On the latest episode of Blockchain and Booze, Draper Gorem Holm’s Adam Levy sat down with three leaders in the blockchain industry to talk about Layer-2 solutions on the Ethereum network. He was joined by Stani Kulechov of AAVE, Jack O’Holleran of SKALE, and Antonio Juliano of dYdX. What began as a discussion on high fees quickly transitioned into a greater commentary on the potential power of DeFi.

The Ethereum Conundrum

For those not familiar with the Ethereum situation, it’s becoming prohibitively expensive to send transitions on-chain. At the time of publication, the average cost of sending an Ethereum transaction is just under $20. Complex smart contracts like those found in decentralized finance protocols can easily run over $100 as the network becomes increasingly congested. Layer-2 solutions are blockchains that can lighten the load and offer much faster, less expensive transactions.

As Aave’s Stani Kulechov explains, the disruptive potential of Layer-2 solutions is massive. Not only are they incredibly promising, but they are still a nascent technology yet to be fully implemented:

“Lots of these (Layer-2) developments on Ethereum aren’t even being deployed yet. We’re still very early on scaling up, but the huge number of people executing on Layer-1 is an issue.”

All three of our guests are proponents of Layer-2 solutions due to the solutions they can bring to the decentralized systems. But how do these protocols actually operate? Jack O’Holleran has an elegant example: he compares the Ethereum settlement layer to a poker game and Layer-2 solutions as a record of wins and losses.

Layer-2 Explained

Imagine a group of friends arriving to play poker. After a full night of gaming, the players don’t walk away with their winnings, but instead, record them on a ledger at the table. Players can play a number of games, recording their wins and losses, and only “cash out” or use the settlement layer when they don’t want to play anymore. Similarly, Layer-2 solutions like Polygon allow ETH and ERC20 users to use the Layer-2 network until they want to “cash out” their tokens onto Ethereum.

Broadening the scope, Layer-2 networks also open up the DeFi space for those who are unable or unwilling to spend high fees on a single transaction. According to O’Holleran, there is a focus on financial inclusion within the development community, which is driving the adoption of low-cost solutions. The more people that can participate in DeFi, the stronger the DeFi network becomes.

Beyond DeFi

Near the end of the conversation, Levy asked the group what the “End Goal” of DeFi was, or what comes next after DeFi has been “solved.” After a pause, O’Holleran spoke about the potential that DeFi’s systems had to offer the world at large:

“The power of these systems goes beyond DeFi. Marketplaces, social media, gaming, these can all be disrupted through decentralization. Ultimately we want to democratize finance.”

Juliano echoed this sentiment by adding:

“The goal is really big. The financial system is the most permissioned, trusting system in the world. We can build something parallel in DeFi, small at first, but eventually, it could be more profitable to use DeFi because of better interest rates.”

To insiders the DeFi space may appear mature and massive, having recently surpassed $100 billion in Total Value Locked. But to the financial world, this is a very small, almost quaint valuation. While traditional finance is currently “interested” in DeFi according to Juliano, there is still much work to be done behind the scenes. O’Holleran echoed this sentiment, predicting the future intersection of CeFi and DeFi:

“The smart CeFi business will begin to figure out how to inject themselves into DeFi. And the DeFi space will improve as a result.”

Layer-2 solutions might not be as flashy as the newest NFT or Bitcoin breaking a new all-time high, but if our panel of experts is to be believed, it might be just as important.