With the loosening of OCC regulation, will Ethereum and Layer 2 see growth opportunities?
The OCC, the largest regulator of U.S. banks, known as the Office of the Comptroller of the Currency, said on Jan. 4 that it allows banks to become blockchain nodes and use stablecoins for settlement, meaning the OCC licenses its banks to use public chains as a settlement infrastructure.
Opportunities for Ethereum
The OCC does not specify which public chain infrastructure banks should adopt and which public chain nodes they should become. Of all the smart contract chains, for now, Ethereum is the largest settlement layer for stablecoins. The overall market cap of stablecoins is currently over $30 billion, with the vast majority of them running on Ethereum.
Although the current transfer fees on Ethereum are extremely high, one advantage it has is security. And security is the aspect that traditional banks are most concerned about. Traditional banking systems have problems such as single point of failure, and every year banks have to spend huge human and material resources to secure them from attacks, which is a very huge cost.
Besides, it is not fully secure. If banks become nodes of the Ethereum public chain and settle through Ethereum, they can greatly reduce their operating costs and are more secure. All these are attractive for banks.
Of course, Ethereum is currently extremely congested and it is impractical to implement large-scale financial activities on it, such as payments, lending, and investments. Because its cost is too high and its processing speed is too slow, it can only process about 1.2 million transactions a day, which is completely unable to meet the needs of the mainstream population. This is what brings us to the second topic: layer 2 of Ethereum.
Layer 2 of Ethereum and the opportunity for cross-chain DeFi
The gas fees are crazy these days, it is even close to 500Gwei when congested, which means that sending close to $10 of ETH in Uniswap and Sushiswap transactions can cost up to $50+ in fees, and even higher for participating in mining (e.g. YFI). The average transaction fee for Ether on January 4 was up to 15.957 USD, which is an extremely expensive transaction fee.
If banks were to issue stablecoins on Ethereum or use them for payments, savings, lending, investments and other activities, the current throughput is completely unrealistic and extremely expensive. Therefore, the practice of Layer 2 solutions, such as Rollups, is increasingly important.
One of the most important phenomena in crypto in 2021 can be expected to be the significant adoption of layer 2 technology by DeFi projects. Synthetix, for example, is adopting Optimism’s layer 2 technology, while Uniswap and Chainlink are said to be adopting it as well. If the three DeFi giants use it one after the other, this could make it a significant layer2 infrastructure in the short to medium term. In the long run, the various Layer2 technologies are just solutions for DeFi projects to achieve a better user experience for themselves, and the Uniswap guys will continue to iterate based on the actual situation, so it will take about six months to a year for the first signs of which Layer2 technology will eventually win out. In the long run, we are more optimistic about the Zk-rollups series of Layer2 solutions.
Optimism plans to release its initial master network on January 15, 2021, and Synthetix will be the first DeFi project to experiment with its solution. Since OVM (Optimistic Virtual Machine) is compatible with EVM (Ethereum Vitual Machine), Synthetix’s smart contracts can be ported to OVM without significant cost.
For ZK rollups, Loopring and Zkswap are also currently testing DEX based on ZK rollups technology.
In addition, with the development of cross-chain DeFi (e.g. Polka, etc.), it can also alleviate the congestion problem of Ethereum to some extent.
The possibility of becoming the largest settlement layer in the world in the future
In the short term, due to the continued rise in the price of Bitcoin, its settlement value will show an alternating rise with Ether. But in the long run, due to the continued launch of stablecoin, the gradual entry of traditional banks, the development of Layer2, and most importantly, the increasing activities of DeFi and traditional finance on Ethereum and its increasing scale, Ethereum is likely to surpass Bitcoin as the world’s largest crypto settlement layer and may evolve to become the world’s largest settlement layer as time goes on.
Once tens of trillions or even hundreds of trillions of dollars of assets are hosted on Ethereum, which houses not only Bitcoin, stablecoins, and other public chain assets (such as polkadot), but also traditional assets (synthetic assets). if it is realized, Ethereum has the opportunity to become the largest financial infrastructure ever built in human history, and as a result, to become the largest settlement layer in the world.
And ETH, as the foundation stone to carry the security of the possible future largest settlement layer in the world, and as the fuel to carry it, its demand scale would rise consequently. Of course, this day will not come overnight, and Ethereum will experience more setbacks on the way to become the world’s largest settlement layer, and it is not definitely achievable, it needs more people to build to make Ethereum a more secure and scalable infrastructure.
Article from LanhuNote
Translated by Yang(Mengyan Finance)