DeFi for Newbies: 4) Beyond Ethereum

Stefan Grasmann
Coinmonks

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We currently see a lot of movement in DeFi. High transaction costs on Ethereum trigger rapid developments on other layer 1 blockchain networks like Solana, Avalanche or Fantom. Ethereum side-chains like Polygon gain traction. Ethereum layer 2 solutions like Optimism or Arbitrum are also growing immensely.

About time to dive into the multi-chain future for DeFi users…

From an end user perspective, most of these chains feel very similar to using Ethereum — except that transactions usually settle much faster and are tremendously cheaper (factor 10–1000 at the time of writing).

Foto von Jessica Bryant von Pexels

This makes these networks very attractive for first steps and experiments. In most cases, we can use the exact same wallet setup that we discussed in parts 1, 2 and 3 of this article series. Metamask wallets work with all of the chains mentioned above — except for Solana where we need to use alternative wallets like e.g. Phantom wallet. For the sake of simplicity, we will stay with our proven Metamask wallet setup.

But before we dive deeper into using these blockchain networks, let’s have a brief look into what distinguishes them from Ethereum:

The differences under the hood

Competitive layer 1 blockchains like Solana, Avalanche and Fantom all come with their very own security architecture.

So while they appear very similar to Ethereum on their surface they

  • bring their own consensus mechanics (proof of stake),
  • trust their own set of validators,
  • are driven by their own native token ($SOL, $AVAX, $FTM).

Ethereum side-chains like Polygon (a.k.a. Matic) or xDAI are a bit closer to Ethereum. Polygon even announced plans to incorporate many different side-chains and roll-ups under one roof. But for now Polygon is also driven by their own token ($MATIC) and their own set of validators. Yet, they see themselves as part of the Ethereum ecosystem.

(Optimistic) Ethereum roll-ups like Arbitrum and Optimism (as well as zk-rollups which are expected to be generally available very soon — see Starkware) are even closer to Ethereum since they are built directly on top of Ethereum and inherit its security architecture — including miners (Ethereum v1) and validators (Ethereum v2). They are called “Ethereum layer 2” and regularly group and settle their layer 2 transactions on Ethereum layer 1 and use it as a “base chain”. They also work with $ETH as native token. That’s why they are seen as “the future home for DeFi” by many Etherians.

A lot of DeFi traffic on these roll-ups means success for Ethereum. The current traction of Arbitrum is enormous — as we can see on their portal. Many “blue chip DeFi projects” like Aave, Curve, Uniswap, Sushiswap and many more are alive and kicking on Arbitrum.

The user’s perspective

But let’s get back to the user’s perspective: Before we can use one of these networks we need to do two things:

  1. We need to configure our wallet to interact with these networks.
  2. We need to bridge assets — and buy some of their native tokens to actually do anything meaningful with our assets.

Wallet configuration

Each network defines its own wallet configuration for Metamask. We can usually find it on their doc pages like this one for Polygon. The pattern is always the same: We have to define a network name, an endpoint where this network is reached (RPC URL), a chain id, its native currency and — for convenience — the address of a suitable block explorer for that network:

We can find these settings in Metamask by clicking our wallet icon and navigate the menus: settings / networks / add network.

Caution: It’s important to get these parameters right! Scammers might want us to enter the wrong coordinates and attack us. So we should always be careful to extract these parameters from a trusted source like the project’s original website. Otherwise we can be tricked with a fake config and think we trigger transactions on chain A and actually perform actions on chain B.

A very comfortable way to add a network to Metamask with just two clicks is via https://chainlist.org/. It has all config data for Ethereum compatible networks gathered in one spot and gets updated regularly. Again — I recommend to check afterwards what has actually been added to your wallet. It’s a website and could have been hacked. We never know.

Now , we are set and can easily switch networks in Metamask between Ethereum and the newly configured blockchain networks like e.g. Polygon. This happens via the small dropdown at the top of Metamask.

Bridging assets

The most complex part is now to bridge our assets e.g. from Ethereum to one of these other chains. Bridges are dangerous — since they are

  1. freshly built
  2. a (potentially) central point of failure

When we bridge our assets from chain A to chain B we must be aware that there is communication between two chains who originally might not have been built to talk to each other. We are leaving the security promises of blockchains behind— at least for a short moment. Instead we trust messaging between two chains that try to make sure that your tokens arrive well “on the other side”. Tokens live in different smart contracts with different addresses on the different chains — so, they need to be mapped properly. Some bridges offer mapping tables, so that we can double check, which address is the right one on the “other side” — see this example for Ethereum x Polygon mapping.

In many cases, it is wise to bridge well known tokens like $ETH — and then use a decentralized exchange (DEX) like SushiSwap, Uniswap or a prominent DEX on the target chain to swap the bridged ETH into a target currency. For sister chains like Fantom with their own native token (in this case $FTM) it might be wiser to swap $ETH to $FTM on Ethereum und bridge $FTM to Fantom — since we need $FTM anyway to do anything on that chain. Some bridging tools like https://multichain.xyz/swap do this in one step. DeFi tools like Zapper integrate bridges into their UI, making bridging more and more user friendly. There are many different bridges built these days. They are young tech and more or less decentralized. Please be careful and do your own research.

Avoiding bridges: Fiat onboarding

Bridging is dangerous — and it costs transaction fees. That’s why it’s a compelling idea to even start on Ethereum layer 2 or one of its side or sister chains — completely omitting Ethereum layer 1.

And that’s possible: One of my favorite platforms to onboard from fiat directly to e.g. Polygon, Solana or Fantom is a gateway called Transak. They have low fees and worked reasonably well for me in the last months (in my case via SEPA bank transfers). You need to do identify yourself due to KYC/AML restrictions — but that’s true for any serious fiat-crypto on-ramp.

Conclusion

There are many blockchains out there that offer interesting DeFi services to their users. Ethereum is still positioned at the center of it all and offers interesting new options, e.g. via its layer 2 roll-ups. But side-chains like Polygon and sister chains like Solana are clearly gaining traction.

That’s the reason why many DeFi projects try to create a multi-chain version of themselves and offer their services on many chains. It’s always a good idea to have a close look into the liquidity on all these chains, like the Total Value Locked (TVL) per chain or trading pools on certain DEXes e.g. via Coingecko, DeFi Llama or Dune analytics. We are still at the very beginning.

Former articles in this series:

DeFi for Newbies: 1) Wallet setup
DeFi for Newbies: 2) Investor profiles
DeFi for Newbies: 3) And action!

Further reading: You can find more articles about Blockchain and DeFi on my blogs on publish0X and Medium.

Disclaimer: This article is not intended to be an investment advice of any sort. Do your own research and search for professional support if you intend to invest in one of the projects mentioned in this article.

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Stefan Grasmann
Coinmonks

Blockchain enthusiast. Driving Thought Leadership @zuehlke_group to the next level. Innovator | Strategic Advisor | Networker | Speaker.