And extremely high transaction costs (known as gas fees) are forcing smaller coins to fight for their existence and keeping them out of the spotlight, far away from big investments.
The Ethereum Network Hostages
The majority of decentralized finance (DeFi) projects are built on the Ethereum blockchain. Actually, 95% of Ethereum’s transaction volume in the past year was generated by DeFi projects.
Ethereum struggles with a fundamental scalability problem that also becomes a huge issue for the number of dApps built on it. The Ethereum chain can process up to 15 transactions per second at full capacity. In volatile markets, when transaction numbers increase, the network gets highly congested, resulting in increased transaction costs (gas fees).
Last month alone, users had to pay a record of over $38 to move assets on Ethereum’s blockchain. Such expenses make multiple DeFi projects less attractive to institutional investors and totally out of reach for retailers.
Ethereum plans to implement its long-awaited Layer 2 scaling solution soon. Still, until that happens, the DeFi industry is on its way to devising its own solutions for decreasing transaction costs.
Uniswap V3 Upgrade
Uniswap, the largest decentralized exchange (DEX), plans to launch its upgraded version 3 later this year. The industry’s key DEX currently boasts a total locked value of over $3.5 billion on version 2 but is suffering from fees and slippage numbers far higher than most users want.
As Uniswap’s CEO Hayden Adams hinted on Twitter, the new V3 protocol should be released in 2021 and will help solve slippage and capital efficiency issues.
There still is no official data about the upgrade. However, the industry expects V3 to improve slippage and capital efficiency significantly, which could be achieved by integrating the Layer 2 scaling solution. Although Uniswap’s full upgrade plans have not yet been detailed publicly, the move could spark many of the Ethereum-based dApps to look for new and scalable environments with higher potential and lower gas fees.
Accordingly, the industry expects Uniswap to include several new liquidity mining pools in its new protocol. This could help increase the UNI token rewards for Uniswap users and provide the platform with higher liquidity.
On the Flipside
More DeFi alternatives
Due to the open-source nature of Uniswap, various developers can use its code and create their own decentralized exchanges. Many of these new DEXes are Uniswap’s forks and already run scaling protocols on various blockchains.
Smaller DEXes, like QuickSwap, Swop.fi or NewDex, use Layer 2 scaling systems and can provide faster and cheaper transactions. They are just a few of the dozens of platforms enabling trades of multiple cryptocurrencies by moving the load off of the expensive and congested Ethereum chain.
As the recent boom of institutional capital demonstrates, Wall Street giants are increasingly drawn to the smell of digital assets. The DeFi industry increased the total value of the crypto market by more than 40x within the past year, and part of that growth certainly came from institutional investors.
Mega whales come with massive amounts of client dollars and are much more calculating and cautious than retail investors. However, they are here to profit. The more various DeFi protocols can catch the eye of these whales, the more investments they will attract, and the healthier and more prosperous the whole industry may become.
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Source: Cryptocurrency - investing.com
