DeFi gained popularity during the last bull market among a relatively small group of early-mover adopters who were prepared to overlook the many user experience issues faced by blockchain users, including high gas fees and a lack of security since all data is available publicly and on-chain.
However, the next generation of adoption will need to overcome these challenges. Exchanges and marketplaces such as ApeX and Sorare are leveraging Layer 2 innovation to introduce better security, scalability, and lower fees, paving the way for the next wave of adoption.
Ethereum has long been the epicenter of the DeFi ecosystem, providing fertile ground for the incubation of flagship projects, including Maker, Uniswap, and Compound. However, while it’s still home to many of the most liquid DeFi protocols, Ethereum’s future as a platform for fintech innovation depends on the growing ecosystem of Layer 2 innovations that are working to overcome its main legacy problem – a lack of scalability.
Another significant issue is the open, public nature of blockchain transaction data. While the public nature of data serves a function to enable transaction validation by the network, the unfortunate side effect is that it makes it easier for attackers to seek out high-value wallets and transactions and may be offputting for many users. Another issue is Ethereum’s gas fees, which, despite multiple upgrades, remain stubbornly high and only serve to make Ethereum’s DEXs unprofitable as trading venues.
Solving the rollups trade-offs
Rollups, which group transactions for batch processing, have become the Ethereum Layer 2 workaround of choice. However, like so many other areas of blockchain development, the implementation of rollups involves trade-offs. Zero-knowledge rollups use zero-knowledge technology to publish a proof of validity to Ethereum after each batch of transactions is processed. This method is relatively secure since the state of the blockchain can always be assured based on the validity proof of the last batch. However, it requires gas to publish each proof, which costs fees.
Optimistic rollups only publish proofs on demand when there is a dispute over the state of the blockchain, meaning they are more gas efficient, but they may not be as secure, resulting in a longer period to achieve transaction finality. Therefore, withdrawal times for optimistic rollups may be slower, meaning that DeFi protocols based on these technologies may be less capital-efficient.
Blockchain core developers are dedicated to solving trade-offs, and so Validium has emerged as a solution that overcomes the challenges presented by zero-knowledge rollups. Validium takes transaction data storage, as well as processing, off-chain. This makes zero-knowledge rollups more gas-efficient since they use less on-chain data while also making transactions more secure since the data is stored off-chain. The enhanced privacy makes Validium one of the few scaling solutions that could appeal to both enterprise users and privacy enthusiasts alike.
Next-gen protocols solve legacy pain points
Solutions need use cases, and there are several DeFi dApps leveraging Validium technology through infrastructure like StarkEx, a Layer 2 scalability engine. One example is ApeX, which relies on StarkEx for its high-performance, order book-based, decentralized perpetuals exchange.
ApeX was conceived with the goal of overcoming critical pain points with legacy DEXs, such as high fees, poor execution, and poor user interface. It aims to create a free and open ecosystem where users can grow their wealth in a safe and trusted environment, offering lightning-fast transaction speeds of up to 50 trades and 10,000 orders per second, significantly reduced gas fees, and improved scalability.
Furthermore, the order book interface is a familiar one for traders, offering a smooth transition into the DeFi sphere. The transition will be further helped once ApeX launches its social trading features in early 2024, which will allow users to interact, share insights, and follow experienced traders to replicate their strategies.
Leveraging the innovation in DeFi and Beyond
Rhino.Fi (formerly DeversiFi) is another protocol leveraging Validium through StarkEx to aggregate financial opportunities from across the multichain DeFi ecosystem. Rhino started out as a decentralized order book exchange for spot trading but has since expanded into cross-chain swaps, token bridging, trading, and yield-generating activities, all from the same user interface. It combines on-chain smart contracts with the StarkEx infrastructure to enable high-speed, low-cost transactions.
Beyond DeFi, protocols such as Sorare and ImmutableX have also leveraged Validium technology to enable gas-free NFT minting, which is more inclusive since it allows users to build their fantasy football team at a cost up to a thousand times lower than on Ethereum.
A resurgence of the crypto markets in 2024 will bring a new wave of interest to the DeFi and Web3 space. However, unlike the previous cycle when the technology was still unfit for purpose for most everyday users, this time around, the infrastructure has been vastly improved, offering users a better Web3 user experience with the low fees and ultra-fast speeds they’ve come to expect from centralized fintech.
