Ethereum Layer-2s and Liquidity Fragmentation
According to Susannah Evans, a product lead at the Interchain Foundation, Ethereum’s layer-2 ecosystem suffers from liquidity fragmentation. This refers to the separation of liquidity pools across different networks with no interoperability solution. Each layer-2 ecosystem operates as its own silo. In contrast, the Cosmos ecosystem has an advantage because all Cosmos-based application chains are natively interoperable through the Inter-Blockchain Communication (IBC) protocol.
IBC is a protocol built on top of Cosmos that connects Cosmos-based blockchains. Evans believes that projects like dYdX and potentially Maker migrating to Cosmos-based chains indicate that developer teams recognize the problem of liquidity fragmentation.
Cosmos Liquidity Issues and Ethereum Compatibility
While several projects have been built using the Cosmos SDK, they face low liquidity. According to DeFi Llama data, the cumulative deposits across 32 Cosmos-based blockchains are just $524.3 million. In comparison, Ethereum roll-ups have total deposits of $2.89 billion. The lack of liquidity hinders the efficiency and functionality of DeFi applications in the Cosmos ecosystem.
Bridging the two networks could allow the Cosmos ecosystem to tap into Ethereum’s deep liquidity. However, Evans suggests that compatibility between Cosmos and Ethereum is impractical due to their different designs. Cosmos aims for instant finality after consensus, while Ethereum is based on probabilistic finality.
Efforts for Compatibility and Future Developments
Despite the challenges, there are efforts to extend IBC compatibility to EVM chains. For example, native USDC has been launched in the Cosmos ecosystem, and projects like Polymer Labs and Agoric are working on enabling connections with Ethereum at reasonable costs.
The Interchain Foundation is also working on establishing connections between IBC and the Optimism stack, a popular scaling toolkit. These developments aim to address liquidity issues and enhance interoperability between Ethereum and Cosmos.
Hot Take: Ethereum Layer-2s and Cosmos Liquidity
Ethereum layer-2 solutions offer efficiency and scalability, but they also face challenges in terms of liquidity fragmentation. The Cosmos ecosystem, with its natively interoperable chains through IBC, provides an alternative for projects seeking better liquidity options. However, compatibility between Cosmos and Ethereum remains a challenge due to their differing designs. Despite this, efforts are being made to bridge the two networks and enable connections at reasonable costs. The future holds potential for enhanced liquidity and interoperability between Ethereum and Cosmos.
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