Why layer 2s are key to onboarding billions

Transcript

GM GM welcome to web3 Academy your one trusted source to capitalize on the next big phase of the internet don't get caught in the hype cycle I'm jay bird joined by my co-host Kyle reedhead and we believe the blockchain audits might save the world that's why we're carving a path for doers to confidently build and invest in web 3. guys we had a great episode for you but first kudos to Jay you can tell he's enlisted his voice he sounds a little bit sick today and that's because he is a little bit sick but he's here working hard as always every single day to deliver the best content for all of you so thanks Jay for for showing up even though he's under the weather I kind of like I feel like my deep voice actually

might itself not better you sound like LG yeah you sound like you got a great podcast Radio voice right now but anyway guys great episode I mean LTS are the thing right now they're hot it's LT summer on teen summer whatever you want to call it but with base launching I mean there's over like 50 plus LTS at the moment that have lodged like recently it's crazy out there and we wanted to get an episode that just helps kind of frame what's going on what the stuff is why we need l2s how they work what the economics are and and so you know this conversation I think does a good job of really covering all that you know in a simple way obviously who we have on he's extremely smart and can talk as technical as you want to get but we kept it very simple

for a reason right we want to make sure this is an episode that everyone can understand and wrap their head around and and I think we did a pretty good job at that what do you think Jay yeah yeah I mean yon brings an incredible knowledge and he's a doctor that has a computer science PhD from our nearby us actually University of Waterloo fellow Canadian love to see it and he is deep in all things Roll-Ups optimistic Roll-Ups zks you know protocol design how to make blockchain scale securely and he does that from his position as the head of l2s at quantstamp which is one of the leading web 3 security companies that

has secured over 200 billion digital assets for over 250 clients you know they've worked with ethereum they've worked Solana flow cardano Avalanche binance like they work with all of the leading blockchains out there and he just really has that ability well-being very deep in his academic knowledge he also is very good at bringing it back to basics which really I think is what made this episode so great the most interesting thing to me in this episode Kai was I'm still of this view that we're going to have a million l2s and it was interesting to hear John say he doesn't think we're gonna have a million l2s and he talks about why and how many

he thinks he's gonna we're gonna have yeah I was gonna go deeper to that and challenge that but I was like you know what I want to hear more of his point of view on that and I think he had a shorter time frame too but interesting that place that maybe we'll have to come back to that and come back to him in in five years and see who was who's right on that but anyway I think people enjoyed that the other reason I really like this episode and the timing of it is we in in for pro members and I know many of you guys listen here on the podcast last week we put out a pro report on l2s and looking at you know who's gonna win and who's currently winning in terms of activity this coming week we put one out on the economics

tokenomics and value accrual of L2 tokens which I think is extremely important because obviously these are a big deal in the space and so we talk a lot about that in this episode and so that's going to give you guys a good basic Insight then the pro reports will sort of add to that and give you like the real numbers looking on chain and and dive a little bit deeper so great little you know combination of Education between the pro newsletter and the podcast here yeah I gotta say you know I got some l2s in my bags and you know I think that it's an important part of your crypto portfolio is to have a percentage in l2s because I think we believe it is the future and Yan talks about how we why we need L2 in order to

scale and if you're investing in l2s or if you don't have Altos in your bags and you want l2s in your bags you gotta go read these Pro reports one of them comes out tomorrow and the other one came out last week and they're gonna either further your thesis on your L2 Investments or give you the thesis that you need to make confident investments in some L2 tokens which I think are an important part of your Investment Portfolio Kai let's jump in before we do we just need to take a minute to hear from our sponsor modern newsletters are built on paragraph that's right paragraph is a brand new newsletter platform that combines the best parts of web 2 and web3 to supercharge newsletters for both

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paragraph We believe this is the future of newsletters because of profound engagement it creates between creators and fans so whether you're a Creator writer or an Avid Reader it's time to check out paragraph and capitalize on the opportunity of being early Yad welcome to web3 Academy so great to have you on the show today thanks for having me here So today we're jumping into everything l2s and L2 scaling what's the future look like super excited to have somebody with your background in your experience in the show to really break this all down for us because we talk a lot about l2s on the show and I think the the

question on everybody's mind is they'll all talk about onboarding the next billion people to blockchain and crypto and what's going to be the next onboarding ramp and we all get excited about you know Starbucks Reddit these big apps and oh it's gonna take us to the moon but I think the real question is are we ready for a billion people and what is required in order for us to be ready for that can you sort of give us an idea of like the current landscape and the way you see things in terms of what we are ready for and what blockchains offer right now sure I don't think we're ready I'll start with that I think we're we're getting closer the scaling Solutions

like layer twos are are definitely incredibly helpful and they're necessary I think I'll touch on that again in a second but yeah we're not ready because all of those apps you talked about Starbucks or Reddit or whatever pick your next favorite you know three things 10 things they currently need need somewhere to go on the blockchain if you know we want to use them on the blockchain and and that means space like block space competing for that space is costly when we saw very old projects that crypto Blog the system a long time right imagine that but with 10 popular apps not just one it won't work right it won't work unless we scale and so coming back to layer twos I mean that's where

where we can start to onboard these systems and and through these systems the people who want to use these systems because we open up the option for a ton of new block space we can say we'll we'll take some some some of these apps we'll put them on some Layer Two we'll roll them up and we'll batch them and we'll save everyone some space on the chain and save everyone a lot of money and enable you know these apps to actually function without worrying about other apps could you imagine the Starbucks rewards system going down because people were excited about a Reddit post if people find that on the main chain that might be you know the reality if we wait for you know scaling solutions to hit mainstream it's less less far less likely to happen and these scaling Solutions have started to appear

and they exist optimism is live and various CK Protocols are also live that's step one but they're they're still new and so I think they still need to be attested a little bit more because they are new but once that happens then we can talk about onboarding you know all the cool apps all the cool features and on and then all the people who want to do things the analogy that I like to use is if layer ones are the highway then layer twos are the side streets that go off the highway and if we build all these layer twos around the highway then when you have heavy traffic on the highway you can just shoot people off into all these side streets where you can manage traffic right what's

happening right now is and you can see it when gas is high you feel it when there's a lot of action transactions happening on the highway it gets slow and it gets blocked and just to paint a picture of how far I think we have to go the best numbers I've seen to compare this to is Visa currently is able to do 24 000 transactions per second Bitcoin can do seven transactions per section and ethereum can do 30. these numbers fluctuate but you know you think about how far away we are to being at the scale now it doesn't mean we need to be at the scale of Visa right now we're not there yet of having that much volume

that many users on chain but if that's what we all dream about if that's what we all talk about about having having crypto be this Global Currency and having it be this ability to transact instantly within seconds well we've certainly got a scaling issue how do you how do you see it can you sort of maybe paint a picture of how how big of a problem is this and where yeah I mean we are right now like I said it is it is the problem right competing for that space is why you know you have so few transactions per second and and the analogy is is I think pretty good of you know trying to direct traffic to different places and that's what these

chains allow us to do and in turn that means you can put a lot more roads or cars on the road which is sort of in the analogy more transactions per second right the better your your network literally your network roads the better your network of cars and therefore data the the situation of like the actual numbers of transaction sounds like it's it is ridiculous that that you know ethereum's gotten so popular just by doing 30 transactions because you almost wouldn't believe it you know someone's like spend billions of dollars investing into this ecosystem to build a system that can do 30 transactions per second someone would like well why why would you do that and and so it's sort of amazing that we've gotten this far but the next step will be figuring out actually those 30 transactions per

second can be scaled up you know to order of magnitudes much much higher through these these various Solutions which you know maybe side side sort of networks of roads in your analogy or more accurately you know the scaling Solutions we're talking about but when that happens it's going to be a total Game Changer because you know all the pipe dreams of why you would have told someone you wanted to spend all this money on building such a network is to do things like pay for a coffee you know some people may not agree that your money or whatever either but a lot of people want to use blockchains in their day-to-day whatever that means so that's a coffee a pizza car or house something organ games or whatever your applications are you can't do that until until you start having you know more transactions per second because if you

imagine just your favorite Metropolis trying everyone reasonably switching from visa to to a blockchain it's not going to work right the system's not not going to work at all and so these scaling Solutions are are necessary and you know incredibly helpful but the trick is to do them securely because the other part you know the biggest part of why you spend all this time and energy building this blockchain ecosystem when in fact you know Visa can do 24 000 transactions per second is because you don't want to trust anyone and so when you when you take that trust away from it you need to make sure that you still have layers Purity still built into the protocol so that everything works and I think this is you know the biggest challenge going forward for a whole

bunch of layer dues because you're going to see probably you know some some issues with some in the past you know I've looked at a lot at Bridge hacks you know two billion dollars lost in the last year two years in in value and depending on who you ask your Roll-Ups are just fancy Bridges some people might disagree with that That explicit statement but certainly there is a bridge usually associated with you know a roll-up and to think that there won't be issues with a roll-up going forward I think is is naive so while you know I'm excited to say you know or is the magnitude more transactions by just using a roll-up you know or you know OB sac and build one now if you want if you don't do that securely and you know bad

for a bit full feedback didn't do it securely which you know I haven't taken a look at their code closely you know it's very important to make sure that that doesn't go down doesn't get hacked doesn't you know don't have buttons and you're looking at more than just that number because it's very easy to reduce the the argument to like oh let's just build a system with many transactions if we want to do that would be not I already said that so this this ability to keep trustlessness is Paramount and I think that's also why those roads are so slow to be being built right obviously some of them are built it'll be stack exists and and several others I'm only an introding a base stack a lot because they're sort of they've been around for quite some time it's a main net but there are others

but you you have to build these roads in such a way that everyone can be very sure that when they drive onto them you know their their car to use this analogy is safe it doesn't get derailed well it works it doesn't so you know building those slowly is probably fine I I think you probably don't want to go as slow as a sort of ethereum itself is because there is generally less value locked up and and there is no reason to sort of you know not learn some of the lessons that that ethereum is already teaching you but you can't just go out there and toss a bunch of money you know at some metaphorical contractors to just build a road Network you need to do it in a very very careful way and only then will you have a number that is you know

comparable to Visa or even you know a 10th a Visa let's say that would be a good starting point that you're you're proud of and that you're they're happy to use and that you know people in the ecosystem want to use because again a lot of the people in the ecosystem don't need to worry about you know the the sort of thanking the unbanked parts of the ecosystem which are good parts I think a lot of them already have bank accounts and if they release wanted transactions they could they could use their bands and if we're trying to lure them off of that as they're sort of you know day-to-day system we we need to have not just the number but also you know the added value of trustlessness and Guilford and well one of the interesting things is when you think of all the hacks that have

happened in web3 in the last however many years I don't think any of them have happened on l2s and L2 Bridges as far as I know and I don't mean I'm sure applications.lt has been hacked yeah but I mean the l2s themselves I mean I think of like Ronin which had the 600 million dollar hack and Wormhole but that's to layer one so there's been a ton from layer one to layer one but I don't think there's any from layer twos which is a lot I don't know why but I'm not aware of any Layer Two to layer 2 hacks per se there was sort of an issue where the OBM and optimism I think it changed the way they had treated tokens on their Network and so there was a potentially big issue but it didn't know it's all corrected this was a big deal but the actual

Bridges between them have been remarkably robust it's almost unbelievable how many Roll-Ups we have currently and the fact that none of them have been you know majorly attacked in this way you're right there has been some applications on these chains that have perhaps dropped the ball or perhaps have been you know put onto a system where they weren't designed to work and so they had some hiccups and issues so there was like a crowdfunding issue where they deployed on L2 and one of the the op codes that changed the gas costs so they couldn't get their funds there eventually it was fixed but you know nothing with the actual Bridge themselves and that's that's kind of great but I I think it's Gonna Change like I'm not gonna have I was gonna say I really hope we're not

speed I'm just saying you existence trying to have like we're gonna look look look forward you know months from now and we're like oh why did we from my understanding the the bridge from an altitude like from l1's ethereum to an L2 is very different than a bridge from L1 to L1 because it's in the same ecosystem there's like I I don't understand it all but from my understanding is that there's it's using cryptography whereas L1 to L1 there's some a lot of centralized components to it and so it makes it much easier to hack versus a Wendell too I don't know if you were aware of that or if there's anything in common I mean so I mean there's a couple things I could say about that first you said you know their L1 style ones are perhaps more centralized in fact I don't know that's

true I think a lot of l1s are are more decentralized most I can't think of any current Roll-Ups that are like claiming to be decentralized right I mean the most of the sequencers are single entity sequencers who live on some server or somewhere and you know maybe there's backup copies of them but they're not fully decent there's projects that that want to do that all of them there are some that like are taking concrete steps to actually do that but centralization is currently the North in in the system and and that's for a very good reason it's it's that security is very very difficult right I I spent a lot of time thinking about future completeness of Roll-Ups and things like getting your funds out if your sequencer goes down

like Escape patches and that type of thing and and some of them have started to implement this functionality some have left it Beyond but a lot of them are also just sidestepping it to go into decentralization in in these other areas and what that means is partly you know these Bridges sorry to take it back to the question of you know R is L1 L1 bridge is different than the note one to L2 sometimes yes so some of those added features that may or may not be present are really cool and they're going to add some attack vectors which is why some people are not developing so this Escape patch functionality for example is meant to help you get funds out if the security if the sequencer goes down but naturally that means there's another way to get funds out of some code so if you implement that wrong

it's a really big list right so some projects don't want to go near this because it introduces a greater attack Vector service which is counter to the idea of a feature itself right the feature is supposed to make the whole system more secure so the bridges themselves should arguably be more complex than L1 to L100 because it's it's worse than just locking up tokens somewhere and unlocking them or minting them somewhere because you have these this tight coupling with the extra features right you said there you know that there could be relayers for example I think you said from L1 to L1 greatest it's often the case I think that's necessary all right but you could sort of think of the sequencer as being the ruler to the the chain itself on the L2 so that still

exists all that functionality you know in some abstract sense is still there the the specifics will change bridge to bridge or roll up to roll up but because of the tight coupling you would I would expect that actually Roll-Ups are going to be you know more complicated Bridges not not less complicated or they're going to be you know having tight tighter coupling not necessarily being tightly couple but they are going to have these bridges that are more more prone to bigger issues and you know there's a lot of extra work to get get them to where they are and I think part of the safety is right now the the centralization because you know that does keep

all of the the system sort of operating if there's an issue someone can pause button it ten years from now that's probably not what we want you know 10 minutes from now that's that's a feature that I really want to have an assistant because something does variety and then somewhere in between we have to make that distinction very different and I think the reason no one's rushing to do that is because we saw these L1 Tel one Bridges get hacked you say oh we took off the piles button look what happened right all those bugs uh that cropped up immediately hurt us and it's arguably less of a concern for for those decentral or these decentralized L1 to L1 Bridges because it's sort of like one relay or goes down in a decentralized ecosystem in principle there's another another one

but if you're running a centralized sequencer and your only sequencer gets screwed you know your reputation has gone and so you've lost a lot more right at best it's your reputation loss right where it's a hiccup and something that's bad at worst the whole funds are compromised and you're no longer collateralized and it's it's a problem it is interesting to discuss the centralization versus decentralization of l2s we actually this show when people are listening to this this last week we had a pro report come out on L2 activity and we didn't really talk about this but we did acknowledge that most l2s are not decentralized yet and that's okay I think this is the point that you're making right that is okay that is a a

necessary step in the progress to getting towards decentralization which we believe that the l2s are will do and are making plans to do that but I want to go too far down that rabbit hole I mean maybe we will later the show but okay here's what I want to I want to sort of frame the this next phase of the conversation I want to talk about how we achieve this scalability and why L2 is the answer what does that look like I'm going to ask a whole bunch of questions here Jan so don't feel like you have to answer them all at once but I just kind of want to frame this for where we're going to go for the listener what does that look like in terms of how many l2s are we going to have you know how are they all

going to work together how will this all function if we have you know thousands hundreds of thousands millions of l2s curious to know how many you think will have how it all work together and then we might get into we'll go into some further conversation from there around economics business models Bell twos as well but let's start how do we achieve this scalability why are l2s the answer yeah I mean I think it goes back to the initial point of block space and and needing to put your apps and you know transactions somewhere on a blockchain so why are they necessary I think that that's you cannot possibly expect you know the the scale of the internet to currently be compressed down into a current ethereum block however Big Blocks

in a reasonable sense I guess you could make it arbitrary you can do it but you know in the practical sense there is a limit to have a good lock is and therefore how much you can do and so by opening up various l2s you know we can start actually you know not really partitioning parts of the network but certainly that's what will end up happening and so I don't want to use the word sharding or these other technical terms but you'll have some apps on some networks doing some things and you'll have other naps on different networks doing different things and as a result you can just support more ads and that's the way to get that effective number of transactions per second up too right it's it's a way to say well I'm not just doing empty transactions therapy blocks

I'm actually you know running some I'm doing something someone cares about I think so I think the the first you know the short answer there is is just space and and sort of where to put transactions because right now there's not enough space for that so and and just quick question on how much more space do we need times the current block space we have like any idea you know I'm sure that there is a good number I'm sure I've heard the good number it's a lot right if you I don't know how big a current lock is on ethereum it's you know maybe a handful of megabytes I feel like with the Dank sharding stuff it's gonna add like two Megs so somewhere probably around that but you know how many how much bandwidth do you expect sort of to

run through your local network let alone the network like of a city or the world right it's it's much much bigger than to make per you know what's an Epoch 12 seconds like and any pop might be multiple blocks it's gonna be you need a lot of space orders of magnitude bigger or um significant yeah many words at least probably probably a lot I'm being conservative because I I don't want to say anything or someone will be tweeting at Mei yeah a lot a lot I'll be there just to put a respective a lot more than even what visa is doing right like Visa at 24 000 transactions per second is still small compared to what how everything's gonna go on chain right yeah I mean so

like light years like so much more yeah yeah my ideal world is is paying I mean maybe not my ideal but one nice world would be you know paying for a Visa or paying for coffees with my blockchain and also going home to play video games um and and having a fun time with that and so you know you have to consider all of the world wide web and then you know the populations only go up and if we're trying to bank beyond the bank and make this more accessible to people and people want to be verifying things stuff like the number of transactions I think is okay before you go farther down the L2 Rabbit Hole just a quick question what about something like Solana which is trying to do it all in a monolithic type of chain do you have I mean obviously

this is what you research this is what you've done like is that possible or do you think that they're going down a road that's just not going to work so possible is tricky I don't know if that's strictly possible I I will say it's it sounds harder if only because you need greater consensus and not in the technical sense of like what is consensus like for the blocks but like consensus of what should this blockchain do right like if you wanted to scale Solano or ethereum up to to handle all the world's transactions by itself you're probably going to have to have some limitations there's going to be some technical barriers into what what can happen and I will like one set of features and you will like another set of features and if those are not mutually compatible you know you're

gonna have a hard time developing that system let alone getting blocks to be confirmed transactions with a less monolithic approach like these scaling Solutions you can say oh I want these features over here and I can say I want a different set of features and we'll just we'll use you know the layer one as our grand source of Truth for the things that matter to both of us like our usdc balance and otherwise if you want to go over there in your world and do something different super cool right like there's a lot of talk about evm compatibility which is you know it should your L2 be able to run exactly the same smart contracts in exactly the same way as a theorem and a lot of people are doubting it as the Holy Grail because that just means

all the like ethereum itself can just scale up which is true and very nice but there's other things you could do you could have a different VM your VM could handle different inputs it could handle different cryptographic Primitives it could be a gaming VM it could be doing something else and and that's totally fine but if you were trying to do that in Solana like are you going to embed a gaming VM into your Solana VM I don't know I don't know that like a large portion of the world would think that's value right but if you just have to put on my own roll up and you can Bridge your assets if you want to play the game and otherwise stay away that seems way easier to me to develop and so you know that's easier in the sense of consensus but I I like a development

but it's also probably easier from a technical standpoint because you know your gaming VM might be very small and Niche and so you don't need to worry about you know how does it integrate with the rest of Salah you just no I know how it's going to work on my L1 smartphone right interesting so on the scalability side of things I was looking at so as we were writing this Pro report this past week on Layer Two is looking at L2 beats and there's I don't know how many l2s there are right now that are live let's say probably like maybe 50 or so on LTB there's like 37 I think it is but the number that it gave was that l2s currently are scaling ethereum to a factor of 5x right so we went from 30 transactions per second to whatever that is 150 or whatever so not much more

compared to what we need now I know most l2s currently are not like at full capacity right I think that they can scale more and there's more things they can do especially with the upgrade coming end of this year early next year but so we're currently sitting at let's say 50 and that's only getting us a 5x so does that mean that we're going to have millions of layer twos probably to get to where we need thousands like how do you think that that works yeah how many I'll Do's so I think there's gonna be lots I don't know if the answer to to your most recent question there is are we gonna have millions millions a lot million sounds like liquidity is going to be a real issue a Millions also sounds like you know if if you actually have millions like that sounds like our ecosystem did very

well for itself right exactly it's very difficult to set up a functional roll up and have people want to use it and you know it so a million sounds like oh boy we're good probably you know it'll be closer to you know in the coming years or 200s maybe like more than 500 sounds like a lot to me more than than 50 sounds obvious because I don't think we're done seeing everyone and there's enough technical challenges that you probably won't be able to get it down to sort of a one-click like deploy new smart or deployment role some projects are definitely working on these these types of things to simplify that but there's also just sort of maybe not a neat right not every app will need its

own roll up so doing this extra work won't make sense at all because some apps can just live on another rollout it does you don't need to do it so I think I think the answer to how many is you know probably 100 to 200 ish you know in in three to five years I don't know it more sounds really really upsetting to me too because then you're going to be walking down the road and be like Oh Denver is saying hey what you know what train are you on like oh I'm on this chain that I've never heard of oh that's well then we're not really you know in the same world you have different liquidity for one but possibly different rules of where you can compute what you do you know and maybe to send you money now I have to bridge three

times right if there's no direct path it's going to be a real complicated thing or you're gonna need a power setup like of all possible you know chain sending things or you take some liquidity from some set of chains and send it to some other and that sounds like a myth so you know more than than even 100 is going to be really rough but if you say we're already at 50 which I believe I've been on the LGB two you know some of them will bubble up and do really well some of them will probably not produce well for for other social reasons or technical reasons or it'll be bad luck right there's a lot of this so I think we'll see you know three or four times that come up which I don't think is that unreasonable so 50 to 150 that that

seems pretty plausible once we start eating past that I think people should really start to realize you know should some of these be l3s or l4s right chains on chains because then the settlement gets a lot easier and it's less about scaling and more about the application specific needs which is you know at the end of the day what we're trying to hit is scaling four applications well Jay I don't know about you but I kind of want to pull that one a little bit Yeah Yeah with your face there talk to us about all three zero fours what they mean and like help the listeners understand what you're what you're saying it's just a roll up on top of a roll up I assume I mean yeah I think that's the most naive interpretation I don't know if I have a more or subtle one I think there might

be some very subtle Corner cases of liquidity or things like this but essentially it is just a roll-up on a roll-up and so now now you can imagine this recursive landscape of scaling and so you know when you say we have a five-time Improvement on on transactions per second with just one extra layer right now this compounds because for each one of those roll ups you can also scale that one five times and so this mean sort of function of speed up grows rapidly assuming everything works out I don't and I haven't really misinterpreted before but certainly for a lot of layer threes I think that the the hype is is for application specific change so a lot of layer threes won't sort of give birth to a layer four they won't need

that because the layer 3 just wants you know a nice place where its underlying layer is fast namely Layer Two and to perform its own computation fast not necessarily to build another blockchain and so the layer threes will probably be a stopping point for I think a lot of applications maybe I'm very short-sighted on that I don't assume all of them will stop there but I think a lot of them you know that will be the sufficient place to to stop and essentially yeah I will be just you know running your computations you know in your own little roll up the world and then settling on the underlying L2 in this case and you know that works really really really well if you don't

need to talk to like another you know L2 or another you know a layer of three that's not on the same L2 right or higher because you just get all the benefits for for very little sort of downside and unless I I've misunderstood so right as long as liquidity doesn't need to move from your L3 to another L3 or to a different L2 then like that makes complete sense the moment that the liquidity or I'm not even sure what else would need to move but something else that's where things get a bit tricky which maybe we can sort of just touch of that because even now we're talking okay there's going to be hundreds of layer twos a bunch of layer threes uh people right now listening are like okay I already hate bridging from my layer 1 to

my layer two and then from Layer Two over to others like base launch everyone's like I got a bridge again shinzura Network launch I was like I gotta Bridge again it's like every time I do this it's like I'm losing money because my eth is now stuck over there in a small amount it's like this is crazy my assumption is I don't know if there's already people building this maybe you're aware but is there not tools or the way that I picked this anyway is that there's going to be some sort of liquidity that's like shared amongst them all instead of having to always Bridge from one to another it got to see that it gets abstracted away at some point and I just start using whatever and the liquid just moves automatically is my hope but maybe not so yeah I I mean I don't have really

really good answers for you here this is this is one area where I think it is very interesting and challenging because the easiest answer is just put the liquidity where you want it the most and you know maybe now it's not clear where you want it the most in particular that you know maybe they're air drops you want to hunt but you know in the in five years there's a good chance you will know where you want to live on this ecosystem and it may not first of all liquidity may be better but even if it's not better right you might know that like one or two chains are where the apps you care about are living and so it becomes less of a problem that way to to sort of go back to the actual question of what happens if we try to split this

liquidity across many chains because maybe you do actually maybe you're a multi-desco and you love living in a hundred different shades which sounds like a nightmare first sounds like nobody I want to meet that person well but no but just to say one thing is like if we're doing so many different things on chain like you said if you're playing a game it's gonna be on this one if I'm on Reddit it's going to be over here if I'm doing my D5 stuff or my banking it's probably going to be not on either of those two ones like I do actually think we'll use a lot of chains in the future not because we want to but just because applications like you said will be using their own customized chains so like I think this is going to be a big problem for a lot of people even though we don't

necessarily want that yeah so I mean I think part of the solution will come with sort of application specific needs right so like if if you're a sort of situation there is your banking is on like one one roll up and your Gaming's on another one that might be totally sort of fine other than the occasional top up to sort of pay for some transaction fees you know your your in-game items that you earn as nfts on that gaming chain we never really need to talk to your bank okay like obviously if you want to sell business value but if we sort of get to a point where maybe there's no hype in nfds maybe yeah if we get through Cloud you know where you know it's not about getting in a piece to sell nfts but they have some other utility in in the game then then that

liquidity isn't so important on on that chain for you because you're sort of you're not incentivized to sell them in any mean I suspect that'll never happen and I suspect you know there's there's always going to be some selling right if you look at Counter-Strike skins there's is always selling but one there will be some natural separations of liquidity is what I'm trying to say not not everywhere and so the core functional like you know your your native currency like ether funding all of these systems and solving that from like keeping that from from segmenting too much and fragmenting is going to be a real Challenge and I don't know how to overcome that you asked if there's some projects to do that I'm sure there is I'm I don't know that they're doing better than just sort of

taking on the added risk of of you saying you're going to keep your funds over there and I'll spot you what it is right now and right if something goes wrong we'll get burnt but you know as a result you're gonna pay me half a percent something I don't know if you can do better I I I've been to some hackathons or some people claim they they have some really good ideas but I haven't seen any of these projects and I guess just to compare it to like the traditional world as well like outside of blockchain is our liquidity is often segmented anyway like I have money in my bank account and then I have like a wise account and to get them back and forth It's not the easiest thing to get my money to someone else's account especially if they're in a different country it's just a pain

especially if these are different currency like so we already are very segmented in how our our value is on the internet regardless so I mean hopefully overall web3 makes that easier yeah I mean I don't think we should aim for that but we can't do much better in the technical sense at least we probably not in a way with the regulatory issues like I'm not there to do things illegally and I'm saying like you know it is very easy to to send money between transactions even if it or between chains it might be slower you have to go through three different Bridges but that's all it is it's not like me sending money to to another country where Russian people there are like you know Banks I need to talk to and they need to talk to government agencies or things like this right

what about a chain links cross-chain interoperability protocol is that a solution that you see enabling us to speak within chains are you are you familiar with it and I'm not super familiar with it I have seen seen some stuff about it but I don't know that I can comment here on a way that that's really really meaningful I'll try to turn into a different approach that I'm seeing which isn't exact isn't at all what you're talking about but I think like circle circle with the usdc what they're trying to do is now instead of sort of having this default behavior of burn and mint right usually when you bring something you burn something and you mint a representation on the other the destination here they just want to

natively like just spawn it I think the other place right so you can sort of purchase native real deep sort of real in air quotes there usdc on your target chain without ever worrying about sort of bridging it you're sort of buying it I guess from from you from Circle or whoever is operating it but I think that's that's another way that we can start thinking about this because obviously for usdc that that's really valuable you you save the bridge and gas fees at that time right you can just say oh I have a new version it complicates the l2b analysis of TBL I think at some point and there are some concerns about that but you know I think it's actually a pretty good idea there will be other apps where you can do that you'll have a front end and you can say I'll just by default

natively spawn you know my liquidity into a fragmentation that I care about right so if you earn some interest you can just say here's the real version on chain a and also here's a real version of chain B that matters and that type of at least setting up the liquidity in the right place at the right time might go some distance for mitigating these concerns about liquidity fragmentation down the road because it'll already sort of exist in the rights okay I want I want to shift gears to the economics and business models of l2s can you sort of explain how profit and value flows within l2's and L1

I mean I can try so I'm very technical and I'm not an economist so I you know take all this with a great assault but for now the main motivator seems to be sequencer fees if you look at various people running crypto Twitter I don't have their names version occasionally there's an analytics come out that says like oh Project X earned why ether this year or or month or whatever and those are non-trivial amounts of money are they enough to keep the Staffing cover for for the projects that are running them I'm not sure I haven't run that math but sequencer is currently you know make a lot of money they did by taking a little bit of the transaction fee that they're getting tundled I think I think I saw somewhere that one project

made 600 eat in a month for for sequencer fees so that's like 1.2 million in a month if it's 2K in each which I don't think it is but you know like in that ballpark that's not bad that that doesn't talk about the tokens or or you know how value flows back to the end user per se but it does sort of also indicate why there's 50 of these systems so it's not just like people want to do the the pure thing of like for the scale of or for the sake of scaling ethereum right A lot of them are profit driven and there's money to be made and and that's not necessarily a bad thing I don't think there's anything wrong with you know spinning up projects that help the ecosystem and making a little bit of money up off of it because if you're still saving the user you know

95 of their their fees they're happy you're getting a little bit you're happy and then you just have to be careful that someone doesn't come along and do it better than cheaper than you which is well and for context for listeners bass has made 2.8 2.8 million dollars in Revenue since launching already now it's not profit their profit is about 2 million now again not profit and County like employees and all that kind of stuff but just in terms of the revenue of the sequencer itself then the expenses it pays back to ethereum to settle the transaction that's pretty impressive and I mean optimism at arbitrim are something like I have it up here on on ardune I think it's like 60 million dollars in I can't remember if that's in profit or total revenue I think that's total revenue since they launched yeah total revenue so quite

impressive yeah and not like I would it sounds like a great you know sort of business model because you're also helping people I think the question though that that was also asked that I hadn't yet got to was you know how does value float and like does that mean I'm entitled to something if I help often doesn't work by if I use optimism even and I think that's where it'll come it'll get really really interesting I think that's where you'll start to see the number sort of maybe shrink back down in the number of Roll-Ups I think we'll see a boom because everyone will see these numbers if you're listening to the podcast you're hearing these numbers and you're saying that sounds pretty good basically think in the future people won't be super happy about that I mean they'll be happy enough they'll continue to use

them but they'll want to do the web 3 thing and say Hey where's my can I get something back from this and and that'll be I think the challenging part and the part that I'm not you know I'm not sure what the the throttle business model will will evolve into but as soon as we can start seeing things like you know decentralized sequencers maybe you earn those fees that you run the sequencer for those blocks or some setup let's write some some Epoch and then you know is it possible you got the ecosystem is competing now for this this two million dollars that that base got on the base chain itself that will make things really interesting and you know then you'll have to start asking questions of who gets to do that because if it's just anyone then then maybe there are some

latency issues that come into play or there are some some things like staking or you know privileges that that are related to tokens or other ecosystem Primitives that that might exist so we having a contributor or something like this or are you a trusted part I mean I think once we get to that level of DC decentralization you can start to ask these questions of how does the value flow back because you know some companies again going back to optimism optimism launch token they do retrogrants and so you know some value does come back to people in the ecosystem right contributors people who bill which is I think a really good idea but I think a lot of people will not want to necessarily build but they'll apart we're lying

around they'll want to also be be sequences or decentralized proof markets in zero knowledge proof systems we haven't really talked about too much I think that's that's going to be quite big it might might not be as big as a new sort of Bitcoin era level of mining but it is going to be a lot of hardware that you know will be dedicated to just generating proofs and so I'm sort of hoping it's not not a whole new era of just server Farms off in the countryside but there is going to be some level of this where people need to generate proofs and that's one way to cut to get value back to the system you say well now it you know those fees the sequencer is collecting is actually going to offset some of these these Investments by

people who want to generate these groups and you know there may also be things like Med so maximal extractable value or minor factorable value where are you you know you say the sequencer will intentionally try to profit and and then we'll we'll distribute that back to people or it will intentionally sort of not try to do that in order to sort of secure the network against something and and maybe there's some stake involved in that and and these are all ideas that have been discussed on you know various places but beyond that I think the biggest blocker for Value coming back like so the business model I think I think is for now short term just like sequencer fees I could be wrong I don't work at a at a L2 so I I don't know what the in

and out of a book looks like there for their accountants but for now it seems like sequencer fees are are enough to make it very interesting and very you know exciting and you could use that those funds to then think about all these other Solutions and other ways to generate other more Revenue through some of these additional features like other young or something else or you know just create a better more efficient system because if you can drag costs down that's also you know possibly profit so that would be particularly concerning probably for zero knowledge systems where the hardware and the prover times might be a lot longer or more expensive for optimistic ones probably you know there's going to be a wall where people don't see increased advantage of optimizing too too much you

know something still have to come into play like like further dank charity where the cost of posting data will get cheaper and things like this but yeah so so to answer the question the short term I think is sequencer piece and I'm not sure if there's much else going on I'm sure there's some Partnerships and all that longer term I think it'll be the you know the the sort of web 3 crypto economic thing how do we we get a nice cycle of value going right and partly I can't give you a good answer this because I I don't know what that'll look like in in The Proven Market that's a little bit clearer but it sort of seems too easy I sort of suspect you know a lot of people have to but what I want to see is the really cool defy stuff where it's integrated in

where if you bridge something you get some special features on the network and you know some some apy or something else entirely like on the one hand deep but it's great on the other hand you know I'm sure we can do do a lot better especially when hardware and pieces of stock like distributed pieces of software that aren't necessarily smart contracts are involved so things like rewarding oracles you know do you have an L2 that that talks to the outside world like you know the traditional web can you incentivize people to to deal with that based on on tokens and is there some way that that you can profit up I'm not sure but I have to imagine you know there's a lot of really smart gaming theorists in this field and and they're gonna figure out some really cool you know Forks of layer twos that do

exactly something that you're used to plus this extra feature where if you if you're an honest actor or you do something right you're going to get a lot of money we haven't talked about fraud proofs that could also be another way but you know assuming honest actors it's probably not going to be super super yeah in terms of accruing value of the token holders I mean I think for l2s there's not a lot of that currently there's potential of that kind of like you to swap token there's potential that you'll get fees in a crew value but right now it's just a governance token l2s are basically the same except for IMX the mutables token I believe you can stake your IMX and if you do that there's a certain percent of the fees that happen on their chain that go to IMAX holders now when you stake it

doesn't do anything it's not like staking for ethereum where you're actually securing the network when you stake for IMX it's just a gimmick to I think try to get people to not sell their IMX tokens then earn a little bit so that makes number go up ideally and so I think like hopefully there's more mechanisms that will make it like you said more like crypto incentives that are kind of more cyclical in nature like ethereum for example when you hold eth the token you a value Cruise there because every transaction either is burnt which means that it makes it deflationary so you hold that token you have a benefit in that or if you stake it you're secure in the network and then you get whatever 6 six percent apy for which comes from transaction fees so great that makes sense l2s they don't have any of that yet for the most part

except for IMX so we'll see I like the idea of using the tokens to potentially decentralize sequencers or other things and I can definitely see that coming in inverse right now I think most tokens are just governance as far as they know and then IMX I know is like you can get yield yeah as far as I know most are more star governance and I mean that point of like securing the network that like again one of those sort of low hanging fruit right you stake take some tokens and now you have the right to run a sequence all right and if you drop the ball you get fraud grouped or something or as anyone else driven the proof doesn't verify you can do to the state but otherwise you earn some percent it seems like an easy idea I suspect there is going to be a way way more level and

cool stuff but I I don't want to rush there for now you know I ever I think I've already been pretty clear they're pessimistic that you know that there's going to be an issue with a roll-up at some point in the future let's make sure the tech is sound before we start adding bells and whistles and all this cool stuff because that's really cool really nice you know I want to make money and I I would love to do some of these crazy things to get some but I think if we can onboard more users into the ecosystem by enabling better apps to more block space these Roll-Ups themselves that's gonna be you know more important in the long term because in fact if you go the opposite way and something goes wrong

the media doesn't pick up the win right big news outlets don't be like oh there's a new blockchain that's really cool that's a really cool feature they picked up what ones where it's like 600 million dollars Lots you're like oh that that scares the average user and these bells and whistles are gonna scare people if if something goes wrong so let's get the core attack down and then figure out the really cool crypto economics at the end unless there's a reason that they have to go hand in hand right like they'll probably need it I don't think you could do well but even ethereum it took however many years for it to go proof of stake and to allow you to stake and then to have the staking as a service tools like rocket pool and Lido uh and to have these burn like this

all came in like ethereum seventh year of existence kind of thing whereas l2s are like I don't know I think the first one's launched in like September 2021. they're still babies so I think that's very smart we need to slow down the people try to make money on these things and like let's just make them work first let the teams make the money so they can keep building the tech and make it better and then okay eventually we can distribute to the community but like Community doesn't need anything right now you know he'll use them and like let's make them work properly first sure yeah all right it's funny you bring up the risks of moving too fast or of trying to do something that is fun and exciting but might not be secure no unfortunately I wish everybody took that

wisdom Jan I want to clip that and hit it on repeat for everybody on crypto Twitter but let's be real that's not the way a lot of people play it and I know that something that you guys do at quad stamp is you provide smart contract Audits and we talked about on the show a few weeks ago how Jack butcher who is the artist behind op pen which is one of the most popular nft collections that's actually made it through the bear Market he launched Infinity checks which was his new collection that was low cost meant to onboard you know Millions ideally into the space because it was you know generative art that's fun you can engage with doesn't cost you much

and boom within a week the wallet gets drained everybody loses their funds and yeah it sucks and so I guess like my question to you is why are these people not taking the time to do an audit or you know how easy is it to avoid these problems like is it audit hard is it on it costly is that why these people aren't is it just time constraints you know you work on that side so you probably understand it better than us sure yeah I think there's a variety of reasons some of it is definitely cost it's a non-trivial cost I don't know the exact numbers but you know it's not incredibly cheap it's not incredibly expensive but you know it's not five

belt you're paying professionals to look at at your code in which you know it could be very novel right the any system that you bring to an auditor they may have never seen before even if they've been around for a while like we have we've seen you know a lot of them so we know what the common issues are so you're the D5 project you know we know definitely the main things we need to look for and then we'll look at what you did differently to see how we a lot of it isn't cost though you know a lot of the projects a lot that we see are funded and they can afford it sometimes it's just ignorance or arrogance occasionally it's the size of the team it's a person I mean the ignorant some people like they don't know about issues they're new they came

from web 2 and in web 2 you don't generally need an audit because you can undo something right if your bank settles the wrong money they can usually get the money back through some long process that is legal for hands or at least you know that's their claim and so if a bug goes wrong you can just patch it it's fine then it won't happen again in what two people don't know that that you can that you can't do that so you need these audit to help mitigate those issues and sometimes they're ignorant in the sense of like they don't know what bugs are are common to even their Niche domain so like they'll be like I want to make an nft you know look at my nft code and I say okay well you're minting incorrectly because of you know this kind of well-known bug like oh

and and part of that is is just experience but that leads me to the next Point yeah sometimes it's just like single person team and you know you won't have someone reviewing PRS on the other end so you know when the developer does something they think they're doing the right thing and you know everyone when they're doing the coding themselves generally always think they're doing the right thing not for all the bug right it's not an intentional Mis you know right it's everyone's confident and then it it turns out you know there's a typo or the variable was wrong or you change something somewhere and you forgot about it and change the related aspects so you know the cost arrogance and you know size of team is part of it occasionally we'll get people who if they need it for the investors or

whatever but they don't see the value in it and so they're like oh I'm doing this because someone said I had to but I don't care about like what you're doing it's really painful to work with some of some of those projects because I'm like well look fix this before you go live where you know maybe something go wrong and and when they're not a Cooperative client it's very difficult I think that probably just stems to the the arrogance and ignorant side of things where they think they don't need it because they're too good or they think they're there are no bugs that can happen but the reality is you know that that bugs can't happen in some bed bugs there's also a lot of people in this face I think that are are rushing things because they want to take advantage of a narrative so they need it

out really fast and if you get an audit obviously that slows things down you gotta like get an agreement you got to pay for it you got to wait for the team to do it then make the fixes and blah blah and it's like the one thing with these systems it's a good thing of it but it's also a bad thing is they're permissionless right blockchains are commercialist you can create any token you want in a second which means when a hype cycle some sort of narrative comes around like bass you can launch token called base or you can launch or whatever and just like run with it and then that's why you see when something new launches all these opportunists take advantage of it and so a lot of them just they don't they're not going to get audited because they're there to just

take advantage of a quick opportunity which is why all the time on our podcast we're telling people don't jump on these like hype cycle type apps and things that are going because they're not audited which means they can and likely will rug you or they'll get hacked which happens just so so so much unfortunately yeah for sure oh yeah a lot of people are in to make a quick buck and and you know an audit slows that down so bored be worse right if someone said hey I want to do this and we see that there's a back yeah you're not going to fix that issue I don't know if there's other reasons but you know I would definitely encourage everyone to take the time to audit to do it right because there is so much on the line and crypto Twitter

doesn't forget it's purely why I'm being self-conscious when I say anything they don't forget right there well and I think it depends on what you're building for too so as Kai said yes there are a lot of people that are trying to take advantage of an opportunity they're building for now they're seeing short term right but I also think there's a lot of people and I hope that we bring more and more of these teams into the space that are thinking long term if your view is long term then you should not be afraid to take the extra time to make sure that your iron clad and you're ready to go and you're all buttoned up tight because otherwise yeah the risk is really high

okay I want to jump to speed round and ask you some fun questions but before we do yawn I just want to give you a chance to tell us a little bit more about Quant stamp and what you guys do and anything you want to ask of our listeners or how they can get involved in Quant stamp and maybe even how they can reach you or follow you online sure yeah so thanks for having me but yeah my name is Johan I work at quantstamp and we're a security company in web free so we you know help secure hundreds of millions of digital assets everywhere and we work out all types of blockchains and all all types of smart contracts and all types of systems and if you want to get in touch with me or anything I'm working on specifically Layer Two stuff but

anything in security or whatever my Twitter or telegram I don't know if you're gonna share those we'll put them in the show notes but you can go ahead and say them okay yeah Jay gorzny so j-g-o-r is that NY put the ad symbol in front of course and yeah come find us after all your auditing needs we're happy now awesome awesome okay a couple fun questions first one what's an nft you'll never sell oh is that right easily yeah yeah those horses are gorgeous is it because you love the art I mean it's not just the art I like the idea of the racing it's a really neat project and they're still around they're still doing a lot of stuff I haven't checked it in a while because I mean hey anybody who's still around at this point

and there's an nft project deserves yeah because there's a lot of credit never one of the first ones they were they've been around for a while a long rally but yeah and then the mating them was a great system like they had a lot they thought about a lot of really things it wasn't just art like I get art I don't get art but like I get why people like art do I like Kyle also doesn't get ours I love that you clarified that there are a lot of you know art that that I don't know if anyone agreed with those art but at least everyone you know they did a lot of really cool stuff and so I really like that they did something me totally totally that's that every time we talk about the gods Kyle's like

I don't get it what is it and I'm like oh it's it's art and he's like what like so there's no there's nothing else to this there's no value where's the utility anyways not gonna go down that path next question favorite person to follow on Twitter actually it's a bartek from from L2 beat I think he's one of the founders I'm not sure he tells it like it is uh he's not afraid to sort of get into arguments with founders of the you know the projects he lost on L to beat and said no actually you didn't do this or at least your contract didn't do this or whatever and I think that's really good because we need I think a third party Watchdog saying look actually this you're claiming to do this but it's not happening and we need a trusted source and from what I can tell

l2b is playing that role quite well so obviously you know they've got an audit also trust the audit but like this it's nice that there's some other entity out there looking looking after the average user and he's not shy about it so all right I do like I love people that are not shy on Twitter we need more opinions don't be afraid to share your opinions on Twitter everybody it's okay just be yourself everybody loves you as you are okay be nice though don't forget to say that because Twitter is angry and it's true I'm just a nice guy so I don't see it that way but you're right yeah go yell if you don't have something nice to say put it that way beyond our favorite question if you had a billboard that one billion people were going to see what would you write on it

yeah this I I mean I think I told you before the show I'd read this question I I don't know the obvious adage of don't trust verify is probably pretty up there maybe it goes against some of the crypto economic stuff I was talking about that's also why I didn't have a good answers for you there's just trust the math and then do the rest yeah otherwise maybe be nice we just ended on b-night yeah everyone was a little bit nicer maybe we wouldn't eat the verify because everyone would just be doing the right thing maybe you don't need blockchains if everyone was just novel I'm imagining like don't trust verify as like the big and then in like you know little asterisks in the at the bottom PS be nice like oh John thank you so much

for the time this has been a fantastic conversation and really appreciate all your work in the space and your insights on LT scaling great thank you for having me Adrian awesome everybody have a great day thanks for listening in we'll see you next time thank you for listening to web3 Academy your one trusted source to capitalize on the next big phase of the internet if you enjoyed this episode please share it and subscribe or follow so that you don't miss the next one while you're at it there's a link in the description for a free newsletter where we provide timely and relevant web through insights so you can confidently build and invest in web 3. make sure to subscribe today one final note this podcast is for educational purposes only and nothing we say is financial advice

crypto and web3 are risky and you should never invest more than you're willing to lose thank you for friends and see in the next one