Crypto Black Wednesday and its root causes
Last week we saw just how dangerous the overreliance on a single chain is. Ethereum has crashed from nearly $3700 to as low as $1800 in a complete evisceration of the cryptocurrency market. As Ethereum propelled into a downward spiral, millions worth of positions have been liquidated in the recent market correction.
One of the causes behind the cascade of liquidations were the smart contracts. As the price went down, smart contract liquidations were initiated. However, as the price continued to rapidly crash, the number of liquidations grew so much that they completely clogged the blocks up. As a result, by the time the previous blocks were processed, prices had crashed even further down, causing a new wave of liquidation contracts.
This time, the complete DeFi market failure was too close for comfort. Had Ethereum block sizes been larger, we could see the price running into the ground. Fortunately, some of the liquidation requests didn’t fit into the block and provided much needed time for the buying pressure to sustain the price.
However, the danger of a catastrophic market crash is still looming over the horizon, as the entire cryptocurrency market struggles to stabilize, with Bitcoin, Ethereum and almost every single other cryptocurrency declining in price.
Cross-chain interoperability as a solution
This latest market crash is the perfect example of why cross-chain interoperability is so important if we want to see DeFi surviving in the long term. Market crashes are a common thing in economics; however, due to its technological aspect, the cryptocurrency market creates unique problematic cases to which we need to adjust.
The expansion of access to other networks is essential to minimize the dangers of Black Wednesday-like occurrences. With the increased access to other networks’ services, the severe overreliance on Ethereum network will disappear, spreading the workload between other networks.
And we are not talking here about interconnecting every Ethereum Virtual Machine network. Bridging to EVM networks is important, however, non-EVM networks are just as important to fully utilize the advantages of the other chains available on the market. As you may know, we have recently launched Solana bridge, establishing a connection between three EVM networks and Solana blockchain.
Bridging the individual islands of separate networks together into a unified ecosystem of interconnected networks is our proposed solution to the problem. This will provide users with financial freedom, as they will be able to utilize the service across a number of different networks. In addition, this will increase the overall market liquidity of the DeFi market, minimizing the costs on congested chains.
Limitations of bridging and the future of DeFi
Of course, one could say that eventually, bridging would not be enough to work around the current market limitations, as the number of users would exceed the bottleneck capacity of networks. Whilst, this is certainly correct, this number would have to be sufficiently large.
At the moment, there are a number of chains providing unutilized resources and space to relocate market participants to. One may hope that implementation of and bridging to the new non-EVM chains would allow us to keep the number of users below the bottleneck capacity.
As for now, the necessity of bridging is undeniable if we are to avoid the complete burst of the current market. There is a sufficient amount of time until the bottleneck capacity is reached, however, unless the cross-chain network solutions are implemented, we may not see the time when it truly becomes a problem.