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Few have predicted the rapid acceleration of the decentralized finance (DeFi) economy this year. The fervent activity in space has skyrocketed DeFi assets to nearly $ 11 billion, equivalent to nearly double the size of the Barbados economy. Likewise, the assets under management held by decentralized autonomous organizations (DAOs) have reached exceptional levels, supported in large part by the continued growth of the decentralized economy.
Ethereum, the rails upon which most open finance and DAO governance runs, must keep up. Soaring transaction levels DeFi is adding significant demand and strain to the current network, with many DAOs being negatively impacted by higher voting costs and slower transactions.
As things currently stand on Ethereum, only the most liquid and hyper-connected protocols will be able to thrive under the current demand on the network.
Back when the Aragon Project released its first implementation of on-chain voting, voting only cost a few cents of ether (ETH). Now, with Ethereum congested, it can cost up to $ 30 for a user or token holder to place a single vote.
Network congestion on Ethereum inspired the Aragon and Balancer Labs community to devise a solution that offers off-chain voting with chain execution via the Snapshot DAO governance tool. The solution was not born out of choice, but out of necessity for the respective communities.
Before a scalable version of Ethereum arrives in Ethereum 2.0, it is likely that many social innovators, DAOs, and DeFi protocols will be looking for off-chain systems to meet their needs.
See also: DeFi Dad – Five Years In, DeFi Now Defines Ethereum
The pull factor of Ethereum
Running a smart contract on Ethereum is like renting an apartment in Manhattan – you’re hyper-connected to “a cultural hub and the world of finance” but you pay a lot for a 500-square-foot studio. Alternatively, you can move to a new neighborhood, like Brooklyn or Queens, or to the suburbs to get a nice home with more space and a cheaper rent, but you’ll have to move and you’ll be less connected to the center of the business.
Similar to Manhattan, Ethereum could be considered a hive of decentralized activity; congested, but a major economic “pull factor” for the many different DeFi protocols. While some DAOs mostly want connectivity and will stay running on Ethereum, others won’t need hyper connectivity as much as they may require lower costs. This is where they can shine solutions like Ethereum 2.0, Cosmos or Polkadot.
The advancement of off-chain and layer 2 technologies – and ultimately Ethereum 2.0 – comes at an important time for these social DAOs seeking to scale.
DeFi protocols, forecast markets, and decentralized exchanges (DEX) are among the most prominent users of Ethereum today. Everyone is looking for hyper-connectivity to interoperate, a hub where creditors, lenders and DeFi communities interconnect to leverage each other’s products. In essence, the hyper-connectivity on Ethereum allows a protocol to open a vault on Maker, obtain from, lend that from on Aave and then offer returns to its users, just one of the many examples of the “lego money” that opens with the hyper connectivity on Ethereum.
In fact, many of the largest DeFi protocols running on Ethereum today will continue to work flawlessly without the need for an additional functional layer to scale. But with the growing emergence of social DAOs, the current network infrastructure will not adapt to their long-term operational or governance needs. (That said, many of the long-tailed social DAOs don’t have to be hyperconnected.)
These rapidly changing DAO social communities need space and room to thrive. The advancement of off-chain and layer 2 technologies – and ultimately Ethereum 2.0 – comes at an important time for these social DAOs seeking to scale.
Similar to the less crowded streets of the New York City suburbs, these solutions can offer these DAOs a cheaper, faster and more affordable alternative model to operate in. The lower costs and faster transaction speeds that will result from these technologies should, therefore, provide a major advance 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 have expanded and evolved over time, launching Ethereum 2.0 will also take time. But in the meantime we shouldn’t discard other options, including blockchains built on Cosmos SDK or Polkadot. Off-chain solutions, such as Snapshots or Tier 2 virtual machines, will go a long way in meeting the requirements of social DeFi and DAO.
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 they need to escape congestion.
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