Ethereum May Not Be Able To Handle DeFi Workload: What It Could Mean for Decentralized Finance

News and Analysis

The growth of decentralized finance may be choking other types of transactions in the Ethereum network. As the DeFi sector is highly reliant on Ethereum, this means a lot for both the blockchain network and the very near future of decentralized finance.

In this article, we take a look at research on the matter and explore the effect Ethereum limitations may have on the emerging DeFi.

Research to Interpret

According to the research published by Ganesh Swami, co-founder of Covalent, there is a growing portion of complex transactions in the Ethereum network compared to transactions of Ether and ERC-20 tokens. These complex transactions are largely associated with DeFi.

The analysis in question compares the growth rate of transactions with smart contract executions with Ether transfers and ERC-20 token transfers. In their methodology, the authors looked at the amount of gas consumed per transaction, associating complex transactions with higher consumptions and ETH and ERC-20 transfers with lower consumption.

After splitting the transactions into three types, the researchers analyzed the monthly gas consumption for each transaction type, processing about 665 million transactions between the Genesis block and March 25th, 2020.

Gas costs for different types of transactions in the Ethereum network

Gas costs for different types of transactions in the Ethereum network. Source: Covalent.

The authors of the research concluded that purely Ether transactions dominate the chart all the way through and pointed out the noticeable uptrend in the amount of consumed gas corresponding with the ICO fever of 2017.

Another rather important point made is that there is a certain limit to the amount of gas spent across all types of transactions. According to the researchers, this phenomenon can be attributed to the demand for block space and the notorious scalability problems of Ethereum.

“In an ideal scalable world, all types of transactions have room to grow. But on Ethereum today, for one kind of transaction to grow, it has to cannibalize the others,” Ganesh Swami notes.

Back in early 2016, roughly half of all block space was occupied by ERC-20 transfers and complex smart contract transactions in almost equal proportion, while the other half was taken up by Ether transfers.

A share of the total gas cost for different types of transactions in the Ethereum network

A share of the total gas cost for different types of transactions in the Ethereum network. Source: Covalent.

As the DeFi sector grew and crypto-lending platforms like Maker and Synthentix launched, the share of complex transactions began to increase, taking the block space from Ether and ERC-20 transfers. Currently, these complex transactions amount to 30–35% of the total block space.

The share of actual Ether transfers went down from 99% at the end of 2015 to 75–80% of the total transaction volume, while the share ERC-20 transfers went below 5% after the decline of ICO.

DeFi Is Outgrowing Ethereum

DeFi has been growing through 2019 and is widely anticipated to grow further in 2020, reaching the $1B milestone in February.

Still, it is a developing sector at its very early stage, taking up the third of the total Ethereum capacity. It will be putting more and strain on Ethereum as more companies and users pour in. But as the global economic crisis shows, the existing infrastructure is insufficient already.

“The Ethereum protocol underlying most of the DeFi systems isn’t enough. Ethereum developers didn’t expect to have this many users. In terms of architecture, the system wasn’t designed to work under loads this high. Ethereum 2.0 will have an entirely different economy and we don’t know how it plays out,” Mikhail Sayfullin, CEO of Enecuum and one of the industry stakeholders, noted in a conversation with ForkLog’s Max Bit.

The recent problems faced by MakerDAO and several other DeFi projects illustrate the matter. While not caused solely by the flaws and limitations of Ethereum, the Black Thursday of DeFi highlights the need for better underlying infrastructure.

Notably, Ethereum 2.0 with the introduction of Proof-of-Stake and sharding may be one of the solutions. It is expected to launch a test net for the initial Phase 0 implementation in April 2020.

Whether or not Ethereum will be able to keep up with the DeFi is yet to be seen, but the sector has to find some room for growth, which may lead to projects creating clever second-layer solutions or migrating to other networks.

Follow us on Twitter and Facebook and join our Telegram channel to know what’s up with crypto and why it’s important.

Found a typo? Highlight text and press CTRL+ENTER

Subscribe to our Newsletter


Related posts

Tags: , ,