Layers on Layers: L2/L3 Narrative and Value Capture - TOKEN2049 Singapore 2023

good morning good morning good morning it's just us um thank you all for being here and for making our time thank you everyone for showing up the first thing in the morning we know the traffic's been bad uh we have a really group really really interesting group of panelists here today and we'll be talking about L2 l3s and I think you know since 2019 we've been talking about L1 l2s and now the narrative and the conversations has been going around to l2s and l3s right why don't we first have everyone start off by introducing themselves and then we jump right into it uh maybe Mark could start sure um it's great to be here everyone my name is Merica I'm one of the co-founders of cello um it's maybe just to start off with a fun fact about myself since we're in Singapore I was actually born here uh way back when so it's a pleasure to be back I spent 18 years here growing up all the way through end of high school so it's a real treat I live in the US now but um yeah it's always nice to be back um we started cello about five years ago and you know I'm sure many of you have heard of cello it's an evm compatible layer one um the big news as of recently is that at ECC we announced a proposal to turn cello into an L2 um that was generally really well received and we had an online governance vote that passed most recently and so uh right now um yeah there's a lot of exciting work turning stello into an L2 but you know a lot of really great things are happening on cello um there's uh active addresses have been growing by 550 percent over the last six months we have [Music] keep your eye out for an exciting announcement later today coming from Berlin blockchain week There's a really big company with around 50 to 100 million users that's launching a payment product today on cellos so definitely something to keep an eye out for I can't give you any more than that teaser but definitely keep an eye out for it that's direct Alpha for you being in the right time zone so thank you Mark all right Derek please go ahead cheers um so morning all uh my name is Derek and I lead the ecosystem research team in mental really surprised to see so many people here at 10 A.M to be honest uh speaks volumes of our industry guys honestly yeah with the traffic yeah um so a quick nutshell about mental uh Mento is the first uh ethereum modular roll up right and our architecture is not that dissimilar from East uh plan eip4844 right involving prototank shutting right and I think how we're gonna achieve hyperscalibilities you know via our distinctive three layer modular and architecture right wherein the consensus settlement layer are on ethereum right the dlas you know powered by Eiger layer via mentodia um and metal network is the execution layer itself right so we launched midnet just a while back ecosystem is still growing I'm very excited for what's to come and yeah do keep looking for us follow our socials and keep up to date with our progress I guess awesome congratulations and Anna right please um Avail is a new kind of L1 blockchain that focuses on data availability and not execution primarily because we are on this L2 L3 uh panel which talks about Roll-Ups in general right like so so it's a new kind of L1 that focuses on providing scalability to roll ups on top uh so that's a whale previously I uh co-founded polygon back in 2017 and just so we began a whale within polygon in 2020 and we've been building for the last two two and a half years and we just spun out a whale earlier this year uh as a separate entity yeah thank you and Nick so I'm Nick white I'm the CEO at slushy labs and uh we're building Celestia which is the first modular blockchain Network so um similar to Avail it's a new layer one that focuses on providing abundant decentralized block space for people to launch Roll-Ups and um the core technology that powers it enables really interesting things like the fact that the amount of block space can scale with a number of nodes in the network and also enables people to verify the blockchain directly on a device like a phone because we believe that that's something that's very important for decentralization um and so I'm excited to see that I talk about the L2 Revolution because I think data availability layers like Celestia and Avail are going to be really crucial to securing and scaling rollups yeah let back to you Nick and following up what you just said the L2 Revolution right where are we in this kind of narrative for L2 moving from also a monolithic to a modular stack world and if you agree with that with all the panelists and how are you seeing kind of that narrative playing out and how are you driving it directly at your company well that's a big question there's a lot to unpack and yeah I'll leave some hopefully for other panelists to answer but to me um if we take a step back there's two primary bottlenecks to scaling blockchains the first is execution which is verifying the transactions and then the second is data availability which is publishing the transactions and um we've kind of I wouldn't say we've solved execution but I'd say we've like roll-up technology is a solution and there are already like numerous uh roll-up architectures that are live and seem to be working both optimistic and ZK but we haven't yet actually shipped a scalable decentralized data availability solution and so I think that's that's kind of the upcoming transition that we're about to hit with uh at least the launch of Celestia in a few months um so I'm really excited for that but more broadly there's like this modular blockchain Revolution happening where people are realizing that um there's a new way to build blockchains where you actually separate out the the functionality of of the chain into separate layers and that gives developers more scalability but also importantly more customizability so that they can build more compelling apps uh for for end users and so I think um we're kind of at the the final edge of where the underlying Arc infrastructure of blockchains is going to be good enough to to build like compelling uh applications so that's that's really what it's about I think at the end of the day yeah thank you for that and Anna reg and Derek and America we have thoughts so I mean in general if you've seen like gone through the last two three years right like Roll-Ups have been on the rise right like I mean and essentially yeah I know that came lift up here um yeah it'd be easier is it better yeah so I mean Roll-Ups have been on the rise in the last two three years and and so what that really means is that the conventional way of doing like a blockchain was you know like get together a set of validators you know like build some consensus you know like uh bring our token and then incentivize those people to run that blockchain right like now that Paradigm is changing from a roll of perspective right a roll-up is primarily another blockchain that runs on top of a base layer blockchain that kind of shares the security of the base layer and that's ethereum you know kind of pioneered that in a sense roll ups first were seen on ethereum first right like and so and now over the last two three years you've seen arbitrum optimism polygons KVM and such right like I mean uh in general so the shift is from not creating your own execution focused L1 to a more uh L2 or you know like if we do layers upon layers right like l3s and so and we'll get into like later if uh you know why l3s are uh narrative but you know like for example chilo um you know he's moving from an L1 architecture to an L2 uh mantle themselves you know launching as an L2 it's essentially because bootstrapping L1 valid asset security is is a pretty hard problem um and not a lot of people can do it right just look at the cosmos ecosystem right there's so many chains but so weak security uh and so that's that's kind of the shift that is happening uh from L1 to L2 and now I mean of course we'll talk about value accrual later um uh but you know like this L3 but that's the sort of shift that is happening and if we assume that Roll-Ups are going to be the preferred way to do execution then you know like data availability plays a major role in that yeah thank you Derek you have any thoughts there yeah yeah so um I was thinking quite but a bit about this topic right yesterday and uh I think there's some harsh truths that you know I would like to confront right and there's no better panel for Giga chats you know to discuss this right so once I fully agree that you know it is important to scale the the tech stack right in ways that you know moving from monolithic to modular and now to participate our trees right and probably I'll do a quick rundown of let's say um the the VPS the value props of uh l3s and molecular uh l1s right so model l1's the three s's right sovereignty um scalability and also uh shared security right I mean they mentioned some of that so I won't go in depth uh it solves for these things as VPS right and for l3s uh it really is about exponential scaling because you can't build Roblox so it doesn't work their way data compression it happens once right so it really is about customizability right customize customized scaling um when it comes to let's say you can choose to uh optimize for the data compression for certain applications right or customize functionalities you know more privacy focused uh ones because L3 release premised on ZK Tech anyway right or you can have also weak weak trust um scaling via validiums right so that really these really are the VPS of um I would say l37 and modular l1's right but then the harsh truth manifests itself as a question right a single question that I ask myself right and I would love to ask everyone here right um do we have are we as industry right um at the application Level facing a hard bottleneck when it comes to a tech stack meaning is there an application that we have identified as perfect PM method right product Market fit uh and that we think will be the next uh maybe the first proper killer app in web 3 right but we don't have Tech stack to build it out right if the answer to that is no then we have to consider you know certain things right for example when it comes to the combo of scaling right we don't just have to talk about scaling in terms of tech stack right we perhaps have to shift the convo as well towards scaling the application stack right because it has to happen in tandem if not you risks certain nefarious effects like fragmented liquidity right diluted Network effects right that he has mentioned we have seen in let's say Cosmos or you know stuff like that right um these are things that we don't want right so I'm just going to clarify here I'm not saying that you know all these Tech stack Innovations right are not important they are extremely important right but perhaps when we talk about scaling we have to think about scaling the depth layer as well I have more to share that later but I'll probably save that for later so yeah thanks for that yeah that's a really interesting perspective and I think Marek has seen it all really so maybe you could share your thoughts on yeah I mean I think a lot has already been said so maybe one additional point to make in addition to I think all the benefits of modularity I think the the roll up um scalability architecture one of the things that gets me really excited about it is the settlement piece and the trust piece I think if you think about the trust that um everyone has to bring to a chain when they're just running on a single um monolithic chain you know it's if you run the full node uh you don't have to trust anybody else because you can verify every transaction on the chain and you know what the current state of the whole blockchain is uh if you know there was a conversation around Cosmos if you move to that way of scaling uh blockchains and suddenly you have to trust for every chain that you're following you have to trust all the validators for all the other chains that are sending IBC messages to you because that's the way that IBC is verified and so suddenly you're trusting uh all of these different validator sets and you're no longer trusting yourself one of the really nice things about Roll-Ups is it brings you back to a much smaller truss set if someone's sending you a message from one roll up to another now all you have to do if it's uh if both chains are optimistic all you have to do is trust that there's at least one honest uh party on each chain that can create uh fraud proofs if they see any fault or if they're ZK chains all you have to do is trust Moon math and that's really elegant and I think that's why ultimately you know obviously ethereum moved in this Direction that's why we're we're using roll ups for scaling ethereum it really is at the core of it to me it's about trust minimization yeah that's really helpful Eric and I really want to dive into kind of the recent announcement about you guys kind of moving on to optimism right can you talk about the constraints and opportunities there by moving on to L2 and kind of on the economic security side a bit more sure yeah um so I think one of the interesting things around being an L1 that's transitioning to an L2 is that you know unlike starting a new project we have existing users we have existing Builders we have existing node operators and we have to think about um all of these different stakeholders um you know as we kind of craft or as we crafted a proposal for the community to consider for this transition and for us that meant really optimizing for three things number one was low gas fees because Sello is really good for payments you can pay for gas with tokens on cello there's a lot of payment use cases a lot of microfinance use case Ubi use cases Community currency use cases it was really critical for us to be able to keep gas fees low um because otherwise all these use cases would leave the platform and so that necessitated that we find in ethereum aligned data availability um project that that could meet our needs and keep gas gas fees low and so that's ultimately why in our proposal we proposed using eigenva because it's secured by ethereum validators the second big constraint was around decentralization you know we have a very diverse and robust uh validator set running seller today uh with a lot of solo stickers a lot of big corporates like Google cloud and Dutch Telecom and in coinbase and we wanted to uh to make sure that those folks still had a role it felt weird to kind of throw all of that away and just move to a centralized sequencer and so we we chose to um have a design that uses a decentralized sequencer where all of these validators effectively will transition to become decentralized sequencers and then finally uh one block tonality was really important so this is something that we offer today uh today if validators equivocate on a block they get slashed that means that that we we can offer one block finality to our users this is a little bit different than the way that ethereum thinks about finality and so we wanted to have a design and it's also different from the way that most l2s think about tonality and so we wanted a design that actually preserved that one block tonality uh in the L2 and that meant again offering slashing for equivocation and then also changing the way that the L2 interacts with the L1 a little bit so that any reorgs in the L1 won't cause a reorg in the L2 and so yeah those are the constraints and you know we're really stoked about the design that we came up with um we announced it a few months ago and it was really amazing to see vitalik coming to The Forum and commenting on it as well as many others um and uh yeah it's just full steam ahead now we're busy building yeah that's really cool and I think I imagine more blockchains who may be looking for kind of Best of Both Worlds may come and follow what zelo's doing um Derek I know mantle just launched a couple months ago how are you guys thinking about scaling and kind of capturing more users in this market yeah um so the combo of scaling right I'll go back to what I mentioned just now because I think everyone here they'll definitely be sharing about you know scaling a tech stack I think they'll be more than adequately covered so I I really want to push forth this narrative right arguing for this that we need to talk about scaling at an application Level yeah right um the reason for that I'll just give quick reason I mentioned the VPS of your l3s and modular l1s right the thing is if we don't um have you know that player skill in tandem right we run the risk of severely diluting Network effects and also a really uh fragmenting the liquidity across the ecosystem and that's something that we don't really don't want right um right now even monolithic blockchains like Solana right you know post fire um fight answer right they will have industrial capacity throughput right that you know it's more adequate for for many applications that are currently in the space right of course we need to keep pushing the tech stack to you know to find the next Frontier um but I think what I'll argue for is that we need to also pour more attention to the application so by you know thinking about the USB support blockchain technology itself and how we can Empower Builders right application Level builders in this space to do better than what webto infrastructure can provide them and I think one ideal solution I have right is to really tap on just blockchain as a database right if we can have a huge ecosystem wide you know level um indexer right or social a tester right um where we can necessarily index all on-chain interactions and activities right that will give I think web3 application Level projects and Founders a huge Edge right over Web Two once right why because then you can have a very informed right iterative process right now most projects at the application Level sadly right have huge bursts of explosions and then they crash right there's no life cycle at all there's no iteration I mean there are many but most don't really have this possible situation that webto products really must have right so if we can use this data from the indexer from the tester right you know to really skill the application layer right I think that we can have more projects finding pmf product Market fit right iterating into that and state you know way faster than web 2 projects and maybe then we can do justice to whatever we're all building here in the tech stack uh and to really tap on the throughput that it really Fosters so that is just my two cents on the whole concept of scaling yeah yeah that's helpful and it's really interesting perspective uh for anorag and Nick you guys are really building you know the future of modular blockchains I'm very curious how you guys are thinking about value capture uh in between the different execution settlement da layers um and I love to kind of throw that question later back also to Marek and and Derek as well but I'd love to start with you first maybe Nick all right sure yeah I I um so I think there's been a lot of different theories or Theses about value capture in crypto generally um I think there are two most common ones one is the sort of the OG the fat protocol thesis which is like oh everything will kind of like go down to the base layer all the value will accrue there and then the there's sort of like the fat app thesis which is about you know the application layers and applications where the users are like closest are the ones that are going to capture the most value and I think the reality is somewhere in between where I think um the applications will capture value but there will also be like the layers of infrastructure that are able to build Network effects uh and are providing a very like useful Service uh as an infrastructure provider will also capture value so it'll kind of be to me similar to what you see in web 2 where there are infrastructure providers like cloud services like AWS or Azure and those are very valuable companies but they're not extracting all the value from the applications that are built on top uh it's more like applications pay them and uh but the applications have sort of like their own separate means of being economically sustainable and so I think that's the beauty of the modular system like if you think about where ethereum is right now it is kind of extracting an undue amount of value from the applications on top like most of it most of the Mev most of the transaction fee volume all just goes to eat and I think the beauty of the modular stack is that applications kind of have more Independence and kind of are able to have more of a say they can I mean you can already see this with um things like optimism arbitrum base they're actually collecting a lot of their own fee Revenue right um and you can't really do that as a as a smart contract and and furthermore there's also the aspect of being able to capture more Mev when you have when you have your own chain you can actually kind of build that in to your uh sort of like State machine like the logic around capturing Mev and so I think that's the economic side is going to be a very powerful motivator for people to move off of shared l1s into their own l2s but they're still going to be paying fees back to the L1 at the end of the day exactly that's one of the questions that we'll be asking later in the another stage panel on the L2 for the L2 panel L2 Founders like you're giving about 80 of your Revenue to paid for transaction fees right how are you think guys thinking about yeah but see but that's also an artifact of the fact that ethereum's block I'm assuming they're on ethereum ethereum's box base is so limited that the fees necessarily are just super high but like in a post Celestia or Avail world where we have scalable data availability the transaction fees don't need to be so high I actually like this quote from I think Chris berninsky um he wrote a blog post in 2019 about um protocols should be minimally extracted extractive but globally produced and consumed and so like it I think the infrastructure layer should be this thin layer and economically should be not uh trying to extract value but provide value and maybe like minimally extra like uh extractive in terms of charge some level of uh Surplus I guess on top of the service that they they provide yeah that's really helpful and I like yeah I think see uh this discourse happens too often in the uh I mean because Roll-Ups have been implemented on ethereum for example so it happened in the context of ethereum the value of the world question now if you look at ethereum very uh closely right like I mean value accrual of ethereum broadly comes from you know like live like slot it into like you know like da like paying for da uh charging transaction fees for execution and at the same time there's also this whole token economics thing around ultrasound money right like I mean so ethereum is trying to balance these kind of three you know like features or narratives at the same time right like in which are in you know like not directly you know like in uh working together right like you can't have cheap DNA with an ultrasound money narrative for example so when you see role of economics in the context of building on top of ethereum at the moment right like I mean with its cost structure for now from a roller perspective right like it seems very expensive right like I mean 70 to 90 percent of roll-up costs today are spent on paying for ethereum da which will go down um uh let's say after four eight four four Etc but essentially you know like uh the way we think about value accrual will increasingly change as we go forward right like I mean when uh you know base layers like Avail and Celestia for example launch which have da at scale the roller economics changes a lot you know in terms of you know like how much cost the roll-up has to allocate for da because you know like a whale has block sizes that can you know like scale even Celestia has the same thing because we implement this thing called datability sampling which will not get into too much uh but essentially that whole economics play the value accrual question will actually change a lot it also changes because there have been changes in how execution is done right like I mean it's no longer uh re-execution of transactions there is you know like now validity proven uh or optimistic rollups for example and so on which reduces the cost of running uh the blockchain itself right like the cost of running a L1 blockchain versus the cost of running a roll up is very different and so the value accrual where the value approval will happen also changes right like so like just from a summary from what we think is you know like of course there is value accrue alert for the DL here it may not be as massive as uh what ethereum you know at the moment like some estimates we we did some modeling around that at the moment roll ups pay ethereum roughly 1300 per MB in uh ethereum da costs rightly which is massive right like I mean um and that that will of course go down for example and so on but value accrual will stop occurring from those areas move to other areas for example right like so and in in this panel we are talking about L2 l3s and all that right like all that is a extension of value accrual right like I mean so there's a value Chrome on the DL layer like the value from the execution layer right like and now but most l2s for example today don't uh you know like do everything in it they pay for da needs they have transaction fees in it so where is the value crawl on that uh so again it's going back to it so you will see more Innovation there on the roll up side also in terms of you know like the native token being paid for fee L3 is being building on top of the L2 for example and so on right like so so that question will change once the DL landscape also changes yep that's interesting um Derek your thoughts on this uh I think they have covered quite a bit on the tech layer right so for me as I mentioned I'll talk more about the crew on application layers so yeah I'll pass it to him first before yeah yeah I do want to talk about that but yeah Mark yeah go ahead yeah and I think maybe the only thing that um might be worth adding is you know one observation um that a few people in the industry have made recently is um you know if you think about the types of applications you can build uh in web3 you can build you know consumer applications but you know you can also build platforms um and and folks have tried you know blockchain based Platforms in the past and platform is built as smart contracts on top of these blockchains and what what we've seen is that the ones in the middle have kind of struggled to accrue value it's really been mostly the the end user applications and in the blockchains that have really excelled and so now there's this big almost shift happening in the industry where where applications are shifting either more to the consumer level uh or more to to the blockchain level and so you see um you know protocols like dydx launching their own L2 uh or you see applications like uniswap kind of focusing more on the end user building you know a wallet uh building more consumer kind of offerings into their into app.ino swap.org and I think one thing that's exciting about this kind of modular future is that it presents a really nice opportunity for these types of applications to go more into the block uh space uh blockchain space and I think that's ultimately good for Value accrual thank you for that um I think where we don't have much time so we have maybe one more question for the audience um for the panelists what are you guys most excited about in the next six to 12 months coming out of your project specifically uh maybe I'll start with Merrick again yeah it's a good question you know I think there was a little bit of talk uh about product Market fit and consumer applications and helping uh these folks um kind of grow that's been a real core focus of the seller ecosystem I think we we really uh work hard to have created a platform that makes it easy for people to build applications that are easy to use for end users uh We've made it possible to pay for gas with tokens even without account abstraction on Sello we've made it possible to send value to phone numbers uh on cello to help application developers tap into the bigger social network in the world which is you know the amalgamation of everyone's contact lists on their phones um and you know we're uh we're now uh making stello uh be uh aligned with ethereum and part of you know the the most exciting um kind of uh blockchain based ecosystem I would say in web three um and so for us what's exciting is seeing these applications uh flourish you know I alluded to this big company that's launching a payment product later today uh I'm really excited to see how that plays out I think payments are like a really amazing uh use case of blockchains and I think to date it's been hard to make them um be as useful and as easy to use as as they can be in part because we haven't had some of the features that now cello is offering and so I'm really really excited about that I think the other part that's really required for payments especially social payments is just making it really easy for consumers to be able to on and off ramp uh into stable coins anywhere in the world and that's another thing that that we're really laser focused on with a with a project called Fiat connect and I think uh the combination of both these things ultimately will make payments um possible in the near term on on public blockchains social payments uh mobile payments um P2P consumer payments this is what really gets me excited thank you Derek yep so uh I previously proposed a business logic layer on top of the application stack right um that involves uh an ecosystem white indexer and social tester right so at mental I think that's what we are trying to do right a first step with uh this is our program called mental Journey right so Okay click right to imbue both indexing you know of granular unchain indexing of D5 protocols uh and whatnot right together with social attestations right to really try to see you know what users really want to enable to empower protocols you know like what he mentioned to find pmf through identifying their power users right and through the process of iteration right so that's something that I think I'm really excited for you know when it comes to mental um personally right um I I feel as much as I'm cynical about this whole concept of game five on blockchain right I I think that with something like that with this scaling layer or an application layer I think game five can find its pmf in web3 right why that's the case um the one Gap you know now that we have here is game publishing right a lot of web 2 games they do super well because of you know strong game Publishers right and they can do that because they have a lot of information at hand right within you know the web tool right to tap on to have very targeted UA campaigns user aggression campaigns right that's something that we cannot that we are still finding a way to have in web3 and I think a business logic layer like that on top of app layer can really Empower um GameFly and social file applications to actually um yeah push out to their target audiences in a more focused manner so yeah thanks that's exciting anurag yeah I mean the most uh exciting thing I'm looking forward in the next six to 12 months is primarily Roll-Ups you know Roll-Ups are going to eat everything up uh you know like right now evm Roll-Ups are you know like the in thing right now but we'll soon get to you know like app specific Roll-Ups not evm specifically you know we have a lot of innovation happening on GK VMS non-evm GK VMS for example so so we are very excited about that in general app specific Roll-Ups in general and app specific Roll-Ups and of course Avail uh will go to mainnet in probably in q1 next year so so that's what we are awesome awesome we're looking forward to that Nick um really simple um in at launch for Celestia is coming in the next few months and um I think that's going to be a watershed moment for the industry as it kind of completes our transition to the modular era and then from then on we're going to be focused on scaling the underlying block space so we can continue to meet the demand because there's a wave of new Roll-Ups that want to be launched and I don't see that slowing down I see that accelerating over the next 12 months and so we want to position Celestia to be there to supply uh the market with box base uh as as the modular Revolution starts to really pick up steam and so we're working with teams in ethereum ecosystem Cosmos ecosystem and lots of teams uh also natively in the modular ecosystem who are building Roll-Ups building other modular layers to make this whole stack work and get adopted so yeah that's super exciting an amazing way to end uh this panel thank you everyone for joining us let's give it a round of applause for our panelists here today for showing up and thank you guys for all coming up here today um really excited about all the scaling happening in front as well as application layer so really looking forward to it congratulations all thank you