Who will lead the next "DeFi Summer": Polygon, Arbitrum, or Optimism?

Author: David Hoffman, Co-founder of Bankless

Compiled by: Overnight Porridge

Last weekend, Arbitrum launched their mainnet for developers, and it's hard to articulate the significance of this event as it relates to the overall progress of Ethereum and the cryptographic system.

From day one, it was clear that Ethereum needed to scale. Sharding and Layer 2 were both seen as reasonable pathways for Ethereum to achieve scalability, but how to construct sharding and Layer 2 networks remained a very open and unresolved research question.

Over time, and through numerous iterations and redesigns, these questions have slowly been answered. From 2015 to 2018, we saw everything from state channels to plasma, culminating in Rollup (the currently adopted best solution).

The launch of the Arbitrum mainnet is the culmination of six years of research and development in cryptographic systems, and Optimism is not far behind.

It feels like we are at the…

The Crest of Layer 2 Summer

This is how I think about it:

Ethereum is like the early Disneyland; it's a central hub where, when you go to the Ethereum park, you go to the same place as everyone else, all trying to enjoy the same attractions.

There are only so many things you can do because congestion limits the park's functionality (imagine Disneyland in 1955 but with a 2020 population). It's a very interesting place, but the fast pass lines are still too long because whales keep riding the same attractions over and over.

The Ethereum park needs more attractions, so how does it do that?

It builds more parks!

Different teams have been building on top of the Ethereum main hub to create cool new parks for all main chain visitors to try out, avoiding the congestion of the main attractions.

Polygon launched a few months ago.

Arbitrum launched last Friday.

Optimism is also set to go live soon.

The number of new places Ethereum visitors can access is overwhelming.

Speculative Growth

Continuing with the California theme, one of the greatest migration events in human history was the California Gold Rush.

In 1848, gold was discovered in California, leading approximately 300,000 people to rush to California from other parts of the U.S. and abroad. The sudden influx of gold into the money supply revitalized the American economy, which is one reason California became one of the most developed regions in the world.

Speculators realized there was wealth to be had, and the demand for wealth led people to leave their homes, migrate west, and engage in gold speculation.

With the launch of these Layer 2 networks, this is what is about to happen (or has already happened!).

But this gold rush will happen in two waves:

• First, for developers.

• Then, for users.

Developers Claiming Land

When Polygon, Arbitrum, Optimism, Hermes, or any other Ethereum L2 opens up, they release free land to the world. But it's just land; it's fertile, but there's nothing built on it.

The first race is to establish infrastructure for DeFi applications on this land! DeFi applications are the new attractions that will ultimately draw people from the Ethereum main park to L2 to see all the exciting things happening.

Layer 2 creates the land, but DeFi applications need to claim it.

The first gold rush is aimed at DeFi applications. That's why Arbitrum did not allow any DeFi application to "lead" over others.

Last Friday, Arbitrum launched the "Developer Mainnet," but it did not grant any DeFi applications early access, maintaining credible neutrality and not allowing any DeFi applications to start building infrastructure first.

Now that Arbitrum is open to developers, they are rushing into this new land to build their DeFi applications as quickly as possible.

Layer 2 Gold Rush

Here comes the fun part; I'll explain why I speculate that DeFi summer: Layer 2 version is on the horizon.

DeFi applications want you to use their apps on the new Layer 2 networks; they have just built your favorite attractions from the Ethereum main park, but now these applications don't need to wait and have almost no fees. They want you to use these DeFi applications instead of choosing competitors to claim as much land as possible.

So what do these Layer 2 networks intend to do? Of course, they will issue tokens!

Liquidity mining! Yield farming! They will do what DeFi applications do best, which is incentivizing usage through token issuance.

We've already seen this on Polygon, which has also achieved great success. If you provide liquidity on SushiSwap on the Polygon network, you can earn SUSHI and MATIC token rewards.

I previously farmed MATIC tokens on Aave on Polygon; it was a happy time :)

Not Just DeFi Application Tokens

I don't know if this is true, but it aligns with my understanding of Ethereum projects.

Arbitrum and Optimism, along with all other Layer 2 networks, will have their own tokens, which are a way to allocate power and control valuable systems, part of the spirit of decentralization in Ethereum.

When DeFi applications start liquidity mining on Layer 2 networks, it is highly likely that Layer 2 teams will add their own tokens to the mining opportunities. This means you can earn both SUSHI and Arbitrum token rewards simultaneously.

Moreover, these teams will also transfer governance rights to the community.

Polygon has already accomplished this with MATIC and has seen great success.

• By using Aave's deposit and borrowing features on Polygon, you can earn MATIC tokens;

• By trading, lending, and providing liquidity on SushiSwap on Polygon, you can earn MATIC tokens;

• By using PoolTogether on Polygon, you can earn MATIC tokens;

Layer 2 needs to compete for users just like DeFi applications! They also need to distribute their tokens to a broad user base, so how will they do that?

By issuing tokens, engaging in yield farming, and liquidity mining.

DeFi Summer: Layer 2 Version

So, this is the straight line.

Ethereum is opening up many different Layer 2 sub-regions outside its main hub, which is so crowded that many are eager to migrate to the Ethereum suburbs.

DeFi applications are racing to stake their claim on this new fertile land. Once they are ready, they will open up to users. Users will start saving on fees, and DeFi applications will do their utmost to persuade users from the main Ethereum network to use their applications instead of competitors. Thus, DeFi applications will issue token rewards to incentivize migration and settlement within their applications.

Layer 2 will issue tokens and distribute their tokens through DeFi applications to decentralize control over the Layer 2 networks.

Next, there will be another DeFi summer, but this time the scale will be larger because we will have dual (application + Layer 2) token incentives, and in the long run, Layer 2 real estate will be highly valuable.

This is what I see on the horizon.

It's time to pack our bags and head west, where there is gold, new, undeveloped land, and pioneers will do what they do best.

It's time to settle on the new land.