The Rise of the Sovereign L2 - Why Institutions Need Interoperability - TOKEN2049 Dubai 2024

um I'm uh Constantine the CEO and founder of blog Damon uh we're the largest institutional infrastructure provider in crypto and so um what that means is we run around 185,000 notes across 70 data centers around the world um really providing access for institutions to send transactions through the respective protocol networks and so we're in the business of abstracting away complexity um for infrastructure and wallets for institutions what's a little unique about us is we've been around for uh a few years and we're the most institutionally backed uh crypto company uh we have three of the top 10 Global Banks as major shareholders which is JP Morgan Goldman Sachs City Bank um and our customers are similarly sort of institutional they include the fidelities the Bank of New York's uh the the people on our cap table the paypals the the robin hoods um and so forth um the reason I mention it is because uh today what I'll talk about is um um a little bit like sort of the next kind of trend that we see in the institutional ecosystem currently and so um uh and before I do that I also want to mention that we um open an office and have a license here um in Dubai and so we officially got that done yesterday um and so we're we're very excited to be here and uh talk to Fox um so next slide um we're going to uh I'm going to show you a little bit uh what l2s actually are um people talk a lot about stuff and and so um I think it makes sense for people to understand what l2s are if you're in the space you probably have heard about them um l2s really deal with uh originally the problem that ethereum has with transaction through put right and so there was always a lot of uh talk about how many transactions can you really actually put into a block and so um what has happened is that you had um networks and Frameworks created that allow people to build chains on top of chains right a layer two uh and really all that the uh well one of the the key component of the layer 2 is that they can bundle transactions and then submit uh one transaction to ethereum but then behind it have a box of 10 transactions and so as an example so it's sort of like kind of 10x the transaction volume that you can uh do um on ethereum and it all happens sort of on chain there might be a slight delay but um it it all happens uh on on the ethereum Chain um the other thing that these Frameworks make very exciting is that you can kind of dictate the rules of the framework a little bit right and so in this example we're looking at the optimism stack that's a very popular um uh framework solution uh the base project is built on it the coinbase uh L2 that I mean if you're not familiar with it check it out it's probably the most significant development that coinbase has done in a very very long time um and the goal really for Bas for example is to have every transaction that coinbase processes um to actually be uh locked on the respective chain and so um and that's a good example of uh um a proprietary chain or L2 in some ways right and so coinbase obviously stresses the importance of this being open source and being a sort of public good uh but that said you know they're not just doing it out of the goodness of their own heart um they're developing an application ecosystem that supports the functionalities of their exchanges and then there actually fun commercial models underneath these l2s which is uh you can uh operate sequencers and generate fees for the transactions to be processed and so um there's so every transactions that gets bundled and pushed through base uh coinbase operates a sequencer and generates fee earnings on it and so um the reason why I mention it because that's why block demon is so interested in that space we've been you know really spare heading the Outsourcing and development of node infrastructure for institutions and for us a lot of the work now is in the sequencer ecosystem for institutions and so um and so that's uh interoperability bridging chains AC chains so translating transactions across multiple chains so they remain on chain and can get settled on chain um there's a bunch of others um that you see on here um they're kind of all the same at all a little bit different some of them have a token some of them don't they serve different purposes but um that's sort of the main the main piece here um the reason this kind I always find interesting it's just interesting to see how much volume actually now occurs on these l2s compared to um uh actually ethereum the blue line here is the eth and then the red line is is uh a bunch of the um the l2s the arbitrum the the bases and so forth and so you can see that there's so much volue getting locked in and and it's becoming a much much more um common way to uh submit transactions and so that's why it's a very trendy subject right and so that's why a lot of people talk about it um and so uh there are some benefits and drawbacks um the the you know the big benefit is that you're ultimately referring back to the decentralization and I'm air quoting um of ethereum here in terms of security right so it gives you some sort of a particular frame work um that has more throughput but still has to go through the ethereum network and so there's obviously lots of different people running nodes um there's lots of debates and and how decentralized ethereum is but um it's you're sort of borrowing from the security of the East Network running in L2 um there's um you're really aligned obviously with ethereum one of the big subjects too because we're in the protocol um abstraction business is um evm chains are very popular to build and develop on mostly because when you want to like redevelop apis for exchanges and stuff for example that are cross protocol anything that's not evm is very very difficult to abstract away and so by definition you know like there's a lot more efficiency around uh abstraction if you can focus simply on evm so some of our sort of adjacent competitors like Alchemy only support evm chains for example and so they're just like we're not touching anything that's not based on ethereum it's just too much work um and so yeah and so those are and then some drawbacks can't be forked uh there's compliance issues um because ultimately um you do default back to the validar set on on on ethereum and that's going to be always an interesting problem when we talk to institutions because what they need to make sure is that wherever their respective block lands and the note that processes and validates the transaction can't be a Noe that really validates a transaction that comes from a non- kyc entity and so there's there actually a lot of interesting conversation on like how do how does that happen technically on like proprietary men pools and things like that but I don't want to bore you too much with it um and so I'm going to do some of this quickly because it's a little um uh obvious obviously why is this so interesting and and why are companies thinking about their own L2 so uh in the Bull Run of uh 2017 and 2018 you had lots of proprietary uh networks being built like permission netw networks right and so you had like hyperledger you had like all the big um Banks everybody was thinking about like you know R3 for example uh lots of different projects uh tried to tackle and bring uh blockchain technology to institutions who could not have an open network because they need to know and AML and kyc every participant in a network and those projects mostly failed mostly because you know the whole benefit of of a network is openness right like and so um one of the key things um that um has evolved since then is that these purely permissioned networks um were too closed off and just lacked a lot of the Innovation and functionality that these open networks can now bring and so now you have a sort of interesting opportunity to kind of have a little bit of both words with l2s right and so uh lots of Banks and companies are thinking about hey do I want to build my own proprietorial too and um and then you know and then I have I can control who has access to that respective L2 um it's closed but it falls back on ethereum which is ultimately a public chain right and so um it's sort of a little bit of a hybrid approach that allows them to take advantage of the development in the ethereum developer ecosystem as well as controlling um um you know the the the the in and outs of their respective permission Network and so it's an exciting time in a way because that type of interoperability in perion Chains didn't work but here here we see an opportunity for uh institutions to get engaged and benefit from the open source nature of ethereum while retain certain degrees of control and so um and then on top of that is another fun layer which is l3s so you'll hear a lot about those so you'll have ethereum then you have Bas and then JP Morgan could say and then we have the JP Morgan chain and they kind of sort of just uh you know ultimately lock transactions through each other and so um uh institutions can develop you know they can develop l1's if they want to they can do l2s l3s so you're going to see all these different layers and use cases the Bas folks would say oh they all need to do l3s on top of base and then you know institutions might say hey wait a minute you control the sequencer and make all the money we're going to build our own L2 because we want to control the sequencer and uh you know make a little more money and so um it's an interesting development that we see that will help us bring institutions um into uh the crypto fold uh a little more openly than we did in the past um use cases fairly obvious payment is a really good one um pay Master applications wallet applications are getting a little better um uh we're very focused on the sort of wallet lens for for which we look at abstraction mostly because wallet Stacks are still pretty poor um and so um there's lot lots more work to come but I think that also creates a lot of opportunities specifically on payment and stable coins obviously tokenization onchain Finance um um I'm sure you guys have heard of some of them um this is kind of going back to what I initially said is sort of like you know just interesting also maybe for folks to know really what blockchains do they read and they write right so uh you read and look at the transactions or you write a transactions and so that's really kind of what it looks like right it's like a spreadsheet that sort of has an account and and says hey this guy send a token to here and you can look up a transaction or you can submit a transaction to be added to the sheet and those are really the two functionalities and the point I was making about the hybrid nature here is that um the the big thing is that on the read side you can make these permission networks open on the right side you make them closed right so only people who are for example kyc submit uh transaction into it um uhm this is all the kind of fun stuff that an L2 needs which is why we like them right like ultimately we benefit from protocol proliferation as an abstraction provider um if they are based on an L1 that we can easily replicate and build apis for and that's really all around how they batch transactions and so um it really like you know when you have 20 30 different protocols you try to offer services for um then uh you need to understand all the different eox how many transactions go where and when and you need to kind of submit all these transactions through a same interface and that can be pretty pretty gnarly um and so let me see and so you know a little bit about block demon I don't really want to shill too much here but kind of so the the the two big trends in infrastructure or three that we currently see is uh one relates to me that you know if you're in the space you'll probably hear about um that's a way how you can monetize infrastructure by providing uh you know really fast and and efficient uh transactions and and opportunities to folks so you get rewarded there's the rollups the l2s and l3s that I've mentioned that institutions are creating and then there's a account abstraction um that's um really really important for ultimately smart wallets right like so you want to make sure that people can on board and uh do things uh really really quickly and easily and uh and smart wallets are a great way to do that and so those are all the things that block demon does right and so we do account abstraction and smart wallet technology for institutions like the JP Morgans and the NASDAQ we do the rollup stuff we're very um involved with Bas for example for a long time we thought about building our own L2 but we figured um U you know we're really just a solution provider we don't really want to have the ownership of a chain and so but we're very involved in also creating others for institutions and then on me it's really a staking related um yield um optimization product I have a minute left so um you know this is a nice little slide lots of Errors kind of says interoperability is important um I kind of the main point I'm trying to make is that Network in Silo isn't really a network right and so interoperability is um really really important um and the next generation of interoperability is all around onchain swaps defi all that type of stuff um that's getting really really juicy and exciting for people because there's lots of opportunities to generate value with it uh for different a lot of different stakeholders so commercial models are constantly shifting in the infrastructure stack and um we're really excited to see it and so uh with that I'm going to say thank you and uh give you 21 seconds back so there you go