multiple protocols and call upon their smart contracts to construct brand new financial products.

This interoperability problem also extends to liquidity and ease of use. Ethereum-based protocols currently share all the liquidity on L1. However, with L2 solutions, liquidity is also split between multiple L2 protocols instead of solely existing on L1, creating fragmented liquidity that cannot move freely between layers. The same is true for user friendliness. Users operating on L2 will need to move back to L1 to move to another L2 solution, creating unnecessary headaches, fees, and friction within the process.

Polygon presents a novel solution to this Layer 2 challenge. Through its highly interoperable design for all Ethereum-compatible blockchain and network that is both highly scalable, super fast, and affordable, Polygon has given many existing Ethereum DeFi dApps a new lease on life. Yet, for L2 to win out over comparable L1 answers, more solutions will be needed to bridge between L2 protocols and reduce the friction in the areas of liquidity and ease of use.

Source: DailyCoin


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