L2 & L1 Adoption and User Behavior Utilizing Onchain Data - Sid Shekhar (Coinbase) - TOKEN2049

hi guys uh great to be here uh and uh thank you for attending um so a bit of an introduction i'm sid i work at coinbase uh in london and i lead the blockchain research team uh so what does this team actually do uh it's actually a very new team within coinbase that specializes in looking at blockchain data and and user flow on chain to determine what's actually happening how is the space evolving uh how are people using dapps and applications uh and how do users migrate to different layers and different blockchains so this is a trend that's been very interesting for us over the past few weeks and and months actually uh is this topic of layer ones and layer twos and how are they gaining adoption and and what kind of data are we seeing to see how uh these different layers gain traction so just to set a bit of context um uh you know the the kind of base layer that we judge everything by is is obviously ethereum which is the primary smart contract blockchain today um and uh and if you look at this kind of map uh that we see here uh the way we look at it is you know alternative smart contract platforms uh we call them kind of l1 blockchains uh including solana including terra binance smart chain avalanche et cetera and then on the other side we have ethereum scaling solutions like the roll-up solutions like arbor trim and optimism and and the bottom over here is the application layer which is currently i mean historically it was always built on ethereum because that's where the developer stack was that's where the tooling was but now the trend that we're seeing is they're starting to migrate to these different layers these applications that used to exist only on main and ethereum and one big trend that we're seeing is not only do these existing applications migrate there are new applications and use cases coming on on different l1s that actually uh utilize their their core strengths and and benefits so this is kind of to just set a bit of context over what we're actually analyzing so let's dive into the data to see what we're actually looking at here so this is a measurement that we did uh it's a high level metric uh called tvl or total value locked where it kind of measures the traction that these different l1 are getting this is a chart of major l1s and how much value has been locked over time in them and if you see here some very interesting trends pop out at you right away so one is the blue dark blue at the at the bottom which is binance smart chain obviously had a tremendous growth in popularity earlier this year a large part of it was because binance exchange allowed withdrawals into binance smart chain and had a pretty good integration with them and so it was a big retail pathway that we saw where retail users were onboarded into binance smart chain um but then if you notice this right at the start of september over here you see all the other colors start to really expand uh all the more and you know flattening in the blue so this is a real trend shift that we've noticed it's actually happened in the past four weeks which is the you know proliferation of on-chain bridges where people who have non-custodial balances on ethereum mainnet can bridge to these different layers and chains easily and cheaply so those two factors have really been playing a big fact a big role in the adoption of these different alternative layer ones like terra like solana and especially like avalanche as you see here so this is major l ones that we're talking about in addition to l ones of course there's also ethereum scaling solutions or l2 uh chains they're not quite as big the numbers are not quite as big here uh but um you know we're still it's still a story of growth especially in recent months again this chart really starts to kick off around september if you'll notice uh with the with the release of these chains in public and on chain bridges uh that allow for easy transfer of money uh in between these layers uh we see a huge spike in arbitrarum uh at the beginning of september uh it was actually due to a a meme coin farming project called nyan cat that was on arbitrary at that point in time so it's a bit of an anomaly but we're still seeing steady growth it's almost a billion and a half dollars locked on these large l2s now and it remains to be seen how optimism and other roll-up solutions start to gain adoption as we see so i mean this is a high level overview what we're really been fascinated about is what's the user journey over how people actually get on these different layers especially as coinbase as an exchange we have to onboard retail users to get onto these different layers and that's a problem we've been thinking about pretty deeply and right now there's two main paths you as a user can either deposit into a centralized exchange like binance or ftx or coinbase and then withdraw it into a different layer or you can use an on-chain bridge non-custodial bridge this is kind of like a simplified view but it really determines the direction of where the space goes because a what withdrawal mechanisms and what chain centralized exchanges support has a say in where this industry actually goes where users go and where traction goes and finally the the ease of use and the and the cheap uh like how cheap uh bridges actually has a also a big impact on on where users go and where capital actually flows so this is a simplified view but uh if we look at a more you know complicated view this is actually a full ecosystem picture a fantastic visual by dimitri from 1kx which shows the full complexity of how crazy this ecosystem really is uh you know we have not only different blockchains layer one blockchains at the top but we also have different sub ecosystems almost like mini galaxies uh within this overall big uh you know blockchain ecosystem that we're in now um so um that we won't go into detail into each of these each of these components we don't have the time to uh but you can see it at the bottom over here uh there's a whole bunch of these different bridges where you know the bridge itself is a protocol where you can relay funds seamlessly between layers and and transfer it between these different galaxies and different scaling solutions that we see here so bridges is obviously a big big point of importance so what do we do with bridges how do how are bridges used and we had a fantastic dashboard by elias he's also here you might see him he's also at coinbase uh basically he made a great dashboard which looks at ethereum based bridges so most of the bridges right now are on the on the ethereum blockchain are accessible via users who are on ethereum and you can see the list of bridges over there at the legend and here the first metric we looked at is how many actual users are depositing into these bridge contracts how many people are actually using this all time if you look at the metric all time this is 190 000 people or addresses have ever used an on-chain bridge on ethereum uh this is a pretty fascinating metric because when you consider it many people have multiple addresses so this number actually becomes a lot smaller when you actually think of how many individuals or groups of individuals have actually used a bridge so overall we're only talking about at max probably a hundred thousand people in the world if you use a non-chain bridge uh so we're still early uh part of my cliche but we're still very very early in this whole ecosystem so that's one key metric another key metric is of course you know users speak with their money how much capital is actually locked in these major ethereum bridges there's over 10 billion locked today that itself is a huge achievement despite the relatively small number of users but again you see here the trend starting in september it's a fantastic growth in terms of alternative blockchains that are starting to gain traction this pink at the bottom here this polygon fantastic uh you know chain very cheap to transact in uh and it's been very popular for the majority of the year but as soon as you know september hits and we start to see these easy to use on-chain bridges especially the bridge of avalanche for example we see a lot of traction in the pink which is avalanche and then also now with arbitrary the dark blue over there and what's been really interesting to see from the on-chain side for for us uh from this perspective is the kind of different communities that form around these different bridges and therefore these different layer twos for example for arbor trim it's arguably not a very easy to use bridge you have to actually bridge it takes several days to bridge your funds back to mainnet ethereum uh compared to avalanche for example where it's a very easy to use bridge but we're still seeing similar amounts of usage for both of these bridges which is which is pretty fascinating because fundamentally they're different communities they're different affiliations people who believe in the roll-up solution technically and ideologically versus people who believe in just a scalable blockchain um uh so uh that's been a very interesting thing to to note as well um and you know bridges is like a huge huge focus for us because we're looking at how are people actually using these bridges are they actually using them on a regular basis uh an interesting metric for example is that uh you know 45 percent of the time after and address bridges to a different layer they don't bridge back uh before seven days pass which means they're actually involved in interacting with that ecosystem it's not like a quick mercenary play to get in and out which is a very fascinating realization so the ease of use of a bridge and uh you know kind of how sticky the network and ecosystem is on the other side has been a huge uh factor playing a role in how popular these chains are uh so and and you know this is this is arguably really really uh you know kicked off with the applications that are on the chain uh so this is another big trend that we've noticed which is uh basically the applications the key applications they're kind of building block applications come up in every chain uh especially with major l ones um these are dex dexes decentralized exchanges and lending and borrowing platforms these kind of two uh holding rocks uh come up in every l1 blockchain and one thing you might notice is that all of these are none of these are actually native to ethereum they're actually native to the l1 that they launched in uh which is a very fascinating thing even though they're massive ethereum applications for both of these sectors uniswap sushi swap or compound and ave all of these are native applications on the chains and they've gotten tremendous traction all of these are number one and number two in terms of users in terms of volumes in terms of tvl on all of these chains so it's a pretty fascinating thing to realize and the interesting differences between these is like whether they actually make use of the chain's native features uh obviously it's a different development life cycle for example to deploy on solana versus deploying on an evm like chain like avalanche however what we've noticed is like the differences in stickiness of how users actually stay and use these applications instead of native ethereum applications has been a really interesting trend to notice uh a great research report for example that came out just yesterday measured users who enter yield farms on on these different chains and an interesting statistic is that 42 percent of users leave a yield form within 24 hours of entering it which is a fascinating stat just to think about itself so this stat compared with the other stat of users not coming back from bridges is a little bit of a contradiction to make sense of because what are users doing if you're not yield farming on a chain what are the other activities you can do right this is kind of a question we all have to ask ourselves apart from swapping tokens and you know lending and borrowing and leveraging up on tokens what else is there to do in crypto today uh of course there's jpegs there's nfts there's other use cases that are coming up but this is actually a key uh trend that we're trying to monitor is all these l1 and alternative l2s uh actually offer future benefits over ethereum faster transactions cheaper settlement and you know more throughput right so are there any applications that are coming out that are actually making use of these features to their full extent um we still haven't seen any that have gained mainstream adoption but we're still keeping our eyes out um so so where does this space kind of go from here this is the questions that we're thinking about every single day one is of course centralized exchange withdrawal support it really matters which uh you know chains and layers centralized exchanges uh offer for our users to withdraw their funds into we're actively thinking about this ourselves and then second is novel use cases like i mentioned that actually take advantage of these chains different features so that we can you know have mainstream user applications and make use of an l1 to its full extent um and then finally the one big problem we've been seeing is uh users moving collateral and and capital across bridges very fast so a very interesting statistic another one is uh users of ave the main lending and borrowing protocol on ethereum we saw a significant percentage over 25 percent of addresses that had used ave on ethereum also used it on polygon and now we're starting to see the trend of it also being used on on avalanche which is very fascinating which means that the same users on the same on the same on one chain is being transported to other chains so it's kind of like an infection of users because you know uh we're they're using the same addresses that they use because for evm compatible chains you have the same address you usually don't change your address when you bridge across chains uh so this has been a fascinating trend to take you take notice of but it's still a pain to move funds across some of these bridges take a long time to move funds across and then the the other big problem which is still not solved i know there are some solutions out there but is once you have collateral in a chain how do you borrow against it in another chain to take advantage of an arbitrage opportunity or a yield farming opportunity it's really tough today uh and we see users struggling with this all the time uh so this is another big area of improvement and and a trend that we're noticing to see how the space kind of evolves so uh this is a bit kind of a high level overview of the trends that we've been noticing you know really look forward to any questions thanks sid awesome presentation uh great intel in what you guys do over at coinbase each and every day maybe we'll open up the floor to any questions that you may have gentlemen here let me pass it right over to you sir uh thank you for that brilliant presentation sid so i had a question on what kind of trading strategies have you seen been implemented off the back of on-chain data yeah that's a that's a great question um there's been many uh obviously i mean very simple ones include especially with the proliferation of these layers arbitrage opportunities on different chains sometimes a pair especially usdc for example gets off kilt because there's a little more liquidity or a bad trade executed here or there in order for large funds or market makers to bridge funds over it actually takes time and it's and unless you have capital resting capital sitting there on that layer it's a it's a big pain so uh arbitrage is still an open green field right now across different layers yeah are you not seeing uh solutions in that space there's a company here in the uk called credo that look after that type of issue for uh um institutional clients whereby they don't have to have funds at each of the uh exchanges but they would have at credo and credo looks after the cross chain liquidity yeah yeah that's i mean that's a great example uh the the thing there is like there's still new l1s coming out live now uh which is like scaling with the industry is like the biggest challenge uh we've yet to see a kind of big prime broker solution for l1s and l2s at scale today which is an open green field so let's see well i'm sure with all the bankers that bought tickets on the last day i'm sure they're trying to figure that out right now exactly bankers that are in the audience you're very welcome um three years too late but still you're very welcome anyway more questions what else have we got anybody anyone else known about gentlemen over here let me get you you're not a banker are you hi uh what are your thoughts on cosmos ecosystem because in the chart that you presented earlier there wasn't there but it's a bit weird not to include it right uh no no yeah so this the charts that i showed are just stats that we can measure accurately no no i mean you showed the list with avalanche tera swap pancake and there was no cosmos no no i mean we're we're still obviously cosmos and the polka dot ecosystem is obviously a big ecosystem as well uh the thing is we're just trying to measure these stats effectively and one big way of measuring these stats is how much funds actually flow through bridges where we can measure the stats uh so that's that's still a you know open question and open problem for us internally one other thing actually just to caveat this the the charts that i showed with tbl uh it's still a very flawed metric uh as we say because tvl is usd value of assets and a lot of these assets the actual core asset appreciates in value against something else and we're now double counting it because we're counting tbl so uh we have to take it with a bit of salt totally agree you