Highlights AMA session 4th March 2021: Innovation in Defi Polygon (previously Matic Network) & Umbria
The main topics were:
- The evolution of cryptocurrencies and innovation in the DeFi space
- Decentralisation vs centralisation
- Challenges of Layer 2 protocols
- User accessibility in DeFi
- Solutions for scalability.
The evolution of crypto: From Bitcoin to DeFi
Oscar and Barney Chambers, co-founders and lead developers of Umbria, talk about how the cryptocurrency era started with Bitcoin, the first coin ever to be created. This was then followed by Ethereum, a newer blockchain network:
“Ethereum came to add more features on top of the ideas that Bitcoin brought into cryptocurrency. And that’s the whole idea of a smart contract: it is able to have extra features and extra functionalities on top of cryptocurrency and still keep all the security of the cryptocurrency you have as a general paradigm.”
Layer 2 and Scalability
Last year saw the start of a boom in DeFi, which uses Ethereum as a foundation. The resulting multitude of transactions and features required by different projects has revealed the network scalability problems. This is where Layer 2 protocols come in with super-fast, cheap transaction solutions, allowing more interoperability and scalability on Ethereum. Polygon (previously Matic Network) stands out as one of the most innovative of such solutions, creating a network of Ethereum-based protocols.
Layer 2 protocols are the next evolution of DeFi
About the benefits of layer 2 protocols, Umbria says: “Something that we’ve realised now in the last couple of years is that we don’t need to use the underlying protocols of the cryptocurrency to still leverage the value of the cryptocurrency. For example, if you hold Bitcoin but you don’t necessarily like the company or a project, you still can leverage Bitcoin. You don’t necessarily have to send Bitcoin over the Bitcoin network per se. You can wrap it up and make your Bitcoin, which is more like representing a promise of Bitcoin. Bitcoin remains as a store of value and wealth, very similar to gold.”
This means that, with solutions like Polygon, users can still hold the cryptocurrency as a store of value and still benefit from the scalability and lower fees offered by Layer 2. Other benefits include the speed of transactions, which take only a couple of seconds via a Layer 2 protocol like Polygon.
Umbria says: “It’s just making the whole process not only with lower transaction fees, but quicker and a lot more user friendly just because the actual transaction process feels more seamless when it’s faster. This is a complete game-changer.”
How can liquidity be moved from one chain to another in a cheap and quick way so anyone can leverage the amount of liquidity on all chains at once? How can the problem of unifying liquidity be solved?
Banks, stable coins and monetary policy
An interesting part of the discussion revolved around the hyper-inflationary nature of the current economic system and monetary policy. Stable coins — those that are pegged to a fiat currency like the US dollar, for example — play an important role in the crypto market.
Umbria points out Tether (USDT): “When we have a cryptocurrency that is holding up the whole crypto economy like USDT, which is one of the main tokens that people transact in and out of because they feel like that’s the safe place to be, and then we’re seeing such insane levels of minting of the US dollar, where will that put all the other currencies when we’re trading with each other as a pair?”
Some points of discussion:
- There is a problem of trust coming up in wrapped assets. Is it a danger to use wrapped assets when we are trusting centralised authorities to peg bitcoin/crypto?
- What is the absolute fractional reserve until things get dangerous /unsafe /unstable — what fractional reserve is ok and not going to cause a crash?
The need for education and user accessibility
While the crypto community is well aware of the benefits and possibilities that cryptocurrencies offer, there is a huge part of the population that still does not understand crypto and is scared of playing around with new technologies. This is where education and user accessibility become key aspects for a successful project.
Umbria says: “There’s a lot of people that haven’t made that initial jump from learning about Bitcoin and then also learning about other altcoins. Now, we’re adding another layer of complexity. But streamlining the process of introducing people to Layer 2 and giving them tools, that makes it really simple to move stuff onto Layer 2 platforms. That will be the main thing that’ll help the adoption.”
About user accessibility, Umbria believes that the best way is to streamline transaction between layers and make the experience seamless: “One way to do it would be to make it so that the user doesn’t have to see that they’re using it and just make it like a native-looking experience. So, I don’t mean to kind of hide it from them and tell them that they’re not using a Layer 2, but to make all the process of moving all the tokens and transacting them a part of the ecosystem that is under the hood.”
Polygon has implemented ‘bridge’ features to make it easier to connect with other users and bring people into the network.
Decentralisation on a spectrum
Another interesting point was the extent of decentralisation that is possible in a platform in order for it to maintain efficiency. Decentralisation is not a binary feature as many would think — centralised or decentralised — but instead it exists on a spectrum and can be combined with other values to improve the platform.
Umbria says: “It depends on to what extent you think decentralisation is the highest value. Having transparency, cheap fees and quick transactions is a higher value than decentralisation? So maybe it isn’t possible if decentralisation is the highest value, but maybe if decentralisation is like the third or fourth or fifth most important value, then you start to get more of the opportunity to have more interoperability with a centralised power. Having something in the middle between complete centralisation and complete centralisation allows for a more robust set of features.”
Centralised or Decentralised exchanges
There isn’t a straight correct answer. It depends on each user’s knowledge. Coinbase or Binance are ideal for people starting out in the crypto space, but those who have some knowledge of wallet transfers and appreciate the value of owing their own keys will prefer decentralised exchanges which also offer higher security.
With centralised exchanges, it is a problem of trust — do you trust the exchange to keep hold of your funds?
NFT Boom ahead
One emerging trend within the space are the Non-Fungible Tokens (NFTs), which basically are non-replicable, like a unique card.
At the moment, these are expensive assets, but the Umbria team sees a boom in NFT marketplaces coming up soon, particularly as more Layer 2 platforms become widely used.
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