Ethereum 2.0 composability issues explained

“Money lego” might be an appropriate metaphor for what decentralized finance (DeFi) does, but since the summer it has been applying another one: the jackpot.

Money lego is the term used to describe the way in which Ethereum allows you to connect different financial services to each other, also known as composability. This was primarily a buzzword, but composability has become a very real competitive advantage for DeFi over the past year. Mixing and matching smart contracts on the fly has proven incredibly valuable.

But a $ 10.9 billion question remains: Will composability also work on Ethereum 2.0 as it does now on the original world computer version?

“Composability is really important because it allows innovation to come together: Entrepreneurs can compose with the creations of other entrepreneurs,” Chris Burniske of venture capital firm Placeholder said in a phone call to CoinDesk. “Many of the services we receive daily in our traditional meat space are comprised of underlying services.”

That is, Netflix relies on many services, such as content delivery networks, storage providers, analytics products, and many other solutions that most regular people have never even heard of.

All of this stacking relies on centralized verification and identity, but on Ethereum you can mix and match without needing your name.

However, the ease of composability collides with the reality of Ethereum’s throughput capability. This is a problem that everyone has seen from the very beginning of the project, as CoinDesk Research recently explained in a report on the next version of Ethereum.

Read more: Ethereum 2.0: how it works and why it matters

To remedy this, some projects are switching to sidechain, but many are looking forward to Eth 2.0 offering much more space for transactions.

The core of the new throughput capability will come from a new architecture called “sharding”. In fact, there will be multiple blockchains that will check in with each other via a chain of beacons. This should make everything move much faster and cost a lot less, but it creates problems if a transaction requires synchronous communication (i.e. no delay or in real time).

But even though a lot of hype is going on about the launch of Eth 2.0 right now, it’s really just the first phase and there won’t be any snippets in that. Each additional stage should take a minimum of six months (considering all the delays so far, it’s likely to be much longer), so DeFi developers and degens don’t have to worry too much.

“Eth 2 with shards is probably still some free time,” Electric Capital’s Avichal Garg told CoinDesk in an email. “I’d be surprised if that happened in 2021, so it’s probably not worth pointing out now.”

Since virtually everything anyone does on Ethereum produces a token to account for it, composability is as easy as throwing an asset into a smart contract, taking the token it produces, and tossing that token into something else. No endorsements, accounts or other frictions needed (just a wallet address and, in some cases, the appropriate guarantee).

This makes all types of trading incredibly easy for participants, from the very new to the extremely advanced.

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But there are concerns that composability may be hampered in some cases in a fragmented environment.

An example provided by Burniske is flash loans. Flash loans allow experienced traders to identify arbitrage opportunities in the market, borrow assets, profit from the difference in price for assets in different locations, and repay the loan in a single transaction. “There is no risk when you are able to do all of this in one transaction. If it’s not completed, the entire transaction fails, ”Burniske said.

When that can’t happen in a transaction, however, the cost and elegance of the product essentially vanish.

Read more: Uniswap V2 Launches with Multiple Token Exchange Pairs, Oracle Service, Flash Loans

There are concerns that such synchronous operations may not be possible if two or more dapps in the sequence are not on the same fragment.

“Among the fragments are considering the passage of asynchronous messages. … It would be kind of a second-class way to integrate smart contracts, “Brendan Asselstine, CTO of Lossless Lottery PoolTogether, told CoinDesk in a phone call.” PoolTogether is integrated with Compound and DAI, so ideally we’ll be on the same piece as them. “

This is a problem for DeFi.

Since there is so much interoperability between the dapps, there may be a lot of pressure to get all the DeFi dapps on the same shard, making all those transactions expensive again.

Although Asselstine noted that just by switching to Proof-of-Stake (PoS), Ethereum should run much faster, so there will be a lot more bandwidth from the start of the transaction.

“I think it won’t be a big deal actually,” Stefan George, CTO and co-founder of Gnosis, the creator of a market forecasting protocol, told CoinDesk. He noticed that many transactions are fine being asynchronous.

“For information that isn’t extremely time-critical, like an Oracle solution, this can easily be on another snippet,” George said.

“There are a lot of really tough questions that haven’t been answered about what to do next,” Zubin Koticha, co-founder of the Opyn options protocol, told CoinDesk. “To be on this financial superhighway that is DeFi, you have to be on a single shard.”

Koticha said one of the problems is communicating between fragments without knowing what the gas tariff is. If wrong, the transaction could be ignored. He also said there’s this discussion of basically moving the state of the snippet to another snippet to run it, which Koticha thinks works well for the person who initiated the move but not so great for other users who may want to interact with it. same smart contract there and then.

Read more: One billion, two billion, three billion, four? DeFi is knocking on TradFi’s door

However, Koticha believes it is solvable, he just doesn’t think difficult questions are still openly discussed. And even if these problems are solved, there will inevitably be more complexity.

“Each contract will need to be rewritten to handle synchronous calls that come from a shard and asynchronous,” he said. This complexity will introduce far more ways to maliciously attack more smart contracts and far more bugs.

“I don’t think the ecosystem has thought deeply about some of the second order effects,” agreed Garg of Electric Capital. “I am optimistic that they will be resolved in the next few years, however, as they become more immediate.”

Hart Lambur of the UMA project, another protocol for creating unique options on Ethereum, believes there are non-engineering solutions to some of these problems. He proposes to solve the synchronization problems with what might be called DeFi thinking.

Read more: Explanation of the inevitable marriage between income farming and NFT

There may be protocols that simply guarantee paid transactions, based on some kind of risk profile.

“You have brokers who guarantee that something will happen and if not, they get cut,” Lambur said, comparing it to an escrow approach or a correspondent bank (banks that have agreements with each other to handle transactions for one).

And if it turns out that there is a very expensive shard, for example, and even though Ethereum remains more expensive than other blockchains after all, Burniske believes that Ethereum will remain the home for DeFi, despite the fact that every other base layer ( Polkadot, NEAR, Solana, Avalanche, etc) is looking to defend itself as the next home for DeFi.

“When you have less important transactions, you can move on to other fragments, other layer 1s,” Burniske said, using an analogy he attributed to Luis Cuende, co-founder of Aragon. Some cities are very expensive to live in, he said, but people do it because they are doing work that is worth it.

Less urgent work, work that doesn’t need to be in immediate flow, can go to smaller towns. In this way, said Burniske, second-tier solutions and other blockchains would be “similar to the peripheries.”

However, he remains optimistic about Vitalik’s invention.

“I think the components for a decentralized financial system could go to other chains, but I think the heart remains with Ethereum,” Burniske said. “Ethereum is the capital of DeFi”.