Ethereum DeFi spillover, who will win among Polkadot, Layer 2, and BSC?

This article was published in the vernacular blockchain, authored by Master Wuhuo Qiu.

At the beginning of 2021, the development of blockchain entered the cross-chain trend, which was expected yet surprising.

It was expected because everyone knew that this year's trend would prominently feature cross-chain technology. The Cosmos IBC protocol was officially announced in February, and the Polkadot KSM parachain slot auction was just around the corner, with these two cross-chain stars joining forces to usher in the "Year of Cross-Chain" for blockchain.

It was surprising because BSC, Heco, and a host of high-speed public chains "rose to prominence" under the consistently high Ethereum Gas fees.

Especially BSC, which went from being ignored last year to over a hundred million dollars in locked value in December, then to a billion in January, and directly surpassing 10 billion in February, certainly caught everyone's attention. This kind of cross-chain migration from ETH to a "relatively centralized ETH clone" was something no one expected.

From BSC's rise, we might discover some clues about future cross-chain trends.

The Terrifying User Habits

Ethereum DeFi has been thriving for a whole year, from 2020 to 2021, without any pause.

However, if you look at other public chains, whether it's EOS, TRX, or Quantum Chain, all those so-called "Ethereum killers" from back in the day have gradually launched their own DeFi ecosystems, yet they have received little attention. Despite offering smoother transaction experiences and lower fees.

ETH has thus supported the DeFi ecosystem all year long.

By 2021, the Gas fees on ETH had finally reached a level that ordinary users could not accept, with a normal transaction on Uniswap costing around 30-50 dollars, and the fees for liquidity mining withdrawals and deposits approaching a hundred dollars.

Both ordinary investors and funds were looking for a place to escape the congestion of ETH and the overflow of DeFi. As a result, among the many "Ethereum killers" and "Ethereum friends," the choice of funds and users surprisingly turned out to be BSC, which was previously not highly regarded.

The reason behind this, aside from being backed by Binance, the world's largest trading platform, is that user habits may be a significant factor.

DeFi users, especially seasoned players, primarily use Metamask, and they are very accustomed to the transaction process of making a trade and spending Gas.

Experienced investors should know that Binance launched Binance Chain in 2019, developed based on Cosmos, and its DEX was the largest application on it. However, that chain or DEX was largely ignored, so they had a bright idea and created BSC.

On BSC, because it is a fork of ETH, it simplifies to the same address as ETH, which means the private keys are the same. You can switch from the ETH network to the BSC network by just changing a parameter in Metamask; all transactions, authorizations, and contract calls on BSC are identical to those on ETH, allowing for zero-cost learning and adaptation…

In other words, you have the same user experience as on ETH, but with transaction speeds many times faster. As for the fees, they are incredibly low.

Moreover, on BSC, because it is backed by Binance, the largest DEX Pancake allows trading of many mainstream tokens from other chains that cannot be bought on ETH, such as Dot, Filecoin, Band, etc., and the liquidity is quite good. Currently, it is the only DEX where you can trade these non-ERC20 mainstream coins (on Uniswap, you can basically only trade WBTC).

Then you see that after BSC went live, its TVL has been steadily increasing, and the number of users has gradually grown, until recently when ETH became "unusable," leading to an explosive growth.

Do you think the experience on ETH is the best? I don't know, but at least for now, it is the habit of most users, just like our current universal keyboard layout, which has long been proven not to be the most scientific layout, yet all keyboards challenging this layout have failed without exception.

This may also be a significant reason why other public chains like EOS and TRX, which require buying CPU and memory, have never taken off. Or, in the future, even if multiple chains coexist, whether they are supported by Metamask and whether you can switch networks with a single click by changing a parameter may be one of the key factors determining whether a chain can attract users.

Of course, you might say that BSC is not decentralized at all, which goes against the spirit of blockchain decentralization!

So the question arises, why is there still over a hundred billion in funds flowing into BSC? Is it solely because of the profit effect? This leads us to the next topic, the "Schrödinger's Decentralization" of BSC.

Schrödinger's Decentralization

First, it must be acknowledged that compared to ETH, BSC's level of decentralization is certainly much lower.

However, you also cannot say that BSC is entirely centralized. After all, the private keys of your account are in your hands, and Binance cannot take a penny from your account.

So, what can it do? Control or influence nodes, and then… destroy BSC, obliterating the entire chain, and naturally, your assets on that chain would vanish into thin air.

Does Binance have the ability to do this? I think at least at this stage, it likely does. However, will it do so? I believe it won't.

In fact, regarding the issue of "decentralization," EOS once raised a question during the debate between DPOS and POW: compared to the 21 elected nodes, do the few mining giants controlling BTC and ETH mining pools really exhibit the level of decentralization that everyone imagines?

Strictly speaking, a few mining giants could easily destroy BTC or ETH, just as Binance could destroy BSC.

However, no one would do that because it does not align with their interests. One significant reason why Bitcoin has not encountered major security issues to this day is that it is based on an economic incentive system or a game of interests.

In most cases, maintaining a chain and being an honest miner/node aligns more with your interests than acting maliciously. Of course, the goal of blockchain decentralization is to move from "not doing evil" to "being unable to do evil."

However, from a technical perspective, unless one day ETH 2.0 truly realizes its previous vision, with thousands or even tens of thousands of block-producing nodes and minimal hardware requirements, the conceptual decentralization is fundamentally unattainable.

We will continue discussing this topic in the next chapter. Therefore, the best current outcome is to have public chains like BTC and ETH that are large enough in market value (examples of small market cap POW or POS chains being attacked are numerous; market cap size is far more critical for security than the level of decentralization), and are permissionless—this is precisely the goal that BSC is striving for.

Currently, BSC has 21 nodes, and in the past five months, eight of those nodes have been operated externally by Binance. Binance also plans to open all 21 nodes in the near future. At that time, BSC's positioning may very well be that of an "assistant to Ethereum," or a "better EOS."

Alternatively, from another perspective, you might find it easier to understand what I'm saying. Suppose you currently have a hundred million in stablecoins and want to find a place to participate in liquidity mining, dabble in DeFi, or borrow.

At this funding level, the size of the returns may be secondary; the primary concern is the safety of the funds. Ethereum is undoubtedly the first choice, but apart from Ethereum, which other chain would you dare to place a hundred million in funds on?

The answer in your mind undoubtedly reflects your confidence in each chain, and at this moment, voting with your feet is the most honest approach.

The Three Kingdoms of Cross-Chain

The situation in 2021 is already quite clear. ETH 2.0 may not only fail to deliver a universal Layer 2 solution within six months but may not even do so within a year.

So, in the case of overflow from ETH Layer 1, there will be three external pools to catch this overflow.

1. Polkadot: The orthodox cross-chain of Cosmos.
2. Other public chains compatible with EVM.
3. Layer 2.

In addition to the aforementioned BSC and Heco, there are also high-speed public chains like Near, Solana, Avax, and FTM, all gearing up. The battle of Ethereum killers from 2018 will reappear in 2021 among Ethereum assistants…

Currently, other seemingly "decentralized" high-speed public chains often do not inspire as much confidence as semi-centralized chains like BSC and Heco. Reflecting on the question I asked at the end of the previous chapter, you will understand.

With the new shared security model announced by Cosmos, it can be seen that Polkadot and Cosmos, including ETH 2.0, are essentially moving in the same direction, relying on relay chains / beacon chains / Cosmos Hub to maintain the security of parachains / sharding / various hubs, with the core theory being a variant of the sharding model.

On the other hand, BSC, Near, and Solana rely on the security of their respective on-chain nodes. The security of native POS still needs time to be validated.

At that time, each "Ethereum assistant" will surely do everything possible to compete for the various DeFi projects and users overflowing from Ethereum.

The emerging trend is that many projects are beginning to plan to migrate to BSC, while some yet-to-launch projects plan to simultaneously launch on ETH, BSC, and even other public chains, running Layer 2 across multiple chains—this year's Layer 2 theme has basically been set as Rollup.

Channels are essentially discredited or can only serve as auxiliary technologies for Layer 2, and even the significance of issuing tokens is diminished.

Sidechains—essentially operate on the same principle as BSC and Near, bridging into Ethereum, while general Layer 2 sidechains are not as competitive as BSC, Near, and Solana. Thus, only Rollup technology, which approaches the security of ETH Layer 1, can bear the heavy responsibility.

So, to conclude, let's discuss the relationship between Rollup and cross-chain.

The leading project in issuing tokens via Rollup is undoubtedly LRC. Among the projects yet to issue tokens, Optimism, Offchain Lab, and Matter Labs are the three most worthy of attention.

ZK Rollup undoubtedly has the best security, but ZK has three significant issues.

1. It requires dedicated circuits and cannot support arbitrary user-defined smart contracts;
2. The relay nodes must maintain Ethereum's increasingly deteriorating or expanding state;
3. Executing zero-knowledge proof calculations on-chain actually has high hardware requirements, making it impossible to achieve "the decentralization you envision" at this stage.

Therefore, in the short term, at least for the next six months to a year, Optimistic Rollup is very likely to be the technical solution for achieving L2 unification. In the current era of increasingly strong DeFi Lego combinations, ZK will only have a chance to turn the tables on OP when it can produce a universal solution.

And the world of Layer 2, like Layer 1, will have multiple solutions and projects that are incompatible with each other, leading to a fragmented landscape.

It is unlikely that, like the current major fast public chains willingly acting as Ethereum assistants, there will be a situation where all stars gather around one moon. Instead, there will be fierce competition until only 1-2 winners remain.

Conclusion

I believe that by then, 1-2 giant companies will emerge in Layer 2, forming an off-chain parallel world of Ethereum that fundamentally resolves the interoperability issues of DeFi. The value of these 1-2 giants is also likely to approach that of ETH Layer 1.

What is curious is that when that day comes, will it be orthodox cross-chain, EVM-compatible high-speed public chains, ETH Layer 1 + Layer 2 continuing the Three Kingdoms rivalry, or will it be a situation where multi-chain prosperity leads to Ethereum's dominance due to the composability effect?