In brief

  • Dharma, a US-based crypto bank, has released a specification for an Ethereum layer 2 solution to speed up transactions on its platform.
  • The design is focused on simplicity, allowing faster development than more filled-out L2 solutions.
  • With more complex solutions still far off, Dharma could deliver the first seamless L2 solution for a major DeFi platform, if successful.

When crypto markets crashed in the middle of March, transactions clogged the Ethereum network as market participants rushed to sell their holdings or shore up collateral in loan accounts. That pushed up gas costs and operating prices. The need for layer 2 (L2) solutions, which could ease the congestion, became even more pressing. 

While the Ethereum community waits for more comprehensive solutions, Dharma, a pioneer US-based crypto bank, is taking matters into its own hands. After recently enabling peer-to-peer payments, it has now released specifications that will allow token transfers on its platform to effectively scale.

Dharma developed its L2 specification in collaboration with Hypervisor Labs with a focus on being simple, non-custodial (i.e., users remain in control of their tokens), transparent, and scalable. 

Based on optimistic roll-up scaling technology, the Dharma specification batches transfers into aggregate blocks and produces a merkle root—a single hash based off of all transaction hashes within a block—to enable fraud detection.

The specification then enters a 24-hour challenge period where the community can verify the merkle root or detect any invalid transactions and submit a “fraud proof.” If the proof shows a block to be fraudulent, the L2 layer is rolled back to the last valid block and whoever submitted the fraud proof is rewarded. The L2 protocol will be managed by Dharma, ostensibly to eliminate the risk of a third party censoring transactions.

To be clear, the Dharma team explicitly supports other scaling solutions currently in development, including zero-knowledge proofs. However, it has decided to charge ahead with this specification based on the unique nature of its use case. The specification only supports transfers of the Dharma Dai token and does not provide full Ethereum Virtual Machine (EVM) support. The Dharma team aims to have its L2 solution reduce gas costs by an order of magnitude, a massive 10x reduction from current levels.

With DeFi applications like Dharma growing in popularity and volume every week, platforms that are unable to scale effectively risk eroding the user experience and extending transaction times in an industry where speed is paramount. Could this set off a trend of other DeFi projects attempting to tailor their own solutions? Time will tell, but the relative simplicity of Dharma’s design means it could be one of the first DeFi projects to bring improved L2 scaling to its customers.