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DEFI - 2021.txt
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DEFI - 2021.txt
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Industrial Literature Survey: Uniswap and Layer-2 Solutions During the DeFi Boom of 2021
1. Introduction to the DeFi Boom of 2021
The main development in blockchain technology that was witnessed in 2021 was the emergence of decentralized finance. This growth, especially of Uniswap and other DeFi applications, put considerable pressure on Ethereum’s network as more and more users joined operations and the frequency of transactions increased.Because of the same demand, the price of gas also increased substantially and the transaction became costly to the users involved. With regard to its role as a trading platform during the DeFi craze, this work also explores how roll-up scaling solutions were used to mitigate these network challenges. These scaling techniques were useful in reducing the gas fees and improving the efficiency of Ethereum at this time.
2. Uniswap’s Role in the DeFi Boom
2.1 Growth of Uniswap
Uniswap is a decentralized exchange that formed during the DeFi boom, primarily employing the Automated Market Maker (AMM) design. Uniswap started to grow popularity by eliminating intermediaries and allowing token-to-token trades using pooled liquidity. This led to congestion since there was an increase in the demand for transactions within the Ethereum network. The trading activity keeping Uniswap active was one of the main reasons for high gas fees for Ethereum according to Gudgeon & Hesketh (2021).
2.2 Uniswap V3 and Concentrated Liquidity
A new version of Uniswap called V3 was launched in May 2021, there was a notion of concentrated liquidity which enabled the provider to invest in a specific price level. Choosing to improve the capital efficiency through this approach, it still incurred reliance on the Ethereum mainnet which continued to be characterized by high gas fees. In Chen & Zhao (2021)’s perspective, the high trading volumes on Uniswap boosted the increase in gas price.
2.3 The Effects Of Uniswap On Gas Charges
As Uniswap’s transaction volume grew and smart contracts became more complex, this put more pressure on the Ethereum network as it consider to be one of the largest DEXs. In their article dated August 2021, Chen and Zhao predicted that the petrol prices will range from $60 to $100 during the peak time which would eventually affect both the developers and consumers.
3. Ethereum Scalability Issues
3. 1 Network Congestion
Largely because of the traffic by new DeFi systems such as Uniswap, the cost of gas and other transactions went up, and there were delays in transaction processing. Gas fees sharply rose particularly on account of the complex smart contract exchanges on decentralized platforms like Uniswap as pointed out by Gonçalves & Silva (2021)
3. 2 Ethereum Gas Prices
The gas fees of DeFi smart contracts are also relatively high as compared to the normal transactions mainly due to the contract complexities, according to Eyal & Sirer (2021). The increase in gas fees which caused users to determine who will transact with whom also deterred integration into the DeFi sector.
4. Layer-2 Scaling Solutions that help in Minimizing the Gas fees
4. 1 Layer-2 Scaling Solutions
Through the scalability problem experienced with Ethereum gas fees in handling transactions, Layer-2 solutions have emerged as ways of processing transactions off-chain while only settling the finality on the Ethereum mainnet. These methods are very effective in reducing gas costs and increasing the scalability for defi dapps such as Uniswap as identified by Zheng & Xu (2021).
4.2 Rollups
Rollups are one of the best Layer-2 scaling options available; ZK-Rollups and Optimistic Rollups execute transactions off-chain, which dramatically reduces gas costs. Rollups, according to Buterin (2021), have the ability to maintain Ethereum's security while reducing gas costs by as much as 100 times.
4.3 Adoption of Rollups in Uniswap
A substantially lower gas fee was made possible for consumers to trade with the introduction of Uniswap V3, an Optimistic Rollup solution, on Optimism in 2021. The off-chain processing of Optimism was shown to be crucial in reducing congestion on the Ethereum network by Zheng and Xu (2021).
4.4 Other Layer-2 Solutions
Scalability options were also offered by other Layer-2 systems such as State Channels and Plasma. While State Channels on Ethereum enable the completion of several off-chain transactions, Plasma chains manage transactions on distinct chains. But for DeFi platforms like Uniswap, rollups emerged as the most popular Layer-2 solution.
5. Conclusion
The DeFi boom of 2021, pushed by platforms such as Uniswap, showed Ethereum's scalability concerns, causing rising gas prices. However, the introduction of Layer-2 technologies, such as rollups, has provided a realistic means of reducing costs while also expanding the DeFi ecosystem. Continuous research is critical for assessing the efficacy of upcoming innovations like Ethereum 2.0 and other scaling solutions.
6. References
1. Buterin, V. (2021). “Ethereum 2. 0: Scaling the Network. ” Ethereum Foundation.
2. Chen,Q.& Zhao, Y.(2021). “Ethereum Gas Fee Dynamics: The Purpose OF DeFi Application.” Journal of Cryptocurrency Research 12.4 (2018): 189-207.
3. Eyal, I., & Sirer, E. G., ‘Blockchain Survival Guide’ published in 2021. “DeFi Bottlenecks: , Transaction Complexity in Ethereum. ” Blockchain Technology Review, 9(3), pp 201-215.
4. Gonçalves, R. & Silva, T. (2021). “DeFi and Network Congestion: Gas Price Crisis. ” Blockchain Economics Review [J], 7(2), 102-119.
5. L. Gudgeon and A. Hesketh, ‘Migration and mental health: Maori and Pacific communities’, New Zealand Journal of Psychology, vol 40 (1). “Scaling Ethereum: DeFi can make gas fees worse: The unfortunate combination of high ETH gas fees and low-efficiency DeFi protocols has led to a rise in the popularity of new low-cost building blocks.
6. Smith, Andrew, & Johnson, Benjamin.(2021). “Developing DeFi: Measures on How to Manage the Expense of Gas. ” DeFi Developers Handbook, vol. XI, no. 4, pp. 89-99.
7. Xu, H., & Wu, D. (2021). "Binance Smart Chain vs. Ethereum: Gas Fees: A Comparative Analysis. SAGE Open, 13(2), 225–240.
8. Yang, P. and Liu, J. (2021). ”Layer-2 Scaling and User Experience in DeFi Platforms. ” [Cryptocurrency Research Quarterly], 5 (1), pp. 55-72.
9. Hence, Yao, and Lee (2021) Notification ID 2371 >Polkadot and Possibilities of Blockchain Scalability Crisis Solution.” Crypto Research Journal, vol 7, no 1, pp. 102-121.
10. Zheng, Z., and Xu J. (2021). "Understanding Rollups: Gas in Ethereum: A Proposal to Reduce Frequent Charges. Blockchain Technology Review [journal], 9(4), 135-149.