The Grand Chessboard of Public Chains: A Detailed Discussion on the DeFi Spillover Caused by Ethereum Congestion

This article is from the WeChat public account Blue Fox Notes.

The congestion of Ethereum has led to the overflow of DeFi, which is a phenomenon currently happening. Originally, people envisioned a path of migration from layer 1 to layer 2, but the reality is that there is an overflow from Ethereum to chains like BSC, HECO, Polkadot, and Atom.

Now everyone is concerned about questions like: Will Ethereum be surpassed? What does the development of BSC and HECO mean? … From the perspective of Blue Fox Notes, the future is dynamically developing, but there are also traces to follow. How to understand the grand chess game of public chains?

Congestion indicates strong demand; strong demand is always better than no demand.

Apart from Bitcoin and Ethereum, the area in the entire crypto world that is most aligned with products and markets is DeFi. This is also the reason why Blue Fox Notes has been focusing on DeFi for more than the past two years. In 2019, Blue Fox Notes mentioned “Why is DeFi the second breakthrough in crypto history?”. The congestion of Ethereum also shows that there is a prominent contradiction between the continuously growing demand and the insufficient infrastructure. This is essentially a good thing; strong demand is far better than no demand.

When demand is unmet, overflow is a natural result.

The congestion of Ethereum is due to strong demand. When demand cannot be fully met, it is normal and natural for demand to seek other alternative ways to resolve it. The overflow of DeFi from Ethereum to BSC, HECO, Polkadot, Atom, and other chains is a natural result.

DeFi is also a gradual development.

DeFi is also a long-term development process; it is unrealistic to bear all the demand from the very beginning. It is also unrealistic for DeFi to be completely decentralized from the start. The current situation is that both DeFi projects themselves and the chains that DeFi relies on have certain trade-offs in terms of decentralization, just with varying degrees of trade-off.

If demand surges while performance cannot keep up, then certain trade-offs will inevitably be made, temporarily balancing security and decentralization while improving performance and user experience.

In terms of the development process of DeFi, it is a gradual and trade-off process, meaning that DeFi and the blockchain itself are also dynamically developing; it is not a binary relationship. It is not "either decentralized or centralized."

On the road to true DeFi, one inevitable stop is semi-decentralization. This is a scenic view along the journey; it offers a better user experience and will attract more new users. Its endpoint is decentralized public chains and DeFi. This is a long-term process.

The congestion of Ethereum is not an unsolvable problem.

With the implementation of layer 2, the congestion problem of Ethereum will be greatly alleviated. Of course, there is at least a time window of several months or about half a year here.

The vigorous development of other public chains is beneficial to Ethereum.

In the short term, there may be competition for Ethereum, such as the migration of its users and the overflow of business, especially for DeFi projects with high-frequency on-chain behaviors like DEX, which are quite awkward. This can also be seen from the development of Cake and MDEX. Whether you like it or not, these chains are developing.

In the long run, as the scalability of Ethereum is resolved and as chains like BSC, HECO, and Polkadot bring in more new users, some of these users will migrate back, ultimately forming a stratification of users. The arrival of new users is also beneficial to Ethereum.

Currently, there are more and more projects on BSC and HECO, developing rapidly. Ultimately, Ethereum will also be a beneficiary. There are two aspects to consider this issue:

1. The overall landscape of the crypto field.

The entire crypto field is still quite small compared to Wall Street, and there is a long way to go. DeFi is the disruption of Wall Street by humanity in the digital age. Just as internet media disrupted newspapers and magazines in the internet era, this is a major historical trend. Players on Wall Street will shift their battlefield to the crypto field in the next five to ten years.

From this historical trend, regardless of which chain develops, it is beneficial to the entire crypto field. Whether it is BSC, HECO, ETH, DOT, ATOM, or other rising chains, they are essentially all on the same boat. The cake here is big enough, so big that several chains may not be able to carry it; perhaps in the future, dozens of chains will be needed to carry it.

2. The ultimate path of the crypto field.

Currently, the crypto field has more or less made trade-offs regarding decentralization. No chain dares to claim it is completely decentralized; it is just a matter of degree. However, Bitcoin and Ethereum are far ahead in terms of decentralization and security. This is not something that can be achieved in a day or two.

When other chains achieve a certain degree of decentralization through trade-offs and make significant improvements in performance and user experience, they will attract more users, especially those who are new to this field. These chains will enlarge the user base of the entire field, bringing more talent and resources to the development of DeFi, continuously expanding the market.

When the market expands to a certain extent and reaches a certain balance, people will begin to weigh their respective needs and make their own choices regarding security, decentralization, and performance.

This will lead to differentiation among different chains. Some chains will carry higher-value activities, such as Bitcoin and Ethereum. Some chains will carry lower-value but more frequent activities. Ultimately, a three-dimensional market structure will form.

When more users enter the DeFi world of crypto through other chains like BSC and HECO, some of them will also have demand for DeFi on Ethereum, which will naturally bring more users and traffic to Ethereum.

Moreover, with the development of layer 2, even if Ethereum is more expensive than BSC and HECO, the differences will not be that significant. If there are higher requirements for decentralization and security, a reverse migration situation may also form.

What is most scarce in the crypto field is not performance but security.

What is most scarce in the crypto field is not performance, low fees, or speed, but security. This security is not something that can be obtained at will. Bitcoin and Ethereum have undergone historical tests, formed social consensus, and permeated the entire crypto world through token incentive mechanisms, value changes, liquidity, and foundational networks. This is the most valuable thing in the crypto field.

With solutions like layer 2 and sharding, especially with layer 2 solutions expected to be implemented in the coming months to half a year, the advantage of security will become particularly precious. Because performance is a more easily solvable problem, while security and decentralization are not. In the long run, Ethereum's advantages will gradually become apparent.

The vast track of Layer 2 based on Ethereum.

When Ethereum's DeFi protocols build their respective layer 2s and achieve interoperability between layer 2s, Ethereum's Layer 1 will continue to be a valuable resource.

• Continue to provide higher security on Layer 1. Layer 1 is more suitable for important transactions that require higher security and are less concerned about costs;

• DeFi will basically run on Layer 2, and will not disturb Layer 1 unless necessary, which will greatly release the space of Layer 1; in the future, Ethereum DeFi, whether it is lending, trading, asset management, insurance, or payments, will all run on Layer 2;

• Layer 2 can basically achieve security comparable to Layer 1, such as ZK Rollup solutions;

• Layer 2 also has a transitional process; early solutions like Optimistic Rollup can solve urgent problems, which will accelerate the progress of layer 2;

• After the competition of Layer 2 ends, about one or two giants will emerge, which will become the overall solution for Layer 2, fundamentally solving the interoperability issue of DeFi. This situation means that future Layer 2 will create projects of extremely high value, and their value may even approach that of Layer 1. If Layer 2 gives birth to projects worth tens of billions of dollars in the future, it should not be surprising. In the ranking of tracks by Blue Fox Notes, Layer 2 ranks fourth, only behind BTC, public chains (ETH, etc.), and algorithmic stablecoins.

The development of Layer 2 will increase the value of Ethereum.

People may say that when the main activities of DeFi migrate to layer 2, the number of transactions will decrease, and will the capture of transaction fees also decrease? The issue here lies in the size of the cake.

If projects based on Ethereum's Layer 2 develop actively, Ethereum's position as the underlying security will be further strengthened. The more assets carried on layer 2, the more important Ethereum's position will be. As the assets it carries increase, the value of ETH will also rise. The value capture of ETH is not only about transaction fees but also about the value as an underlying asset.

The grand chess game of public chains.

In the future, public chains will form a stratified pattern based on the needs of user groups. For users with higher requirements for security and decentralization, especially those with larger transaction volumes, Ethereum will have a greater advantage. For users with higher demands for transaction fees and speed, especially high-frequency trading users, non-Ethereum chains may have greater advantages, and these users will be scattered across various chains.

Chains like BSC, HECO, Polkadot, and Atom not only migrate users from Ethereum but also bring more new users to Ethereum. Among the new users brought by their respective chains, some will convert to Ethereum users. The development of BSC and HECO is essentially beneficial to Ethereum, just as the development of Ethereum is beneficial to Polkadot, Atom, BSC, and HECO.

With the development of Ethereum layer 2, even if it can significantly improve performance, chains like Polkadot, Atom, HECO, and BSC also have their relatively fixed user groups, ultimately forming a certain equilibrium with their own space for survival.

In the final public chain landscape, Ethereum still occupies the most advantageous position because it has the most coveted trump card of all smart contract platforms: the most scarce security. This advantage cannot be replaced, but other chains also have significant development space and can stabilize their user groups through advantages in performance and user experience.

The future public chain landscape will be multi-chain, stratified, full of possibilities, and exciting.