Why a million layer 2s are coming to Ethereum

Transcript

GM GM welcome to web3 Academy your one trusted source to capitalize on the next big phase of the internet I'm Kyle reidhead joined today by my co-host Raul and we believe that web3 is going to change the world and that's why we're covering a path for doers to complete build and invest in web 3. today we're talking about one million layer twos coming to ethereum and you know what that's not an exaggeration we truly believe that in the coming decade there will be hundreds of thousands if not millions of layer twos which are all rolling up and settling on ethereum or whatever the main layer one blockchain is at the time we believe that this is the proper architecture to have secure

decentralized and scalable infrastructure for blockchains and so as the world migrates in the online World on chain World We believe this is going to happen so that's what we're talking about today is we want to talk about the big news that's happened with polygon and Arboretum and a bunch of other layer twos over the last week which we touched on in our roll up last week but we just wanted to give more insight into this how's it going to play out why it's playing out this way and what this means for us in the future as Builders investors Etc and give you just kind of a clear idea of what this whole layer 2 ecosystem means and why it's going to exist so that's the um the purpose of today's conversation I hope that you enjoy it again this was recorded on Twitter during a Twitter space which we

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description below I hope you can join us in our next Twitter space on Monday at 12 p.m East we're going to do this every week today we're gonna talk a about 1 million layer twos coming to ethereum why are we talking about that because last week four new layer twos were announced and last week there was also an announcement about the ability to create a layer 2 with just one click So Cal why don't you start us off by telling us about l2s and what's happening in the world now yeah so for those listening and we've talked about l2s for years now here I went through Academy and I think we're just always we're going to continue to talk about them because they are important piece of infrastructure for web3 they really came into fruition book September 2021 that was when arbitrary mid Optimus watched

uh not the first ones but really kind of the first general purpose main one we've seen more and more pop up ever since we're now probably over like 30 or so that are rolled up onto ethereum and so we'll talk about some of the technical components are kind of the why these existed a little bit but the reason we're talking about and why it's so important is just last week we had four new layer twos launched so Zora network is one of the new ones Zora is a tool so it's just an app that allows you to Mint nfts and they wanted more scalable way to do this so they launched their own Layer Two in order to do that which is pretty cool we have polygon who is transitioning their proof of stake Network one of the most used most active blockchains in history they have all the

big Brands Reddit Nike Starbucks Etc and they are moving or transitioning at least they have a proposal out to transition their proof of stake Network into a layer 2 ethereum so they're actually going to change their entire security model of their of their blockchain which is um pretty crazy to be honest but is rather interesting we actually had binance have their first layer two announced so they've actually just forked the optimism stack and they're going to have a layer two go on finance which is quite interesting and I think that over the coming weeks months and honestly probably years to decade this is going to be the norm I think every week moving forward we were going to see layer twos and I think that might be a bit confusing to a lot of people here we have our return we have optimism why do we need all of these layer twos

and so that's kind of what the discussion is going to be about today and help people wrap their heads around why this map and then if you're building if you're investing what this means for you and then the kind of final reason why we've hit this inflection point where layer twos will just there'll be so many of them is because arbitrum released last week that they have launched their sort of version of like the op stack so optimism has their own stack where people can create their own layer to using their Tech that's what bass did so that's coinbase is L2 that's what Zora has done arbitrary just launched theirs and theirs is literally a one clicked one click to launch your own Layer Two on top of ethereum it's pretty unbelievable you literally just put in your name the address Etc and then boom

it you can I want to just use the word mid to it Layer Two which is kind of mind-blowing it's taking years to create this technology and now it's to the point where it's like one click and anyone can do it and we saw a tweet from um natter David one of the developers at Lens protocol we had him on the podcast he actually did what he called the chain Deez Nuts so there's now a layer two on ethereum called These Nuts chain and I mean that was just for fun I don't think he's going to build much on there but we'll see but the key Point here is it becoming that easy to launch a layer two and so I think what we're gonna see is continuous continuous adoption of these layer twos in terms of like users and applications but also in terms of

new layer twos and so I want to make sure that everyone's just kind of aware of why we're going to do that so that's just a quick kind of intro on the headline news that's happened over the last week and then why we're touching on this Rel I'm not sure what direction you want to take here after that I want to ask you why it's great to see like all these LTS launching you know we see people building we see teams shipping and stuff but why do we need all of them and maybe you can take a step back and kind of talk about what lyricses are and which problems they solve but why do we need so many yeah for sure so a layer two you can think of as just another blockchain but it doesn't have its own security it uses a a layer one

blockchain for its security so if we think about when a blockchain works so blockchain of course is basically it's selling block space right block space is important because instead of having a centralized database to make whether that's transactions whether that's to store data to do whatever it is right now without blockchain you have to do that in sort of like a centralized database you need permission to do it and so what blockchain allows is sort of a permissionless global way of storing data exchanging value Etc okay so we believe that that's going to be a very important thing we see you know that's where nfts come from the stove it's come from all that exists because of block space so it's a very important product block space now block space itself and the blockchain that I know enables that

has some what's called a blockchain trilemma so in order for Block space to exist we need security right so people can't just hack it if you could hack this block space it'd be useless right and so there's no point in it if we don't have that to help with security you need something called decentralization This is to ensure that things remain permissionless and you can't get rugged okay also very important one of the big problems with web 2 Tech with databases is that you can get rugged on normal databases so decentralization is a key component to have what we call unruggable technology and then of course you need scalability if you can do this only for a few transactions a second well that's pretty useless right we think that storing data on the internet and having transactions that are permissionless on the internet

and creating applications that are permissionless on the Internet is a very important thing and we want millions of people to do this billions of people do this if we don't have scalable blockchains then this is all for nothing anyway and so a blockchain needs to be secure it needs to be decentralized and it needs to be scalable the problem is is that the more scalable the blockchain gets typically the less decentralized and the less secure it is so there's sort of some like bandwidth type issues in these three things and so what this has been called is the blockchain trilemma right the more decentralized something is just by Nature decentralization typically means slower right less scale well that's what decentralization is at its root it's more secure it's harder to get hacked But ultimately as a result of that it

becomes less scalable and so there's this trilemma between the three and so how do we sort of make these chains have all three of them right that's kind of the key thing we've been trying to figure out for the last like 10 years basically now there's different ways to do this Solana is trying to accomplish it all in one but again they are very scalable but not necessarily decentralized not at least to the point of something like Bitcoin and ethereum the way that ethereum has decided to do this is using what's called layer ones and layer twos layer one is hey let's make a blockchain that's not scaled at all but it's very secure and very decentralized and then what we can do is create other blockchains which will inherit or use that security and they don't need their own security so they can focus solely on scalability because

they're actually going to roll up all their transactions and settle them on ethereum on the layer one and so they don't need to worry about the decentralization factor and the security Factor because ethereum can take inhale that they can focus on scalability and then the layer one in ethereum's case doesn't need to worry about scalability and they can focus on security and decentralization so they focus on certain parts of this trilemma that's essentially what a layer two does now why do we need them well because ethereum has nailed the whole secure and decentralization aspect of smart contract blockchains we've got that figured out but it's not super simple right every time we have a bull run fees go crazy I think it's about 16 transactions per second is all it facilitates to give you some context here Visa does a hundred thousand

transactions per second ethereum is 16. if we want to be the settlement layer of the world we want to put all Financial transactions and value on blockchain 16 transactions per second is just not going to do it so this is why we need layer twos we need layer twos because we need technologies that can focus on scalability and get hundreds of thousands of transactions per second and be cheap right be next to nothing in order for those transactions to exist and so that's sort of what l2s enable but we also again we need scalability but we need that with decentralization that's why the L1 L2 kind of combo the duo we can call that is so key Salon is probably the closest other chain to nail all three of these in one but again so far they're not fully decentralized they

go down a lot and to be honest it's scalable in the sense that it can do maybe 100 to 200 000 transactions per second but you know what that's actually not going to be enough right if we want everything to move on chain then we need more than 100 000 transaction per second or 200 000 I mean I don't know how Solana gets any more than what it already is and especially if they're also trying to get more decentralized so this trilemma continues to exist no matter what that's why we need l2s right providing the dancer there no I think you guys are well and I think you touched on a point that I want to touch on in a second but I think it's very interesting that like how it works is that like an L2 just focuses on scalability while borrowing security from ethereum I think that's like I

don't know how to better explain that but it's like fascinating how that works one more thing that actually if you do your next thing Raul is the best thing you need to think about in blockchains is it's also business right blockchain's cell block space and their expenses are security right they have to pay the validators to secure the network right they can do that through inflation they can do that through giving some of the fees of gas over to those validators whatever it is they need to pay those expenses and these validators need to be profitable in order for them to actually want to come and help secure that Network when you look at blockchains that are super scalable that have fees that are down to basically nothing they don't make any money which means they don't have any money to pay the validators which means why would someone

want to validate that Network right now Solana people validate that Network right now why because they're inflating their currency to basically subsidize those payments if they got rid of that inflation which you need to at some point otherwise what's the point here right if you're just inflating away your token at some point they're going to need to be able to afford their security right now they can't they're very far away from it no blockchain can currently afford their security ethereum is the only one that can because it has high sheets now I know that the hive feed sucks for most people that's why layer twos exist that's why when you have both you can create a profitable business that can afford its security for its block space while still giving a product that is usable for millions and billions of customers around the world right so

you also got to think of that aspect of it too and I think a lot of people kind of miss that point when it comes to blockchain economics right great explanation I just have a question specifically about ethereum I know there is an upgrade coming up called prototype sharding and it's an eip4844 and this promises to make ethereum go to 100 000 transactions now you said that those aren't enough but it will make a big Improvement is that not enough and if that upgrade happens or wave happens will that make else is not useful anymore yeah so one of the things ethereum is trying to do is make its base layer so if your ml1 more scalable and it's doing after what you said is pro to bank sharing I won't get it in the technicalities I want that it is

because to be quite Frank I don't even completely understand them but essentially it's going to Shard the blockchain so that it becomes extremely more scalable and so yes it'll be very cheap on the L1 for the foreseeable future I don't know when protector will fully come to light like it's still going to take some time for it to fully be and I don't think the upgrade that happens in things like October or November is the full sort of episode one yeah it's not the phone but it's part of it and so anyway look that's a good thing because even as ethereum gets more busy and it's l2s get more busy we still need to find ways to bring costs down on the L1 so that the cost will go down with the l2s as well right if the l2s are paying the L1 for security well we

got to make sure all one's not too expensive still right so that's what they're trying to do now is upgrade ethereum with proton charting does that make l2s kind of useless one that goes I've actually had an founder I was talking to last week we suggested those and the reason he suggested this is he's saying well ethereum will go like a hundred thousand trans per second if not more that's more than Visa right so do we really need more and my thought on that was well okay that's enough for financial transactions like what visa does but we got to remember that blockchain is doing a lot more than just Financial stuff right blockchain is also going to be the new level database and I do that with quotations you can't see me but I'm doing that it's not a database

but it's going to be the new way that we have social media they're all going to live on chain right all of our content if you see recall farcaster the content is now tokenized right it is all nfts our accounts our identity will be on chain and so it's more than just Financial transactions that are happening on chain that I think a lot of people haven't wrapped their head around that so if a hundred thousands per second is enough for financial transactions what about all the social media transactions in communication and identity in tickets and gaming stuff and you know I mean like the list goes on every industry and coming on team how do we know that that means we're going to need millions of transactions per second right which means that we need probably thousands to tens of thousands to

probably hundreds of thousands if not millions of layer twos all plugging into ethereum or whatever L1 doesn't really matter I'm not an ethmoxy they just can start this along right now I'll plug into that but even that in that case the layer one still needs to find ways to get a little bit more scalable as much as it can to again enable a million layer twos to be able to settle transactions so we need to think more exponential but we don't need to be two times better than Visa right we need to be a hundred times better than Visa right while also being decentralized and secure right so there's no point in making a centralized blockchain that does a hundred thousand transactions per second we already have that in Visa right found on blockchain but if it's

centralized then it's basically the same thing so we need not just a decentralized version of what visa does but then we also needed 100x more scalable than that too right so that's an insanely difficult technological feat for that to occur and right now at least in the research the old way that we know to do this is with the layer one layer two combo so I think there will always need for l2s the good news about this upgrade coming at the end of the year is L2 still aren't the cheapest things in the world right there's still like maybe a couple cents to do a transaction which like for us degening and playing around early on that's fine but remember most applications will likely cover these fees for their users and so we won't even think about using gas when we we're working on chain and so in order for a

company to manage millions of transactions for their millions of users when this stuff goes mainstream we need transaction fees to be like .0001 cents right and so again that's what layer twos will enable with having more upgrades to the L1 as well so we need theorem to become more scalable we also need l2s to become more scalable and more abundant more of them if that makes sense yeah and I think the comparison with Visa is super significant because they have all this competition with MasterCard especially and all other Financial uh you know settlement companies and we're not only competing with both MasterCard and Visa we're also competing with everything else that's happening on the internet not we I mean ethereum right now so I think that's where one million Layer Two

is come into question so I wanted to ask you a question I had this prediction at the beginning of the year that a couple of layer one blockchains will pivot to scale ethereum instead of creating their own kind of like closed ecosystems so we've already seen bowling on make this move obviously there weren't a layer one necessarily they were a proof of stake side chain they were still kind of scaling ethereum but not really do you think we should expect more blockchains to Pivot in the next years it's a good question I would say probably let's say why would they do this first of all like when we looked at we said binance just as their first layer to ethereum now has I don't know 35 Plus layer twos why are they all going to ethereum and then why did one go to binance well if you're

going to build a layer two it means that whatever you roll your transaction up on you need to really trust that layer one right remember this is a tech stack thing if you're going to build technology on top of something you better hope that it never shuts down and it always works and it continues Forever This is why people don't build on top of Twitter because Twitter already rugged a bunch of companies like 10 years ago when they removed their API this is why companies are afraid to build on top of Facebook right because they can they control all the rules and they can shut everything down if they wanted to but there's one video around my yeah Twitter Banner account you don't even want to use it so I think blockchain's like real estate right just like if you were to open up a physical business with a

location somewhere where would you do it would you want to do it in North Korea probably not right one they wouldn't let you two there's probably not a lot of users there three you don't know what is going to happen with the rules would you want to build it in Russia absolutely not right the rules just changed and all of a sudden they're going to war and there's all these problems and there's sanctions like it's not a stable place that you want to have a build your business in right but would you want to do it in the U.S look I don't know forget the politics of the US for example but the US has always been known as kind of like a free country with very good rules for Citizens very good rules for businesses and so it's a good place to build a business that you know

typically is not going to go Rogue right now who knows at some point they might but for at least in the last hundred years it's been a great place to build a business right so when you're building a layer two or and remember applications themselves can be their own layer too like we just saw with Zora they want to make sure that their app is being built on top of a piece of technology that's going to exist for forever and so you might not want to do that on a brand new blockchain like I don't know sui or like I don't even know what some of these are right like Ontario imagine you built on Terra Luna right exactly your business is gone because you built in the North Korea of blockchains right or whatever and so again you need to think of well if

you're a layer 2 or you're an app you want to build on something that is decentralized and secure and right now the number one blockchain for that is ethereum right so that's the place that you want to do that most are not going to go to binance the L2 we just saw in binance is binance they did that themselves right I don't think you'll get many businesses that go and do that on binance when you can do it on camera so that's sort of like if you're thinking about where they're going to go and why they're going to do it and you'd be there now why would an another L1 move over and do it you know turn into like an L2 well the reason would be to be at L1 like I said in terms of the economics it's very difficult to be a

profitable L1 right every other blockchain in the world that exists right now including polygon even though they have so many users they had to inflate their currency to pay for their security they had to pay for their validators which means that they're inflating their token in polygons and since automatic Solana it's Soul Avalanche and save acts whatever they're all inflating their currency in order to fund and their security and that can't last for forever it does fine during a bull market right people will still buy the token they don't care but long term you can't continue to inflate the currency that's why crypto exists actually because Fiat currencies are inflating away and so you need to have a token that can secure the network that is not being inflated that's very very

difficult to do you know ethereum is managed that after seven years other blockchains will likely manage it too I think Solana reaches this at some point so I don't think Solana rolls up onto ethereum but other blockchains probably aren't going to get that right it's going to be very difficult and it it's the technological feat that is insane it is a tokenonic sheet that is very difficult there's a lot that needs to come together whereas if you just don't do that instead you roll up on onto a layer one you don't have to worry about security anymore right you don't you don't even need a token and so it makes the product of l2s a much or in the business of L2 is a much easier business model because again you don't have to figure out the whole security aspect of it and so

I think there will be some L ones I don't know any names right now so I won't name any that will move because if they don't then they don't have a business right and so I think they will and I also think that less blockchains will get made now I think most people will just make a teams from the beginning so back in the last run the last cycle there's so many ones that were launching and I was like do we really need this many blockchains it's like we do but probably not this many layer ones but it was because it was hard to make a layer two four years ago and so people just made out once but now it's very easy to make an L2 and it's already like we've shown proof of concept with arbitromatos and now all the other ones that are

coming out so I think we've reached a point where most people just won't start layer ones anymore they'll just they'll just go straight to layer twos but for the layer ones that do exist probably some of them will will convert over but no one's ever done that so also that's not easy to do and so we'll see polygon is going to be the first it should happen by Q one of 2024 and they'll kind of rate The Playbook on how to do that and so we'll see I bet you after that people will go okay now we know how to do it we know it's possible then I think some will follow suit yeah and if you want to learn more about polygon 2.0 we have a newsletter that was released on Friday you can go check that out we tell you all about about it there that's it

for me Kyle do you have anything else to add yeah no I think think the main thing is we've talked a lot about layer twos and so I know our audience and our listeners are aware of layer twos and they get it I think what a lot of people have not wrapped their head around yet is let there's going to be millions of layer twos which is why we titled this that again as billions of people come on this tube on chain and there's millions of applications and use cases we need that scalability and I think that's going to come from the layer two ecosystem and there's going to be many different types there'll be general purpose ones like arbitrary optimism there will be app specific ones like dydx like what Zora just lodged until they will serve many purposes across many Industries for many different

things but I think it'll be very common for apps to launch as a layer two and very common just for Laertes in general to come out so expect this to be the new Norm moving forward after this past week I think that's kind of why we're having this conversation is it's going to be very now how's it going to look it's going to be weird right right now it sucks verging from one layer or two to another so we're gonna need technology to fix that this is where like cryptographic bridges come in like hop like connects there's going to be new ux's needed in wallets so like for a business idea for those that are looking to start companies you should be thinking about this layer two ecosystem how do we better service these like users that are going to be moving from one layer two to

another right whether it's app specific or general purpose this is the way that this is where the real estate is having how can we build infrastructure for that new kind of dynamic so it's something to be thinking about if you're looking to start a business whether it's an app or a piece of infrastructure this is the next kind of venture for the space and so we need to start solving the ux problems that come from having a million by your twos so there will be tons of new technology that comes in results of this which is great we're still super super early and we're just continuing to build things out as we go that's what's on my mind anyway at the moment great thanks so much Kyle for the podcast listeners of course you're a little bit too late but you can always join us at

12 pm EST on Mondays we do these weekly and uh so you're always welcome to join us come in and ask any questions sweet Raul thank you so much thanks everyone have a good Monday 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 next one while you're at it there's a link in the description for a free newsletter where we provide timely and relevant web3 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 friends and see you in the next one