Ethereum Is Manhattan and Everyone Is Moving to the Suburbs

Few predicted the swift acceleration in the decentralized finance (DeFi) economy this year. The fervent activity in the space has sent DeFi assets skyrocketing to almost $11 billion – equivalent to almost twice the size of the economy of Barbados. Similarly, assets under management held by Decentralized Autonomous Organizations (DAOs) have hit bumper levels, supported in large part by the continued growth in the decentralized economy.

Ethereum, the rails on which most open finance and DAO governance runs, needs to keep pace. Soaring DeFi transaction levels are adding significant demand and strain to the current network, with many DAOs adversely impacted by higher voting costs and slower transactions.

As things currently stand on Ethereum, only the most liquid, hyperconnected protocols will be able to thrive under the current demand on the network.

Back when the Aragon project released its first on-chain voting implementation, it cost just a few cents worth of ether (ETH) to vote. Now, with Ethereum being congested, it can cost up to $30 for a user or token holder to place a single vote.

The network congestion on Ethereum inspired the Aragon community and Balancer Labs to devise a solution that offers off-chain voting with on-chain execution via the Snapshot DAO governance tool. The solution arose not out of choice, but out of necessity for the respective communities.

Before a scalable version of Ethereum arrives in Ethereum 2.0, it’s likely many social innovators, DAOs and DeFi protocols will look to off-chain systems to meet their needs.

See also: DeFi Dad – Five Years In, DeFi Now Defines Ethereum

Ethereum’s 'pull' factor

Running a smart contract on Ethereum is like renting an apartment in Manhattan – you are hyper-connected to “a cultural center and the world of finance” but you pay a lot for a 500-square-foot studio. As an alternative, you can move to a new borough, such as Brooklyn or Queens, or out to the suburbs to get a nice house with more space and cheaper rent, but you’ll need to commute and you’ll be less well connected to the center of activity.

Similar to Manhattan, Ethereum could be considered a hive of decentralized activity; congested, but an important economic “‘pull factor”’ for the many different DeFi protocols. While some DAOs want connectivity above all and will remain running on Ethereum, others will not need hyperconnectivity as much as they may need lower costs. That’s where solutions like Ethereum 2.0, Cosmos or Polkadot can shine.

The advancement of off-chain and layer 2 technologies – and eventually Ethereum 2.0 – comes at an important time for these social DAOs looking to scale.

DeFi protocols, predictions markets and decentralized exchanges (DEXs) are among the most prominent users on Ethereum today. All seek hyperconnectivity to interoperate – a hub for where DeFi creditors, lenders and communities all interconnect to leverage each others’ products. In essence, hyperconnectivity on Ethereum allows a protocol to open a vault on Maker, get dai, lend that dai on Aave, and then offer yield to their users, just one of the many examples of the “money legos” that open up with hyperconnectivity on Ethereum.

Indeed, many of the bigger DeFi protocols running on Ethereum today will continue to operate just fine without needing an added functional layer to scale. But for the growing emergence of social DAOs, the current network infrastructure will not fit with their longer-term operational or governance needs. (That said, many of the long-tail social DAOs do not need to be hyperconnected.)

These rapidly evolving social DAO communities need space and room to thrive. The advancement of off-chain and layer 2 technologies – and eventually Ethereum 2.0 – comes at an important time for these social DAOs looking to scale.

Similar to the less-crowded streets of New York City’s suburbs, these solutions can offer these DAOs a cheaper, faster, alternative model in which to operate. The lower costs and faster transaction speeds that will arise from these technologies should, therefore, provide an important advancement in DAO governance standards and social innovation.

See also: Ready Layer One: Base Layer Protocols Team for Virtual Developer Event

Just as the suburbs of New York City expanded and evolved over time, so, too, will the rollout of Ethereum 2.0 take time. But in the meantime we shouldn’t discard other options, including blockchains built on Cosmos SDK or Polkadot. Off-chain solutions, like Snapshot, or layer 2 virtual machines, will go a long way to meeting the requirements of DeFi and social DAOs.

These will be available to us in the very near future as we wait for Ethereum 2.0 to offer decentralized communities the essential infrastructure necessary to escape the congestion.