Optimism's bet on millions of chains, with Karl Floersch

Transcript

We have less than 1% of the global financial system blockchain probably less than you know.5%. And so we have so much room to grow here. We are in the very early stages and we are really in the kind of prove out the use case phase. Optimism is one of the most popular and most successful solutions for layer 2 in all of crypto. But what have they been up to lately? How do they see the ecosystem evolving from here? And what does all of this mean for the future of digital assets and investors? Hello and welcome to Milk Road Crypto, the show that's pretty sure that every major financial institution is just slowly turning into its own layer 2. I'm your host, John Gillan. Today is Friday, September 18th, and today we are joined by Carl Flourish. Carl is the co-founder

and CTO of OP Labs, the team behind Optimism and the OP stack. A huge amount of the crypto industry is built on the tech that he and his team have built, and today he's going to give us his updated outlook for everything going on in the crypto industry. If that sounds good to you, make sure you like and subscribe. Share this episode with somebody who's going to enjoy it. And as a reminder, our podcast today is free and that would not be possible without our partners at Nexo, the digital asset platform that lets you trade, earn, borrow all in one place. So keep an ear out for more information on them later in the episode. But for now, welcome to Milroad Crypto. Carl, how are you today?

>> Hey, how's it going? Thanks for having me. >> It's going really well. I'm excited to talk to you. uh you're a major player in the space and somebody I haven't gotten to interview yet, so I'm really excited to catch up. Um for starters though, let's lay out some basics here. Tell us a little bit about optimism for people who aren't familiar and just a little bit about the business, the business model there and what people should know about optimism. Awesome. Yes. So first off, I could not agree more. Every single institution, every single company will have a chain, will have a layer 2, and we have been building for that future. So, we've got more than 50 organizations with layer 2s built on the OP stack, you know, the optimism layer 2 technology stack rooted into Ethereum

and they're all in production. We last year we did like six billion transactions. We are, you can see our Twitter, we're having announcements with major organizations month after month. It is heating up right now in the crypto space for real institutional adoption and we are essentially right in the center enabling each one of these companies to come on chain and have their own chain and so that is effectively what we do. We make it incredibly easy to deploy a chain and scale it.

>> Okay. So, why does a company decide to go with optimism as opposed to either building their own L1 or building on, you know, an existing L1? Why do they go with a layer 2? And and why optimism? Yeah, lots of reasons, but one of the big ones is differentiation and product focus. Enabling your use case on chain is the thing that people are trying to do. Sometimes the crypto industry gets a little bit seduced by vanity metrics. Oh, I want to have this fancy new technology with this abstract sounding marketing pitch. But the reality is that for real institutions coming on chain, they want to build a product that

enables capabilities for their users. So what does that mean? That means not reinventing a data availability solution. That means deploying on production software that is battle tested. That means building on top of software that enables the expressibility, the customization, the interoperability that the OP stack is providing. And so ultimately a lot of these things kind of boil down to a, you know, a compelling product that we talk with a lot of institutions about every day.

>> Okay. So you've gotten deals with Coinbase, Kraken, OKX, Upbit, Bit Panda, all of these have built their own L2s all using the OP stack. Talk to me a little bit about the the pitch that you make when you go to these companies. And then you know a follow-up question I have on this is like how many companies do you think are in this addressable market? Do you really think it is every financial institution or is it a smaller pool than that? And how do you think about that? >> Yeah, great. So each of our pitches for each one of these companies can be tailored to what they're actually trying to achieve. What is the actual differentiation that they are going for?

And the goal is to make it so that they can bring their products to market as quickly as possible. So that means we knew that centralized exchanges were a perfect target for having their own chain. Why is this? Well, they are one often times very mature organizations with a lot of distribution and two they are familiar and comfortable with the onchain stack which means that they are just perfectly positioned to spin up their own chain, bring a bunch of users, launch new products on that chain that they otherwise would not be able to launch in a centralized context and grow their ecosystem. And so this has been extremely I I mean we've we've had huge

success with all of these crypto centralized exchanges and they're essentially all building off the OP stack for their chains which is really really exciting and we're we're enabling them to do this with OP enterprise and all of that. Now as for who else is going to have a chain I mean I already said it I we will have a million chains. every company will have a chain. But let me explain a little bit more about the intuition around why. It's almost like saying the controversial statement. Every company will have its own website.

You know, 10, 15, 20 years ago. That is the kind of thing. every single institution that is coming on chain, they don't necessarily want to put all of their assets, to put all of their IP, to put all of their distribution onto someone else's website. Now, of course, there is a place for that. You know, we see Twitter, for example, very successful. Everyone uses the same website, everyone makes a profile there, for sure. But that does not take away from the fact that if you are a really serious business, you are going to want control over your own infrastructure.

You're going to want control over your own distribution. You're going to want control over your own monetization and your own compliance. And a huge amount of the new wave of institutional adoption is really focused around deploying on their own chains because they see the value in all of those things that I just listed out. >> Hey guys, it's LG jumping in here to let you know about an incredible interview that John did the other day with the legendary Raul Pal. It dropped on September 15th and they got into why crypto has struggled this year, what needs to happen for it to finally move and why Raul thinks crypto could become the financial infrastructure for the entire AI economy. They also got into how Raul himself is actually investing for the cycle. We also recorded a Milk

Road Pro after hours for this one, which is where we sit down after the fact to talk about how we're expressing some of Real's views in our own portfolios. So check your pod feed for the episode and head over to Milkroad Pro for the exclusive after hours at the link below. So, how do you think about optimism's moat in this landscape? If if we really are going towards a future where every company is going to have an L2 just like every company has a website, there's going to be even more competition there is today and you already do have some stiff competition. How do you think about the moat and the the continued differentiation of the optimism product stack?

>> Totally. So we are positioning ourselves just squarely for the future that there will be a million chains. And so we are getting ourselves ready to facilitate that process to make it easy to customize your chain and provide the features that you need to actually reach the audience with the product that you're trying to provide. And we are making it so that all of these chains can bootstrap and they don't have to start from zero with things like interoperability and interoperable liquidity etc. So this is really a kind of we are positioning ourselves because

we know the future is going to be more and more chains popping up. As people dabble in crypto they might launch a product here and there but eventually that road almost always leads to a new chain. And so when they want a new chain, we are ready and we are making this platform super super user friendly, easy to do, oneclick and seamless. >> All right, I want to ask you about something that's in the headlines right now. Toss is a uh an app. It's kind of like a Korean version of a super app.

They have something like 30 million users. They are piloting a one- denominated stable coin that is on the OP stack. Could you just tell us a little bit about this project? why it's unique and exciting and just what's going on here. >> Yeah, totally. So, one of the most exciting phenomenons that have happened in the past few months is actually just how incredible the velocity is and the momentum is in Korea. There is so many large institutions that are on the cutting edge of bringing Korean customers and Korean products on chain.

And so this is an exa an incredible example where we're starting to see some real traction with actually deploying these products as their regulatory clarity is starting to come into focus. We are seeing a lot of this momentum driven by the regulatory clarity and ultimately we're seeing it even pick up. And so I'm really excited for for Korea as a whole. We're going to we're going to go there actually in the next couple weeks. Um and that is in essentially seemingly just the beginning of this like massive uh uh wave of adoption. And this is this is these are products by the way I'll just say like bringing crypto to like millions 30 million plus

users. So very exciting to see all of those users coming on chain. >> Okay. So there's a huge market there that you're exploring. Um, I read a little bit about this pilot program and what's happening here and it seems like the whole point of this is to try to use a public blockchain that can handle settlement KYC AML and privacy all at once. Can you explain to us a little bit about why this is such an important achievement if this is a successful product and what differentiates this from maybe other things on the market? >> Totally. I already mentioned the regulatory clarity, but let me double click there really really quickly. The core blocker, one of the biggest blockers to real mainstream adoption of crypto is enabling compliance controls

and enabling the product, the crypto onchain products that we know and love today to actually fit within a regulatory regime that is designed to protect consumers and make a and enable this massive audience that we otherwise would not be able to tap. tap into. And so one of the really cool reasons why I'm super excited about these new projects that are building out compliant block space is that they are able to show that it is possible to be compliant and tap in to the incredible network effects and the incredible product

velocity life cycle of onchain application development. So that is that is really really exciting and that is actually something that we've been building towards. We've been building a lot of these compliance products so that each one of these institutions in each one of their regulatory environments are able to take our kind of platform for customizing your compliance, tune it to your regulatory environment and then deploy a chain that is actually compliant with wherever your jurisdiction is.

>> Okay. I'm really curious to hear more about this because like compliance blockchain infrastructure usually implies to a lot of people who hear that they hear centralization they hear you know government control and so I'd be curious to hear your thoughts on how you're sort of like able to preserve some of the the values and the you know the important things about public blockchain infrastructure and cyberpunk values for lack of a better word and at the same time try to offer something that you know is is compliant with these regulations and these jurisdictions. How have you like kind of threaded that needle and navigated that?

>> Yeah, that's a really good question and it actually does get back to the million chain thesis. If we had one chain and that one chain had some kind of very restrictive compliance regulation whatever then yeah fair I think that there is a you know there's a case to be made that people who are nervous about over centralization and you know control okay sure but what we're talking about is we're talking about chains that are targeted for different users for different jurisdictions and it's not like you are being forced into one ecosystem and not the other. So what do we need to do? We need to make sure that

there is a chain for each well each company but each jurisdiction there is a set of ways to remain compliant and there is a connective fabric that allows us as people to leverage each one of these chains for their unique differentiation and their unique value props. There are going to be things that you cannot do unless you comply with certain regulations and that is for good reason. I challenge the crypto people to come up with a more decentralized organization than a representative democracy. So, you know, sometimes there are rules that are made to protect people, to make the world better. And we need to make sure that there are chains that fit within those rules that allow

people to leverage capabilities that were otherwise not possible while still enabling differentiated block space, the more wild west block space, the more decentralized block space for those different use cases and applications. And Ethereum is a great point, a great a great example of this. A lot of these are layer 2s that are rooted into Ethereum. And why is that so valuable? Well, it's not because Ethereum is customizing its block building to each jurisdiction. No, it's because it is optimized to reach the maximum decentralized audience and that's just what it's there for and what it's there to do.

>> Okay. So just because Ethereum is, you know, preserving these crops things of censorship resistance open permissionless secure scalable doesn't mean that every single L2 also has to have those properties. They can be sort of bespoke, tailored for for whatever whatever they need to be. Um, okay. So let's talk about the the implications for this. If if this pilot program that TOSS is doing in Korea goes well, scales, is successful, do you think you just like kind of copy paste this around the globe for everybody else? Do you have to customize it further? Is it just is it just like ready to go for everybody else? Like how does this scale and and what does that look like as more people try this sort of model that you've laid out here?

>> Totally. So the goal is to show how easy it is and to bring how valuable it is to bring products onchain and that is why we're positioning ourselves for this million chain future. It's because we see that once you get a few examples of really successful cases of ringing customers on chain, I mean, Robin Hood has been the most recent example of this. And you can start to see massive interest from a large number of these institutions that each want to bring their own products on chain and enable new features that they otherwise

wouldn't be able to enable. And so what is our goal? Well, our goal is to make that process once the interest has been sparked incredibly easy. And that doesn't mean that we are going to have a single product that require that is just copy paste for every single customer because each chain is going to be different. And so what are we doing to prepare for this future? We want to make it super easy to take our product to then customize it for your jurisdiction, for your use cases, whether that be, you know, custom compliance policies, which we've talked about, or custom block building policies, custom data feeds, all of the different ingredients required to make

your chain special, unique, and deliver the value that you're trying to deliver. We want to make that a one-click experience so that it speeds up, accelerates the process for the global financial system coming on chain. And again, reminder, I say this all the time, we have less than 1% of the global financial system on chain, probably less than, you know, 5%. And so, we have so much room to grow here. We are in the very early stages and we are really in the kind of prove out the use case phase. And so once we get a little further and we start seeing just a whole bunch of people, we're gonna have so much demand and so much interest that we're not going to be able to customize

it, you know, by hand tuning the the bits uh per user. We're going to make sure that it's easy for everyone to do it themselves. >> Carl, I want to get your thoughts. Speaking of regulation and compliance on the regulatory landscape, we've seen the adoption of the Miko legislation in Europe. A lot of other jurisdictions around the world have some sort of framework for crypto and and how to do business in digital assets. The United States Clarity Act just, you know, failed in Congress. The SEC and the CFTC are moving in very quickly to try to give clarity there. Um, but a lot of people are still saying we we do need a bill. Is the lack of regulatory and legislative clarity in the United States hampering optimism's ability to come into this market? Is that why you're going overseas? Or do you still think

you have, you know, enough to be able to to do business in the United States? Yeah, we definitely have enough to do business in the United States. And to be clear, a lot of the uh guidance and leadership in the United States is also impacting the the legislation overseas and vice versa legislation overseas. So, it is 100% a kind of complex system in that respect. And we are actually in a position that's not too bad with the SEC and CFTC coming out with all of this rulemaking. They're going to establish a lot of really good precedent that we will be able to, you know, leverage for the next few years. I've even heard some folks say that it's even better than the Clarity Act, which had a lot of

compromises that we are now getting uh rulemaking done by by the CFTC and and SEC. So, that is it's a complicated situation. Now, of course, we want legislation long-term that is not going to stop, you know, just because Clarity has, you know, didn't make it. There's going to be other things. There's going to be additional movement. Um, but we have what we need. And I will say this that we have definitely, and it is palpable, we have crossed a threshold. And honestly, I think we may have crossed that threshold in 2018. Um but we have crossed a threshold where this technology is established in the

institutions and in the kind of future of the financial system. How exactly plays out the the different customizations of the block space and all that stuff to be seen and we'll support it all. But the reality of the global financial system really taking this seriously and coming on chchain and new products being developed on chain that is really the momentum is so so firmly in that direction that I'm extremely you know optimistic I guess um that this will that this will continue.

>> Well I'm glad to hear that the guy who is running things and optimism is still optimistic. That's good to hear. Uh Carl, I want to get your take on the Ethereum ecosystem, particularly as the relationship between the L1 and the L2s um grows, develops, changes. You know, Vitalic wrote a piece recently saying that the old layer 2 roadmap doesn't make sense anymore. Can you just talk to me at a high level your vision for what you think a healthy L1 L2 relationship and ecosystem looks like in Ethereum and like how you see it progressing from here? >> Totally. Totally. So Vitalik's post was essentially hey look layer 2s should differentiate and layer 2 need to differentiate and now I will just first off address the you know obvious crypto

Twitter drama farming sentiment which is you know layer twos are vampiric to Ethereum Ethereum etc. Look, I have a lot of uh understanding empathy. I feel the way this way as well. It's so hard to internalize positive sum growth markets and like what that means for competition, what that means for positioning, what that means for an ecosystem as it grows. It's really easy to see layer 2s starting to succeed and really picking up and growing their market share relative to Ethereum and

see that as a threat to the Ethereum vision to Ethereum's you know position in the market etc. This is very much not a uh this is a zero sum mindset. When you are starting to see just the relative positions, you're not considering the massive potential for growth in the marketplace and the need for differentiation in the marketplace. There is not going to be a single onesizefits-all solution for every single person who wants to come on chain. And literally we wouldn't want that anyway. If you are a, you know, we were talking to the crypto anarchist, I

gave the example of what if there was only one L1. What if there was one one chain? That would not be a good future. We need multiplicity. We need diversity. We need competition. We need every single institution to at least have the option to deploy their own chain. And so if you consider that future, Ethereum being a layer 1 where there's a ton of layer 2s that are enabled by it, that seems like a really nice position to be in. And that's a position where both the layer 1 succeeds and the layer 2 succeed. You know, one of the weird things about crypto is that the longer you're in it, the more accounts you seem to end up with. You buy in one place,

trade somewhere else, earn yield somewhere else, and if you actually need capital, you end up having to sell something that you probably wanted to keep. That's why we at Milkroad are partnering with Nexo. These guys keep the whole thing under one account. You can buy, trade crypto, earn interest on what you already hold, and even borrow against your capital without having to sell it all in one spot, all in one account, all on Nexo. So, if you need liquidity, but you don't want to give up your position, or you're already holding crypto and you want to be able to do more with it, I think Nexo is worth your time. We love working with them. I think you will, too. Telemilk Road sent you. >> Okay. I think that's very helpful and I think that that symbiotic dynamic is ideally what you want to see in an

ecosystem. So I do hope things go in that direction. Um you talked about Ethereum and ETH and the L1 succeeding. You talked about these layer twos succeeding. What does optimism succeeding look like? And and I I think I want to ask this question specifically around the OP token. Um because the the price action has been you know what it's been and I think a lot of people have questioned do we still need an OP token? How does optimism secure and capture value in all of this and and where does it fit in that as you you know you said the L1 grows, the L2s grow. What about optimism and the OP token?

>> Let me just talk zoom out and like talk high level tokens are incredibly useful primitives for a decentralized ecosystem and for decentralized protocols enabling all of these companies to have their own chain and to come on chain. It is incredibly useful for us to have the token as a primitive that we can use to enable those companies to come on chain as well as a ecosystem incentive and you know thing to rally behind. Oh, it is certainly there OP token is like in the in the in the story. Um certainly and uh you know don't worry. Gosh, it's all

macro, right? Like let's we got to we got to stay focused. Remember less than 1% of the global financial system has come on chain and we are in a moment where we are just booting up the internet. It is crazy. So, and by the way, what I mean by that is there was a time where the pe where people thought that the internet was a bad idea, that it was dumb. You know, the dot bubble burst and it was just, oh, pack up your bags. Are you on the internet? Then you're making a mistake.

We are booting up a new network and that takes time and that takes technological development and we are in that process as an industry. So, we've been in that process honestly for for you know, I've been in that process for like 10 years plus. So, trust me, it's uh you you know, one step at a time. >> Carl, I I appreciate you laying out your thoughts here. I think I have a much better understanding of where you and optimism stand on a lot of things. I'm curious about your thoughts of the risk of your thesis being wrong, right?

Because like a lot of people don't see these things as symbiotic. they do see them as, you know, colliding, competing, fighting over the same users and resources in space. A lot of people don't think we'll have a million chains. A lot of people do think it'll aggregate down to just a handful of winners. Um, what do you say to somebody, you know, who kind of has that worldview and what what happens if if we end up in that outcome as opposed to, you know, a world with everybody has their own chain, everybody has their own website? What is what is your thought process around that? >> Great question. So, first off, just want to say that it is part of a, you know, every company, every vision that we just see the future and we just see it play out that way. And it's the the market

sometimes believes you, sometimes doesn't, comes back to round and believes you again, then disagrees with you vehemently, and simultaneously both of those things happen at the same time. And so the fir first off we just have to think about things at least when to remain sane and to try to predict the future you just have to think about things from first principles as deeply as possible and you know predict and so you know I it it's probably sounded crazy what I was saying like Ethereum would be the platform for the singularity in 2016 because the singularity was probably not going to happen in 2016 apparently and then now it's like oh yeah we're already in it or

something like that. So like these trends these fads like you just have to look at things with as clear eyes as possible. So what what happens if I'm wrong? Well, okay. What happens if we have a single totalitarian government that you know controls everything and you know does uh you know command and control whatever across the world or maybe we're like controlled by an AI super intelligence that just tells us what to do or something. Look, I there's lots of bad futures that I can kind of imagine, but what is the reason why I am pretty confident honestly and I would say optimistic both about the singularity by the way and also about

just where we are headed as a crypto industry is because the incentives the whole thing that we've been building is based on analyzing incentives and the incentive is to have your own sovereign domain. that you have control over that you can customize that you can launch products after and that can still interoperate with all the other ones but you own it and it is yours and that is just a fundamental thing that everyone needs. Everyone needs I mean I I I now I'm sounding a little silly but like private property rights enabling the flourishing of you

know civilization like this is it's really important to have rules and bounds and boundaries of control. And so a world where there's only one chain is a world where there's only one authority. And the reality is we need a lot of input from a lot of different people each with their own ability to make their own decisions. And that's how we come to a much more diverse, much more flourishing ecosystem. And that goes for, you know, the real world, quote unquote, as much as it goes for crypto. And so, it's only a matter of time.

>> Good answer. Well, I I hope we uh we well, I guess we'll have to check in and see how that all plays out. Uh Carl, I want to ask one more question around this because we touched on this a little bit, but I'd like to get a little bit more detail. You know, you talked about how like 50% of the revenues go back to buying the OP token. Um, Ethereum has gotten a lot of criticism for not extracting enough rent from from its L2s. How do you think about pricing this for your clients that are building L2s with Optimism? Is it like an upfront deal? Is it like an ongoing fee deal? And how does the OP token sort of capture that? Just give me a little bit more clarity around around what that looks like.

>> Yeah, 100%. And pricing is incredibly challenging and to be honest, we are figuring it out as we go along. And that goes for, you know, optimism, but that also goes for Ethereum and the broader crypto industry as a whole. And so, you know, we spent a lot of time doing focusing on revshare splits with transaction fees. Now, we're kind of moving to more fixed uh cost models that are more familiar to these institutions because you need pricing regularity for a lot of these products that are getting deployed today. And so, it's essentially an evolving process. we're moving towards that more like fixed fixed cost model. Um, but it's still evolving and that also goes for Ethereum as well.

Like there is I will say you know Ethereum has the ability to charge more for its data availability. Just set a floor that is a higher floor. And there's a trade-off whenever you make these decisions. Are you going to be prioritizing growth in the near term or are you going to be prioritizing, you know, taking in revenues? And making that right trade-off at the right time is is an art. And we need to make sure that we're evolving over time. That goes for Ethereum, that goes for optimism, and that we're figuring out the right pricing model. And I I mean I'm also very bullish because ultimately pricing is downstream from value added, you

know, and both optimism of course and also Ethereum. We're adding a lot of value and so there is pricing power there. There are network effects and we're starting to to see that play out. Carl Flourish, Optimism, thank you so much for being on the Milk Road Show. I really I really appreciate you coming on to share a lot about your point of view and your just your your your take on the market right now because you know there's a lot of of people with different opinions. We're figuring it out in real time as you say. Um but yeah, I just I appreciate you coming to share your insights because you've built so much of this industry. Um so thank you for everything you're doing. Where can we send people to find more of you and your work online?

>> 100%. So look at optimism. Look at optimism.io. Um, you know, you can Google my name, check out check me out on Twitter, but but really get in the ecosystem, explore a chain. Super excited to have you on board and uh, you know, buckle in for the next uh, 99% of global finance. >> Well, Carl, I'm looking forward to seeing what that looks like. Thank you so much for being on Milk Road Crypto. >> Thanks. Bye. >> And thank you all for joining us. I hope you all learned something today. This was a fun one. Uh, so until next time, stay safe, stay educated, stay bullish, and we will see you on the next episode of Milk Road Crypto. Thanks for being here everyone. Bye.

>> Thanks for listening to Milk Road. If you enjoyed the show, make sure you like and subscribe. And if you're struggling to find winners in the market, that's exactly what Milkro Pro is built for. Our analysts have called some of the biggest winners early, and Pro lets you see what they're buying next, every trade they make, and the research behind every position. Check out Milkroad Pro at the link below. Everything you hear on Milkroad is forformational purposes only. These are our personal opinions, not financial advice, and we may own some of the investments we talk about. Always do your own research and make the decisions that are right for you.