In the latest episode of Blockchain and Booze, Adam Levy of Draper Gorem Holm met with three leaders in the blockchain industry to discuss Layer 2 solutions on the Ethereum network. They were joined by Levi Stanny Kulichov from Aave, Jack O’Holleran from Skale and Antonio Giuliano from dYdX. What began as a discussion of higher taxes quickly became a broader commentary on the potential power of decentralized financing.

Ethereum Mystery
For those unfamiliar with the state of Ethereum, it has become prohibitive to send transfers along the chain. At the time of publication, the average cost of sending an Ethereum transaction was just under $ 20. Complex smart contracts such as those used in decentralized finance protocols can easily run over $ 100 as the network becomes more congested. Layer 2 solutions are a protocol that can reduce the load and enable faster and cheaper transactions.

As Aaves Kulekhov explains, the destructive potential of Layer 2 solutions is enormous. This is not only an incredibly promising technology, but also a technology that has not yet been fully implemented:

Many [level 2] developments have not yet been published on Ethereum. We are too early to scale, but the large number of people using level 1 judgment is a problem. ”
All three guests are supporters of tier 2 solutions due to the benefits that decentralized systems can offer. But how do these protocols really work? O’Holleran has an elegant example: he compares Ethereum’s settlement level with poker and second-level decisions as an overview of winnings and losses.

Explanation to the other team
Imagine a group of friends coming to play poker. After a full night of gaming, players do not give up their winnings; Instead, they write it down in the ledger on the table. Participants can play multiple games, record their winnings and losses, and only “withdraw money” – or use the equalization level – when they no longer want to play. Layer 2 solutions such as Polygon also allow Ether (ETH) and ERC-20 users to use the Layer 2 network until they want to “pay out” tokens in Ethereum.

For scaling, Layer 2 networks also open the DeFi room for those who cannot or are not willing to spend high fees on a single transaction. According to O’Holleran, the focus is on financial inclusion in the developer community, which leads to low decisions. The more people can participate in DeFi, the stronger the DeFi network becomes.

Beyond DeFi
Towards the end of the conversation, Levy asked the group about the DeFi “ultimate goal” or what would happen after the DeFi “solution”. After a break, O’Holleran talked about the potential of DeFi systems that should offer the world as a whole:

“The power of these systems goes beyond DeFi. Markets, social media and games: all of these can be disrupted through decentralization. Finally, we want to democratize the economy. ”
Giuliano confirms this view by adding:

“The goal is very big. The financial system is the most authoritative and reliable system in the world. We can build something parallel in DeFi – little in the beginning, but in the end the use of DeFi can be more profitable due to better interest. tariffs. ”
To insiders, the DeFi room may seem mature and overwhelming, since its total closed value recently exceeded $ 100 billion. But for the financial world, this is a very small and almost strange estimate. While traditional economics is currently “interested” in DeFi, there is still a lot of work behind the scenes, Giuliano said. O’Holleran shares this view and predicts the future intersection of centralized and decentralized finance:

“Smart CeFi will begin to understand how to build them into DeFi, and the DeFi room will be better as a result.”
Tier 2 solutions may not be as exciting as the latest non-fungal token, or take Bitcoin to a new full-time level, but according to our team of experts, they can be just as important.