IBC Product Officer: Ethereum Layer 2 is not the “Holy Grail” of scaling

Author: Nivesh Rustgi Translation: Huohuo/Vernacular Blockchain

When it comes to Ethereum Layer 2, what else is there but efficiency and solving the trilemma?

Susannah Evans, product lead for the Interchain Communication (IBC) protocol at the Interchain Foundation, said that Ethereum’s Layer 2 ecosystem “fragments users and liquidity,” referring, of course, to individual blockchains. Separation of liquidity pools between networks and no solution interoperability.

"Tier 2 is not the Holy Grail," she said. “Every second-tier ecosystem is an island.”

According to her, the Cosmos ecosystem has advantages over the Ethereum ecosystem because all Cosmos-based application chains “can natively interoperate through IBC.”

Inter-Blockchain Communication (IBC) is a protocol built on top of Cosmos using the network's software development kit for connecting Cosmos-based blockchains.

Evans said projects such as **dYdX and the potential migration of Maker are proof that development teams are realizing the problem of liquidity fragmentation. **The decentralized derivatives trading platform is expected to launch a new chain based on Cosmos before the end of the year.

Cosmos liquidity issues, Ethereum incompatibility

Although several projects, including Cronos, Kava, Osmosis, Canto, Thorchain, Secret Network, and Sei, are built using the Cosmos SDK, they still face a distinct dilemma: low liquidity.

According to DeFi Llama data, the cumulative deposits of 32 Cosmos-based blockchains are only $524.3 million. In comparison, Ethereum has aggregated total deposits of $2.89 billion.

This figure does not include the massive $21.5 billion in assets locked in Ethereum-based DeFi applications and other chains that borrow securely from Ethereum, such as Polygon and its $757 million in deposits.

Lack of liquidity can adversely affect the efficiency and functionality of DeFi applications in the Cosmos ecosystem, limiting their growth and adoption.

One solution is to bridge the two networks, allowing the Cosmos ecosystem to take advantage of Ethereum’s deep liquidity.

Still, Evans said differences in the designs of Cosmos and Ethereum make compatibility “impractical.” Cosmos is designed for “instant finality” after consensus is reached, while Ethereum is based on “probabilistic finality.”

Probabilistic blockchains like Ethereum and Bitcoin do not guarantee that all nodes will always agree on the same block after a transaction is confirmed, but they guarantee that the probability of agreement is very high. The probability increases as more blocks are added to the block containing said transaction.

Still, these projects are working to extend IBC compatibility to EVM chains.

Evans mentioned developments such as the launch of native USDC in the Cosmos ecosystem. She added that teams like Polymer Labs and Agoric are working to enable connectivity to Ethereum at a reasonable cost, particularly through Metamask Snaps — a feature of wallet providers that allows third-party developers to build on top of crypto wallets.

Meanwhile, the Interchain Foundation is working to establish a link between IBC and the popular scaling toolkit Optimism stack.