While layer 2 has alleviated the slowdowns and high gas fees plaguing layer 1, transfers between layer 2 and layer 1 assets will beproblematic, potentially taking weeks to go through. Warp Finance steps in to resolve these issues, providing an efficient cross-layer value transfer solution.
In the world of cryptocurrency, layer 2 tools including “rollups” are the hottest new technology. These methods resolve scalability issues that are straining many prominent public blockchains, such as the Ethereum chain that is at the core of the decentralized finance (DeFi) industry. Layer 2 has been such a successful solution that even Vitalik Buterin, founder of Ethereum, has said that Ethereum is “all-in on rollups” to fix these pressing problems. The main chain on Ethereum (layer 1) has been plagued by issues of high gas fees and long wait times for transactions — making the complicated maneuverings of decentralized finance protocols expensive and out of reach for many. Thus, a big issue has been figuring out how to solve scalability problems on the network, while maintaining the security, immutability, and decentralization that the blockchain promises.
In response, a number of solutions have been proposed and implemented which attach to blockchains without requiring lengthy verification processes. Layer 2 is a catch-all term for solutions which stack on top of this main chain in a separate layer, connected to layer 1 but operating separately. Layer 2 takes transactions off the main chain, allowing all of the same functionality, but without every transaction needing to be immediately verified and included on the main chain’s ledger. As a result, the burden on the main chain is vastly decreased, allowing for the lowering of gas prices and the speeding up of transactions.
The most promising layer 2 solutions right now are ‘rollups’ of various kinds. Rollups bundle multiple transactions on a separate chain together, prove their validity, and submit only the proof to the main chain. This cuts down on the individual verification time and while still maintaining the same degree of security.
Despite these advances, we are just at the beginning stages of building a blockchain industry that functions seamlessly on layer 2. It is clear that now is the time to start figuring out optimal uses for layer 2 that will transform DeFi in the coming year. Here at Warp Finance, we are actively taking the next steps to make layer 2 optimally useful to DeFi traders, making movements between layers more streamlined and functional.
Layer 2 with Warp Finance
One of the biggest hurdles to widespread use of layer 2 is its distinctness from layer 1. Layer 1 and 2 assets are not interchangeable, and as a result, transfers between layers have been plagued by time delays. With Optimism, transfers from layer 1 to layer 2 can be quick, but transfers from layer 2 to layer 1 can still take a week or two. Withdrawing funds from Optimism is time-consuming because the rollup requires the finalization of the verification process for transactions to be completed in advance. Moving between layer 2 and layer 1 presents a series of headaches — especially for fast-moving users who want flexibility with their funds, and are forced to miss out on value-generating opportunities by these prolonged slowdowns.
We are investigating ways to bypass this problem without compromising on security. Warp Finance is looking to be at the forefront of lending, by offering the ability to lend and borrow across layers. We are working on building a lending solution that allows users to deposit layer 2 assets and borrow layer 1 assets. We also will have the functionality for users to do the opposite: deposit layer 1 assets and borrow layer 2 assets. With this solution, the verification process of Optimism is retained, but the lengthy withdrawal times are completely avoided.
These fully collateralized loans will allow users to leap effortlessly between layers 1 and 2 in record time — all without the need to constantly shuffle assets back and forth. Users will be able to continue to gain value on their layer 2 assets, while using lending to have immediate access to layer 1. This means an increase in ease, liquidity, and yield, all through one simple process. This new solution allows users to jump efficiently between layers and free up assets that would have previously been relegated to one layer only.
Layer 2 is clearly the future of DeFi. We are all in on Optimism’s rollup model and feel that it can be harnessed to make layer 1 and 2 compatibility a reality. Some of the benefits of Optimism include ease of transferring existing DApps to layer 2. The OVM (Optimism Virtual Machine) allows for the same smart contract capabilities as the Ethereum main chain and requires very few changes for developers to make layer 2 a reality. With the full rollout of this technology happening soon, we expect to see DeFi become increasingly centered on layer 2.
Here at Warp, we want to be setting the pace rather than playing catch-up, and therefore are enabling cross-layer asset swapping in anticipation of the layer 2 boom. Layer 2 presents new opportunities for DeFi, and efficient value transfer between layers via the Warp Protocol is the first step towards an influx of fast, cheap, secure protocols.