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Layer 2 DeFi solutions spell doom for blockchain and altcoins

Blockchain is the underlying technology for Bitcoin and alt-coins which are both on a dizzying upward price explosion. But something is threatening to obliterate both blockchain and alt-coins

with the rise of decentralized finance (DeFi) in 2020, Ethereum’s technological flaws have come into relief Alt-coins will be at a severe disadvantage when up against the likes of bitcoin and stablecoins The cumulative market capitalization of all cryptocurrencies has charted a new record of nearly $910 billion

Blockchain is the underlying technology for Bitcoin and alt-coins which are both on a dizzying upward price explosion.

However, Layer 2 technology, referring to a secondary protocol built on top of the existing blockchain system and aimed at solving the transaction speed and scaling difficulties faced by major cryptocurrency networks, threatens to obliterate both blockchain and alt-coins.

Two major examples of layer 2 solutions are the Bitcoin Lightning Network and the Ethereum Plasma, both solutions striving to provide increased throughput to blockchain systems. 

Bitcoin and Ethereum to survive the onslaught

Today, we see the bitcoin cryptocurrency gaining monetary premium as prominent institutional investors identify it as the ultimate inflation hedge

But this year has seen the rollout of the first layer 2 projects. In fact, Ethereum co-founder Vitalik Buterin himself has stated that layer 2 is now the roadmap for Ethereum, and by extension other blockchains, too. This means that other ways to improve a blockchain’s functionality such as tokens – application-specific bits of code – could become obsolete

The Bitcoin blockchain had been designed to create only bitcoin but as others jumped onto the bandwagon, a multitude of alternative coins were created that were meant to function in a specific application, such as health care, identity, or gaming. In reality, almost all of these projects ended up going nowhere, with one notable exception: Ethereum.

Its provision of smart contracts provided real functionality, making ether the second-most popular cryptocurrency after bitcoin. Ethereum’s first “killer app” was the initial coin offering (ICO), a way to create more tokens. 

However, with the rise of decentralized finance (DeFi) in 2020, Ethereum’s technological flaws have come into relief. These include being incredibly slow, expensive to use, and inefficient to the point where it is sometimes difficult to even get a transaction in. These flaws forced Ethereum developers in 2020 to turn to layer 2.  

Read: A new year, a new high: Bitcoin crosses $33,000 but can it reverse course to $0?

Layer 2’s impact

Technologies around layer 2 on Ethereum have taken the form of DeFi projects being built on rollups (off-chain aggregations of transactions inside an Ethereum smart contract), meaning the only confirmations made on Ethereum are in aggregate, where the vast majority of transactions doesn’t involve ether, significantly altering the importance of the underlying (block)chain.

2020 was also the year that interchain solutions such as Polkadot, NEAR, and Cosmos went live, effectively as layer 2 solutions for Bitcoin and Ethereum connected via “blockchain bridges.” 

Keeping its native currency as bitcoin and giving primacy to stablecoins results in a solution that is faster, cheaper, more secure, and easy to use. What this means is that the primacy of the “chain” is diminishing fast.

Layer 2 solutions represent a fragmentation of the chain-first approach. 

While layer 1 systems like Bitcoin and Ethereum have built-in interoperable standards, layer 2 has not. The implication is that the network effect will no longer be in the chain but in the assets. 

Both bitcoin and tether in 2020 have migrated massive value across chains because the tokens themselves are the focal point, not the chains.

In this new world, alt-coins will be at a severe disadvantage when up against the likes of bitcoin and stablecoins. This is because up until now altcoins have been based on the promise of a chain with unique properties. Their existence has been predicated on the idea that they would be the native currency for a chain that would gain in importance. But the chain is at its weakest link. 

These altcoins will by nature lose their justification to exist.  

Tokens will flourish more than ever, but the nature of these tokens will change. Rather than trying to capture a monetary premia, tokens will represent other types of asset classes such as equity and debt in the form of crypto bonds and derivatives. 

For bitcoin, we are at the end of the beginning. For alt-coins we are at the beginning of the end. 

Bitcoin is no longer limited to a single chain, and the theory of chain specific currencies is being debunked.

Read: Top UAE banks that adopted blockchain technology and why

Ethereum breaking $1000

Ethereum is just one of many alt-coins experiencing a meteoric rise, price-wise. 

Its performance could be the result of a recent upsurge of interest in Bitcoin, leaving investors searching for the best altcoin.

Ethereum, the second-largest coin by market cap, today broke past $1000 leaving it some $450 short of its all-time high of $1,432, which it set in January 2018. 

Its current price means that it has a market cap of $114 billion. Bitcoin’s price today at over $31,000 gives it a market cap of $660 bn, as of this writing. 

Earlier on Monday, Bitcoin rose to highs of $34,408, or about a $4,000 jump this past weekend.  

Other alt-coin performances

Ethereum has led the early 2021 altcoin surge with a massive 40% increase.  

Bitcoin Cash has added 25% to $445, Cardano (31%) to $0.23, Chainlink (25%) to $15, and Litecoin (21%) to a new yearly high of $174. Two top-ten coins have painted new all-time highs – Polkadot and Binance Coin. BNB reached $44, while DOT saw a double-digit price tag at $10.5.

Ripple has increased by 15% on a 24-hour scale to $0.25. Nevertheless, XRP is still down by over 60% since mid-December, facing a lawsuit in the US.

Ethereum Classic (30%), OMG Network (30%), Aave (29%), VeChain (28%), Yearn.Finance (28%), Ampleforth (28%), Uniswap (27%), SwissBorg (25%) are a few more representatives of the double-digit price increase club.

Overall, the cumulative market capitalization of all cryptocurrencies has charted a new record of nearly $910 billion. This means a $150 billion increase since the start of 2021.