Solving the Composability Problem
A quick overview of how we will bring together different scaling solutions and other layer ones
Hey DEFI TIMES community,
Scaling solutions will greatly impact Ethereum’s future - both in the long and short term! They will greatly improve transaction throughput and reduce fees to an absolute minimum.
It seems like the future is already here: Optimism and Arbitrum are going live right now. In fact, Uniswap already launched on Optimism a few days ago.
This is where we are!
In addition to that, sidechains are also on fire. Polygon saw one of its greatest months ever in June!
Another type of scaling solution is different layer one chains like Binance Smart Chain, Solana, Cosmos, etc.
We talked about interoperability many times in this newsletter and it becomes more and more clear that we need to find a way for these chains to efficiently communicate.
We already see first steps like the IBC.
But there are also many other solutions to make different scaling solutions more composable!
This is a quick overview of how we will bring together different scaling solutions and other layer ones to form an interoperable future!
Solving the Composability Problem
Building a multi-chain environment is definitely the way to go. However, it comes with inherent trade-offs that we have to pay attention to. Before we go into possible ways of connecting different chains, let’s first examine the pros and cons of a multi-chain future!
Advantages of a Multi-Chain Environment
Scaling: Multiple blockchains, second layer solutions, and sidechains will bring additional block space, which will ultimately increase the transaction throughput. More transaction throughput, of course, means more transactions per second and lower fees. A multi-chain future will greatly enhance the user experience - no more high gas fees!
Adjustable parameters: By building many blockchains we can adjust different parameters to fit the needs of their native applications. Polkadot and Cosmos brought this narrative to life by building a framework to easily build a whole new blockchain with adjustable parameters. For the first time ever, we can build blockchains for specific purposes. For example, if we want to build a blockchain that is specifically designed to fit the needs of a supply chain, we can do so.
Less competition: Imagine a future with only one blockchain, which is exactly what we have with Ethereum today. Most DApps run on Ethereum, which is why we are forced to compete for block space with people doing completely different things. Do you remember the memecoin hype? During that time, gas prices reached incredible highs. If you wanted to do a simple Uniswap transaction, you paid hundreds of dollars for a single swap. Why? Because you competed with people aggressively buying memecoins?! You don’t want to compete for block inclusion with people going crazy over the latest hype. That’s how you overpay for gas prices, and it’s not even your fault. In a multi-chain environment, you don’t compete with people doing completely different things. Blockchains and L2s can be programmed to only serve one single purpose and you only compete with people doing the same stuff as you! Here is an interview with Arbitrum explaining this issue:
No single point of failure: If we only use Ethereum and it goes down, we are all rekt. In a future with multiple chains, we don’t heavily rely on one single chain to survive. Less risk, fewer dependencies, and less risk of black swan events threatening our industry.
Disadvantages of a Multi-Chain Environment
Less composability: Even though we are building a future without a single point of failure, it also comes with inherent trade-offs. For example, the money lego effect on Ethereum would be a thing of the past. With many different chains, we sacrifice some composability of applications building on top of each other. This is what we are yet to solve but it’s possible. How? Read one!
Untested technology: The longer technology has been around, the longer it is likely to exist. This is widely known as the Lindy effect. When technology is still young, there are lots of risks associated with it. Anything could go wrong and we can be pretty sure… that there will be hacks, black swan events, and other horrible stuff. Prepare accordingly!
Network effects: With the loss of composability we will also lose network effects. We have to build these network effects all over again, which will certainly take time!
How can we solve the composability problem?
So one trade-off is the loss of composability. But how can we solve it? We already see some interesting solutions trying to solve the problem within the Ethereum ecosystem.
Hop Protocol is a bridging/interoperability solution trying to connect Ethereum, Rollups, and sidechains. The protocol uses two steps to do so:
You first create an hToken - an intermediary token you can use across networks (e.g., hETH, hDAI, etc.) that can be quickly moved from one scaling solution to the next.
You can use Automated Market Makers to swap the hTokens to their corresponding assets on each scaling network.
Of course, the UI looks much simpler than this. It’s already live and you can use it today:
You choose the token, the networks, and you are ready to go. At the moment, Hop Protocol only supports Ethereum, xDai, and Polygon, but Rollups will be added soon!
Connext Protocol is a bridging/interoperability solution similar to Hop Protocol. It aims to connect all kinds of scaling solutions that are EVM compatible. EVM compatibility means that Solidity is supported by the virtual machine. In plain words, any code running on Ethereum can also run on the EVM compatible chain.
Connext Protocol is used to connect scaling solutions. State channels enable users to batch up normal Ethereum transactions without needing to trust intermediaries. So, they don’t require any custodians to manage assets.
Hop Protocol and Connext Protocol are the first solutions to solve the composability problem. However, they currently only focus on the Ethereum ecosystem and EVM compatible chains.
If we want to achieve full composability/interoperability, we will need to find a way to connect all chains, without focusing on one single ecosystem. For example, Cosmos’ IBC is a great step in this direction!
Let’s make true interoperability happen!
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.