DeFi Testing Ethereum’s Transaction Limits, These Solutions Offer Hope for Scaling

Key Takeaways

  • On-chain activity on Ethereum is growing as DeFi popularity grows
  • Ethereum is slow, and this is unlikely to change soon
  • Off-chain solutions are getting implemented to increase Ethereum’s scalability

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On-chain activity on the Ethereum network has been surging in 2020 to the levels previously seen amid the 2017-2018 bull run. Data suggests that it’s likely due to the rapid expansion of the DeFi sector.

While the growth of on-chain activity is beneficial for Ethereum, it’s low throughput can cause high transaction fees under heavy network load. Expensive transactions, in turn, are prohibitive for DeFi usage.

Etherum 2.0 could solve many of the network’s current scalability issues, but it’s unlikely to come anytime soon. In the meantime, there are several already available scalability solutions to accommodate the network’s rising activity.

The numbers of daily active addresses and daily transactions have been enjoying steady growth in 2020, suggesting that more people come to use the network. Importantly, people mostly move around ERC-20 tokens, while the number of ETH daily transactions has stayed around 2 million over several months.

Daily Active Addresses (straight purple line) vs. Daily Transactions (dotted purple line) on Ethereum. Source: CoinMetrics
Daily Volume ETH Transferred on Ethereum by Dune Analytics
Daily Volume of ETH Transferred on Ethereum (Blue), and It’s USD Value (Green). Source: Dune Analytics

Many of the platforms with the highest number of transactions, like 1inch.exchange, Synthetix, and Matcha, all belong to the DeFi sector, indicating the decentralized finance movement is responsible for the surge in on-chain activity.

DeFi Users Over Time on Ethereum by Dune Analytics
DeFi users overtime on Ethereum.Source: Dune Analytics
Top 10 Platforms by Transactions on Ethereum by DappRadar
The top 10 platforms by number of transactions over the 7-day period on Ethereum. Source: DappRadar

As the on-chain activity increases, the network becomes congested. As a consequence, transactions become more expensive.

Miners fill blocks with transactions from a transaction pool. If…

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