Layer-two and multichain DeFi platforms see record inflows as Ethereum fees soar

Since October, multichain, compatible DeFi platforms have seen record inflows as investors and developers attempted to avoid the Ethereum network due to soaring gas fees.

High transaction fees have been a persistent thorn in the side of investors and blockchain projects since at least 2014 when Ethereum co-creator Vitalik Buterin stated in reference to Bitcoin: “The ‘Internet of Money’ should not cost $0.05 per transaction. Its kind of absurd.”

Fast forward to November 2021, and the simple act of approving a token so that it can be transacted on Uniswap can cost as much as $50 worth in Ether (ETH) depending on the time of day.

Even layer-two solutions, which were billed as the protocols that would help solve the fee issue, have been unable to escape the high-fee curse of congested networks as new users onboard into the cryptocurrency ecosystem by the day.

Users migrate to low-fee networks

As a result of persistently high Ethereum fees, a growing number of users are bridging assets to lower-cost Ethereum Virtual Machine-compatible networks. Data from Dune Analytics shows that the total value locked (TVL) on bridge protocols has been on the uptrend since the beginning of October.

As shown on the chart above, the Ronin bridge has become one of the more popular protocols over the past month thanks in large part to Axie Infinity users migrating assets to the lower fee platform.

The popularity of Axie Infinity is shown in the following chart from Token Terminal displaying protocol revenue.

The third-ranked protocol by revenue is PancakeSwap, a high TVL decentralized finance protocol on the Binance Smart Chain that offers significantly lower transaction fees than those found on Ethereum.

A majority of the top gainers in terms of TVL over the past week are also competitor protocols that are either found on Ethereum or offer multi-chain functionality in side-chain environments.

Avalanche, Abracadabra.money, Yield Yak, Benqi, SpookySwap and Loopring are also multichain or Ethereum side-chain compatible networks that have seen a significant bump in TVL in the last seve day.

Unless something can be done in the near term about the high transaction costs on the Ethereum network, the trend of liquidity being migrated to other blockchains is likely to continue.