Bridging DeFi and Traditional Finance with Arbitrum

Steven Goldfeder is the Co-Founder and CEO of Offchain Labs, the company behind Arbitrum.

Arbitrum’s flagship blockchain, Arbitrum One, is a leading Ethereum L2 in terms of TVL and liquidity and supports applications across DeFi, DePIN, AI, gaming, RWAs and other verticals.

In this conversation, Steven and Will Beeson discuss Arbitrum’s origins, the use cases that have driven its success so far, and expectations for Arbitrum’s role in the transition of regulated financial activity onto blockchain rails.

Will:

Awesome to connect It's been a while since we last caught up I'm very happy that we could do this on the record now 'cause I think we can have a really interesting conversation I think just for background, for people listening, you're the co-founder and CEO of Off Chain Labs, which is the company behind Arbitrum, one of the leading.

EVM L-2's, and you and I have had chats about basically this concept of tokenized finance, bringing financial markets on chain, and I think we can dig into a lot of that today.

Steven:

Yes It's great to be here and that's correct I guess to break it down for you Yes So I am a co-founder and CEO of Off Chain Labs.

We are the initial developers of Arbitrum and still core contributors today, and we also build Prysm in house Prysm is the leading layer one Ethereum consensus client Ethereum layer one layer as well as the L-2 layer in Arbitrum, as well as in interop Another big area of contribution for us of how do you connect all these different chains.

But yeah, tokenization is also a really big interest to us, so a lot to dig into today For sure.

Will:

Cool Maybe we can break the conversation down into a few parts One, it'd be great to get the sort of high level on how came about, how you guys are structured today, and then what the drivers of your success have been to date.

And then we can shift and start thinking forward specifically in the context of this theme of on Chain finance It'd be super interesting to hear how you guys think about that What the existing projects that you see currently on Arbitrum that can be drivers of that, what you guys as a labs company, and potentially the, the foundation or DAO are doing to support that and ultimately what the potential roadmap looks like.

Steven:

That sounds great Would love to get into all that.

Will:

So maybe to start, tell us the backstory Where did Arbitrum come from?

Steven:

Yes, okay So I have my PhD in computer science from Princeton University And I got there at about 2013 and that's when I actually first was introduced to blockchains And initially it was Bitcoin, 'cause that's what there was at the time, together with my advisor.

We did a deep exploration into Bitcoin and I ended up doing a lot of work actually on the intersections of cryptography and cryptocurrencies So a lot of the MPC protocols are multi-party computation protocols that you might be familiar with today that are used to secure and custody Digital assets were protocols that I gather some others designed at Princeton, and that was really an early area of interest for us.

That was later commercialized, but not by us directly And other things we did at Princeton is also was a coauthor together with Arvin and some others of a textbook, cryptocurrencies, which is used in many university courses But I got involved in Arbitrum in about 2017, but Arbitrum actually goes back a little earlier referenced to about 2014 when Ed and my co-founder had this idea of, Hey, we need to build infrastructure to scale smart contracts.

We need scale scaling solution for smart contracts And the reason why it's interesting to think about the timeline and you can actually see this So it was initially Ed's idea, then there was an undergraduate seminar Different undergraduates did different projects and Ed led one of these at Princeton in the fall of 2014 semester, and you can actually go on YouTube and look for the initial mention of the word Arbitrum on YouTube and you'll find this video from that project.

Again, predating my involvement when Ed was involved And the reason why that time is interesting is It was really academic in the most literal sense because there was no smart contract platform, right? There was Bitcoin, probably there was Litecoin at the time There were these like Bitcoin and Bitcoin derivatives, but there really wasn't any live smart contract platform.

Ethereum, of course, went live later in July of 2015, so six months after that course had finished And I find that to be quite interesting because we've really been thinking about this idea of smart contracts for a very long time The reason was it was clear to anyone looking at the early academic papers on smart contracts.

One of two things would happen Either the technology wasn't going to go anywhere and we wouldn't be talking about it in a couple years, or this would become very powerful 'cause the poor technology did and has proven to be extremely powerful and the demand will continue to outpace the supply if we don't build a different system, a different way to do these computations that doesn't require you to just rerun them on many different computers simultaneously.

Ed saw this problem He was coding in the second camp well before smart contract platforms existed and said we need to build a scaling solution for smart contracts So history wise, Ed then went after that semester, Ed went off to the White House for about two years He was the senior advisor to President Obama and Deputy CTO of the US government.

He came back in 2017, late 2017 after the election And that's when Harry, so he's the third character here He's my other co-founder together with Ed Harry was also a PhD student at Princeton Together with me We went and knocked on Ed's door and said, Hey, Arbitrum, we think it's time We need to actually build this out in a much more significant way.

At the time, we were thinking about it as an academic project, but a graduate academic project, and we did that We spent about two years in it We published it in a top academic conference At that point, smart contracts had become real already Ethereum was live and we were beginning to see the initial spikes of adoption that really needed scaling solutions.

It wasn't clear to everyone at the time I remember when we initially raised capital for off chain labs, there were many that thought scaling was not a real issue and would never come to be But obviously history shows now that it became a problem very quickly And so in about 2018 when we published that paper also when I graduated at Princeton.

That's when we decided to actually spin this out as a company It started off as a sort of a side thing Ed was still at Princeton, so was Harry I was doing a postdoc, but very soon we actually decided to raise capital and the project became very real and we left our other jobs and went full into building Arbitrum, and here we are nearly seven years later into that journey.

It's been quite a ride, but a really fulfilling one It could not be happier or more excited to do what I do every day.

Will:

Wow Amazing story At some point, I guess there ended up being alignment between basically your team's vision around building Arbitrum and I guess the core Ethereum roadmap of scaling through roll-ups.

How did that dynamic play out?

Steven:

So it was, I think October, 2020 where Vitalik put out his well-known blog posts about Ethereum's Roll Up centric roadmap Before that, there were talks of ETH 2.0 execution scaling where a lot of this would happen directly at the layer one, where Ethereum itself would do these things.

But I think it became clear to many very quickly, and by the time 2020 came, there were Plenty of different teams, early teams like Starkware as well Building, early ZK roll-ups There were a lot of early teams building different types of layer twos on Ethereum Two things were clear at the time to the general ecosystem.

Number one is there's diversity of builders If you ask me even today, what is Ethereum's core, core benefit, how does it differentiate from other ecosystems? Just the diversity of people and teams building it I mentioned before, we at Off Chain Labs build Prysm, which is a core Ethereum layer one client, and we build Arbitrum, but we're not doing this because the Ethereum Foundation is paying us to do this.

We're doing this because the Ethereum has a broad ecosystem, a d diverse ecosystem where many different People are contributing and are incentivized and self-funded, independent contributors in doing that And there's just a broad ecosystem where businesses like this work and make sense So I think that's number one, which is the innovation of having so many teams building made sense.

But you also need to have a roadmap which ties together with these pieces, right? You can't just have all these teams building these things And number two is actually I think it became clear and it became clear to me and I clearly to Vitalik as well, and others at the time and also today, that the power of this layer one layer two design is just tremendous.

This idea that you don't have to stick everything into one layer, but you have a layered system and layer one gives you that core security, decentralization and consensus, and then many different execution environments can tap into that on layer two and scale that way I think that's That's an extremely powerful design for a few reasons.

Number one is it allows you to get diversity on the execution layer So you can have chains like Arbitrum, you can have ZK roll-ups and optimistic roll-ups You can have chains that enforce privacy You can have chains that do institutional KYC. You can have all sorts of chains that different rules, but they're all secured by that same consensus.

And this just really efficient To give you an example, the merge happened, right? So the merge was an Ethereum move from proof of work to proof of stake.

Our team via Prysm was very involved in the work on the merge even before Prysm joined Off Chain Labs But if you ask me what happened when the merge happened, so did Arbitrum also move to Proof of Stake? The answer is yes What did Arbitrum have to do to move to proof of stake? And the answer is it had to do nothing.

And that's the beauty of a layer design It inherits all the benefits underneath it You have these different layers and different components, and you can swap out one component You can literally change the underlying consensus from proof of work to proof of stake But that gets contained in its layer and as long as Arbitrum and Ethereum can still talk the same language, the same smart contract language, those benefits are just inherited automatically.

And it wasn't only Arbitrum Today there are a hundred plus L-2s building on Ethereum, and all of those will inherit any changes that Ethereum makes A more recent one was blobs 4 8, 4 4, which was the move of data availability and blobs So think about it as cheaper and more abundant data All Ethereum's Rollups inherited that automatically they could immediately tap into the new, in this case, log infrastructure very easily in order to scale much more quickly.

And they didn't need to each go ahead and make big consensus changes And that's really the beauty of the layer two architecture allows for diversity and experimentation.

Will:

Yeah Talk to me quickly about the organizational structure of Arbitrum slash off chain labs I guess as a proxy for other part centralized part decentralized projects in the space.

So there's the labs company, off chain labs, I imagine it's technical development, heavy tech company Basically it's building infrastructure in this space Then there's Arbitrum the L-2, there's a foundation, I guess there's a DAO Talk about these component parts.

Steven:

Yeah, I'll talk about those three entities.

From the Arbitrum ecosystem perspective, those are probably the most relevant There's the off chain labs, and that's where I sit There's the Arbitrum foundation and then there's the Arbitrum DAO. So off chain labs, we were the initial builders of Arbitrum before there was Decentralized protocol before there was any protocol live that may not at all was us set off chain labs, building this core technology initially at Princeton and then in off chain labs beyond Arbitrum.

What we do today, we build, like I said, besides for Arbitrum technology, we also build Prysm We also put interop technology broadly for Ethereum chains That's off chain Labs In March of 2023 was when the Arbitrum DAO and the Arbitrum foundation were formed And lemme talk a little bit about the roles of those entities.

That's the same time where the Arbitrum protocol was decentralized There was now an Arbitrum token And what did this token do? It's in governance token for these protocols What it means is it actually gave the Arbitrum community, the community of these token holders real governance power over the future of Arbitrum.

In many ways, and this is actually Unprecedented The levels of decentralization of the Arbitrum DAO are really unprecedented, certainly among layer twos, but I believe really anywhere in crypto So let me give you two different areas of where the DAO actually has, real exercise power number one is in the technical roadmap of the Arbitrum chains.

So what does that mean? Just recently, we pushed a big update as a community called Arbitrum Bold, which opened up validation for anyone so anyone can serve as a validator Previously, it was a whitelist action or you need permission Anyone can serve as a validator on Arbitrum one and they can unilaterally actually guarantee the correctness of the chain.

So really big upgrade We at Off Chain Labs spent years building the code for that upgrade So that originated with us Ed and our research team, to our engineering team And we spent a long time building that code, but We actually don't have keys to the chain We don't have upgrade keys, so we can't, we have no way to say, okay, Arbitrum one, here's a new code module.

Go ahead and upgrade to Bold, go ahead and upgrade to this new system It's a lot better You should use it We don't have the ability to do that So who does have the ability to do that? That's the Arbitrum DAO. And actually there's an on chain vote where you, the DAO votes and the token voters vote and say, Hey, we go ahead and propose this upgrade and say, we created this upgrade.

What do you think? And the DAO votes and says, yes, I want that upgrade, or no, I don't want, and there are a lot of DAOs that do voting of some form, but the key difference of the Arbitrum DAO is that governance is self-executing What I mean by that is, in some ecosystems you'll have a vote And then they'll have someone with the keys and they'll watch the vote.

And the social understanding is that the person with the keys will do what the vote says So maybe you'd think that I have a pair of keys and I can go ahead and upgrade it, but I'm gonna listen to the vote because I decided to But that's not how it works I literally don't have those keys Off chain labs doesn't have those keys.

We can't push an upgrade there It's a self-executing vote So the way that the software is set up is the vote itself passing On chain is what allows and enables the upgrade to happen, right? So you post the code on chain, say, here's the digest of what we want to actually upgrade to What do you think? If that passes, then it becomes technically possible to actually do that upgrade on chain.

So that's technically, and number two is actually funding If you look at where the funding and the Arbitrum ecosystem goes, there is over a billion dollars of token sitting in the DAO in community control Also, all the fees Also go to the Arbitrum DAO Treasury directly on chain DAO Treasury So there's been about 20,000 ETH collected of profit in fees by the Arbitrum DAO since its launch.

Those all sit in the Arbitrum on chain treasury They actually haven't sold any of those yet So those are all sitting on their balance sheet today Extremely powerful, and it really is an experiment in true decentralization where the power stems from the community to the community And what you'll see in the Arbitrum DAO forums.

People call it chaos But it's the type of chaos where you expect to have voices that actually have the ability to make change, right? In a dictatorship, there's not that much point of dissenting voices because you'll know they'll be squashed, they won't be listened to, but you actually have these active delegates that care a lot about the protocol or other teams that want to voice their opinion and say, Hey, we think the future of Arbitrum should be this.

It could be technical, it could be funding Actually you have debate and discord, if you will, but in a very healthy way, similar to a democracy So that's the Arbitrum DAO. The Arbitrum foundation is often a real life representative of the DAO because you need, often you'll need legs and arms to actually go ahead and do things.

So the DAO is a decentralized entity, but sometimes even in like business meetings where I don't know about you guys, but you might just not wanna talk toa DAO at Libeara for example, you might say, Hey, wanna talk to a person and I wanna sign an NDA. I want someone to represent privately I didn't wanna go and tell a public forum about my private plans is a very common thing we see in bd.

So the idea of having the Arbitrum Foundation, which can help foster the ecosystem, do ecosystem grants as well But all that funding, majority of the funding says in the DAO, the foundation has its budget From time to time, the DAO will decide to give the foundation more money It has in the past, it can in the future.

You'll also have other teams that do grant programs as well, because they can also go to the DAO. We have this as well, independent grant teams to say, Hey, we want a budget This is our plan Can we have some funding here? And anyone can go to the DAO and do that as long as they have some minimum token requirement to go ahead and post an update.

So those are, I would say, the three most important institutions in the Arbitrum space But also there's many other contributors that are entering today that are also building technology with their Arbitrum DAO. And the Arbitrum community is very welcoming to all of

Will:

In a sense, I guess the foundation almost has a role which is delegated to it by the DAO, to act on behalf of the ecosystem to facilitate growth and help progress certain initiatives.

Is that the arrangement?

Steven:

Yes, and so much so that's actually codified in the bylaws of the foundation So this hasn't happened, but should the DAO want, it actually has the ability to remove and appoint directors of the Arbitrum foundation, so very directly, yes The Arbitrum foundation serves at the appointment of the Arbitrum DAO, and it's a very important vehicle for doing a lot of that work.

That just can't always happen in a public forum But yes, the power stems from a DAO certainly

Will:

and the foundation for Off Chain Labs play a role in the DAO as governance token holders and therefore voters, or no?

Steven:

No, we don't By policy, I don't believe the foundation does I can't speak for them, but I don't believe they do.

But certainly us at Off Chain labs have a policy that we will not vote with our tokens We do allow employees to delegate to other delegates, but we by policy, do not vote in DAO governance.

Will:

Switching gears a little bit, talk us through what has, I don't wanna say what factors have contributed to Arbitrum's success?

I don't mean it that theoretically, but if you look back over the handful of years since Arbitrum has been live, you've obviously been successful What have been the leading use cases or most adopted projects? What have been the reasons? The actual tangible reasons that have driven TV L's Arbitrum that have supported ultimately the token price in so much as that's a reflection of people's view of the, in a sense, enterprise value of Arbitrum in the ecosystem.

What have been the main contributors for that?

Steven:

There's a few things Number one is Arbitrum has always been a very open, builder friendly place to build one that even from its initial launch, it was fair launched So what does that mean? I mentioned that Arbitrum went live, actually, I didn't mention Arbitrum went live in 2021 as a chain.

And in May of that year, we opened the ecosystem for developers only And then in August of that year, we opened it up for everyone And the reason for that is we wanted to do a fair launch where everyone started at the same footing No one was unfairly advantaged We weren't slowly rolling on some protocols to give them an advantage.

And I remember in July of that year, there were certain protocols that, okay, hey, we're ready Like open it up, let's go We're ready to build We said No, we wanna wait until all the critical infrastructure is there so that all protocols can start at the same time It's kind of similar to if you know the taking an example that initially the Bankless guys used was like an amusement park.

If you open up an amusement park, imagine it's a park where like independent people are building rides You can't let the people building rides in the same time as the customers that wanna go on the rides You have to have a actually head start, so's like interesting to do there and give people the ability to actually build those experiences.

So that's what happened during that time And if you fast forward on the same day that Uniswap went live in Arbitrum, and Uniswap is doing fantastically in Arbitrum They're actually about to cross $300 billion in cumulative volume But at the same day, they went live, sushi swap went live and an exchange called Swapper went live.

And you may never have heard a swapper, probably didn't Our thesis was Uniswap is going to win an Arbitrum because they know how to execute, not because we're gonna roll out a red carpet for them and say, okay, you're going to win And the thesis actually prays out pretty well because you always know who the previous winners are.

You don't know who the next winners are So in a little protocol that was not well known at all Also came to Arbitrum during those first couple of weeks they were called GMX, which fast forward to today is one of the largest protocols in Defi And that idea that we're open to everyone willing to work with everyone not picking favorites or picking winners, they gave everyone an equal and fair playing ground.

That's something that started off in the very, very early days of Arbitrum If you fast forward to today is still extremely relevant There was an announcement where USDT0 was created by USDT to expand our stablecoin, and they chose Arbitrum as the hub for basically cross stablecoin transfers for all these new chains.

And again, I think the reason is credible neutrality that the Arbitrum ecosystem has Arbitrum, has a ton of USDC on the platform, but also a ton of USDT on the platform It's not a platform that PIX winners or PIX favorites as a platform where there's fair competition and everyone can go ahead and thrive in terms of those specific verticals that I think have really contributed to Arbitrum's success.

Number one is certainly defi That was Arbitrum's first vertical that really took off and to today Arbitrum to many is the defi chain But also gaming is one where the Arbitrum, as the ecosystem has invested very heavily The DAO created a fund called the GCP, the Gaming Catalyst Program Many other initiatives there are.

Great gaming teams in this space There's proof of play They build a game called Pirate Nation, which is very popular They have their own Arbitrum chains There's something we didn't talk about There's something called Arbitrum Orbit, which actually gives teams the ability to build their own chains.

So proof of play is actually so successful They have their own two of their own Arbitrum chains and we have a team called Zy that's building a platform for games as well And actually you have Probably about a dozen different gaming platforms, building the ecosystem as well as individual titles by Ubisoft and others.

So gaming has been a stronghold for the community as well And I think the other one that has been increasingly strong is RWAs real world assets or tokenization, really the merging of old and new As Defi meets traditional finance on chain, we're seeing a ton of early adoption in there Those were, I would say, our ARB trim's core strength and where the bets that ecosystem has taken.

Of course, it's a broad ecosystem, so there's NFTs on the platform There's every type of asset that exists on the platform There are meme coins on the platform It's an open ecosystem You can launch whatever you want, but if you ask me about the, what are the verticals that most contributed to Arbitrum success, I think those are certainly the strongest one today.

Will:

How do you think about balancing what to A very core part of the ethos and the philosophy, which is platform neutrality, like an ecosystem in which anyone can build with supporting specific verticals In the extreme, there are examples of Even Ethereum L-2s that are very specifically designed around a specific vertical to the extent where maybe they're even like building tooling that's natively part of the platform and or like really making a concerted effort from a commercial standpoint to drive success around specific verticals on their chains.

How do you think about the two approaches and what that maybe suggests for the future of some of these verticals on Arbitrum.

Steven:

So we have to differentiate between Arbitrum one and the public chains, but also Arbitrum the technology and the many chains that are building an Arbitrum orbit I think that they both have their place and we have an offering that caters both to the really opinionated block space, but also to general neutral block space as well.

My philosophy is something like Arbitrum One is the leading Defi chain in the layer two ecosystem that should be credibly neutral There should be equal opportunity for all to participate there It shouldn't pick winners It shouldn't feel like, Hey, there's a particular stable coin or a particular asset that's favored, that's has an unfair advantage.

I think that would stifle competition in a way that doesn't really make sense, right? The only reason we're here building these systems is because we want a fairer system We want more open system We want to reduce and lower the barriers to adoption and If we're choosing our winners or we're enabling new power brokers and new centralized parties to decide who's in and who's out, that's not actually very interesting and I think our efforts will have been wasted if that's the case.

That being said, there is definitely room for others and teams that want to have their own vision of what that block space looks like How do they want to have, maybe it's branded block space, maybe it's blockspace that actually makes technical changes to the core protocol experimentation This goes back to what I said before about Ethereum being different, where it has, and it can support all this different experimentation on one layer, one via one consensus.

So if you zoom out and look at the broader Arbitrum ecosystem today, Arbitrum one is the most successful chain in the ecosystem There are over a hundred chains in development today, dozens of which are already on main net, that are doing very opinionated things and building chains for their communities And some of the strongest crypto native communities are actually building Arbitrum chains.

So to give you a few examples, just to give you a taste of some of the diversity here, you have really strong cultural teams like Yuga Labs and Board Ape Yacht Club They have a chain called Ape Chain, which they contribute . You have anime.com from the Zuki community that has their own chain that they're building.

Geared towards their cultural identity and their NFT Community and movement On the other hand, you have chains like Phoenix Phoenix is building a chain that's a privacy first chain for fully homomorphic encryption, where you have privacy baked into the core protocol just to name one or two others You have chains that are defi first chains, you have chains that are institutional.

Kento is a good example They're holding a chain that's an institutional chain focusing on Institutional KYC and trying to bring on the right set of conditions that will make institutional customers more comfortable bringing their products on chain So in the Arbitrum ecosystem, we have a ton of this innovation and the fairness comes from two things on the main chain.

The fairness comes from the neutrality there on Arbitrum one, the leading chain of the ecosystem today The neutrality, I think is very important, and to have that public chain as the center of the ecosystem where others can bridge liquidity to and from, and really utilize that block space as well to their advantage, I think is important.

And then the second one is when you're looking at these tools, we're giving developers to build their chain, trying to give them the most customizability and the most flexibility And that's actually something that makes Arbitrum stand out If you wanna build an Arbitrum orbit chain, your own chain, you can customize it at will.

You have teams like Phoenix that are building deep cryptography into the core bones of the chain in order to provide a new experience You have teams like Kento that are changing core rules of the chain provide a differentiated experience And then you really have the broad gamut of what you can do You have teams that use alternative data availability layers that don't wanna post their data to Ethereum.

Many teams choose to use what we call a custom gas token, where they choose, Hey, we want the fees to be collected in this particular token It could be ETH, it could be USDC, it could be their own token Really giving them the tools that they want to not limit them and give them the ability to execute their vision in any way they wanna do it.

Will:

Bringing a few of these things together So you talked about defi having been a core driver of Arbitrum success I imagine in part that was A fortuitous result of timing It sounds like around the time you launched was really when defi was kicking off, and I'm sure as one of the early low cost, higher speed ways of people interacting on chain.

I'm sure Arbitrum naturally benefited from a lot of that defi energy and in fact fueled it How would you characterize the What I would call on chain finance activity in the Arbitrum ecosystem today, I would include quality defi in that world, and then also I guess some of the perhaps more recent RWA related activity.

Steven:

I think we're going to a place where all these things really merge in In a real way We tend to use these adjectives, so we say defi and decentralized finance We say TradFi I've met a lot of people who say, what do you do? They say, I work in Defi I've never met one person that says, Hey, I work in centralized finance.

Those people don't exist They just say, I work in finance And actually I think if you look at where we're going We're going to a place where it's just finance and you see this going both ways Now You like via ETFs, you have defi being packaged in tradify instruments You see now the opposite as well.

Tokenization, you guys obviously know very well where traditional instruments are being packaged for defi, and what I just see here if you zoom out, is emerging of these two things There's so much potential that can happen when you merge these things That can be from things like more efficiency, things like 24 7 trading, more accessibility, global reach, et cetera, et cetera.

There's so much that crypto can contribute to and really help not just this little defi system, not just a particular set of assets that are tokenized today, but if you zoom out and look where we're going, it's just gonna be, I think, one system And that system is going to be called finance on chain, off chain.

There's gonna be a very strong on chain component to finance That's gonna be fueled by the technology and innovation we have And yes, there will be parts of that are more crypto native There'll be parts of that are more for institutional investors and that's okay But ultimately where I believe is, the merging of actually these three things.

So what we call defi today, the stablecoin surge that we're seeing today and the RWA tokenization threads that we're seeing very strongly today on Arbitrum and not just throughout the ecosystem, in my opinion, these will all merge together to just become One financial system and a better financial system than we have today.

Will:

Yeah Listen, I totally share your view energizing to hear you say that, and I think we're very much working in the same direction How do you think about the role of Arbitrum one, which is this neutral chain versus some of the more bespoke, dedicated chains that projects can build In terms of where ultimately, a lot of this activity might sit, is the future where Goldman Sachs is transacting with Bank of New York in the same block that a crypto gaming user is upgrading his sword, or are those completely dedicated environments, or does it even matter?

The internet is sending packets of information to do both of those things simultaneously, and I don't think anyone thinks about that.

Steven:

I think there will be self clustering, if you will And then we actually have technology that supports this, what we call chain clusters, where different chains can associate with other chains and get some benefits for that, some interoperability benefits.

But I think we'll see clustering, these systems are open and permissionless, so even if we declare Arbitrum one as a defi chain Which we haven't It's really a general purpose chain that does very strongly in defi, but also other verticals No one's gonna stop an NFT project from launching there.

No one's gonna stop a game from launching there and that will happen, and that's great That means the systems are open and permissionless and people can innovate and people can actually contribute to the identity of the chain and can actually over time Evolve the identity of the chain for new product launches.

I don't think it's, there's gonna be a hundred percent clarity ever on everything here goes here, everything there goes there It's always gonna be a little bit of a mix But I do think we'll start to see a lot more of clustering of different like-minded projects The example I like to give is TV channels.

So you'll have TV channel, like Cartoon Network and it'll have a TV channel like Animal Planet And you'll have your news channels You also in general sense of where things go, but you'll also have like cartoons about animals that can go in either place And the idea is that I actually don't think that it makes sense for every application to have their own chain.

There are some out there that are pushing every application to have their own chain I don't think that makes sense I think there are many applications that are well served by a highly liquid public chain They wanna be resident with other applications They want to be close to liquidity They don't want to deal with the over of having their own chain.

They don't need that Today, maybe they'll never need that So I think there's certainly a strong place for a strong public chain On the other hand, I don't think that there's gonna be one chain for all Again, back to TV channels, it wouldn't work if every program had their own network It just would be empty program most of the day.

And there are synergies from actually coming together, if you like cartoons, to go there and you can discover new applications If you like gaming, you'll go to the gaming chain and maybe you'll find new games adjacent to the one you already,

if you just had one TV channel and had to fit all the programming there, it wouldn't work either You need a bit of diversity and I think that's really the place where we're getting, I think Arbitrum one has a very crucial role in that ecosystem. 'cause like I said, certain applications may never want, but certainly may not want to start off as having their own chain.

It's a large overhead, particularly if you don't have users as much easier to get users and get liquidity on the public chains There also are really good reasons, particularly for larger applications or for applications that may care less about interoperability If you're playing a game and you don't really care about liquidity, you just want your users to have their on chain experience as cheap as possible, and you wanna fully control that environment, it might make a lot of sense to have your own chain from day one or from early on.

The Arbitrum ecosystem gives you that optionality You can start off on a public chain and if you're doing really well, you can graduate Actually a protocol that's done this in practice is the one I mentioned before, proof of Play Pirate Nation It started off on the Arbitrum and public chains and it graduated through their own chain and eventually two of their own chains that worked together to give the users.

A great and consistent experience, and that's really strong And the fact that the ecosystem has these two offerings is also better for the neutrality of the ecosystem as well, because we don't have an incentive to push you to launch your own chain, even if you don't need it, or to push you not to, even if you really are a good candidate for it.

We have the different tools for different developers and say, Hey, what is best for you at your stage? That might be different tomorrow than it's today Everyone thinks they're going to do.

Push off that decision and say , I'll start off on the public chain and if when I get there I can use literally the same technology stack and just graduate to my own chain and everything will still work And hey, there have been examples of teams doing this in the past, it makes that decision just a little easier.

And there will be some that wanna start in their own chain right away And then we, some that never wanna go to their own chain, even if they're successful because they want the benefits of being resident with other applications on a very liquid chain, like Arbitrum one And all of those things are well supported by the ecosystem.

There are a basket of options and there's no one right choice It really depends on the particular protocol, the particular community, and their needs and what they're trying to accomplish.

Will:

Makes sense Two points I'd love to cover before we wrap up if we have time First one around interoperability and then the second around, broadly speaking in the context of on chain finance, things like K-Y-C-A-M-L compliance and how that all can be woven in, but maybe starting with interoperability.

So you talked about Other chains building on the Arbitrum stack all within the same ecosystem I imagine I imagine that there's some level of native interoperability among those types of chains As you project out some sort of future, let's assume that we're successful in the collective work that we're doing to bring finance on chain.

I feel like ultimately it's unlikely that all of finance goes on the same L-2 or Even on the same L one ecosystem, what could potentially happen to get to a world where users be they consumers or businesses can have quality UX, financial experiences and settlement, if you will, can happen across a range of chains in a fluid and interoperable way.

Steven:

We're very committed to solving this problem at Option Labs, and I say problem, but really It's a good problem to have And the reason is, it's not like any other ecosystem Layer one ecosystem has solved interoperability They just don't have the problem of interoperability because there aren't people trying different things.

There isn't diversified experimentation Everything's happening on one layer So it's not like you have a chain like Phoenix that's doing privacy and the other ecosystems and they just don't have those chains They don't have those developers They don't have those experimentation That development all comes to Ethereum, so it's a really good problem we have, or anyone that wants to do something interesting is understands that the only place they can do that is Ethereum because it's the only ecosystem that actually supports experimentation at this layer.

But it's also, it's a problem that has to be dealt with as well It's a two-sided coin because For a user coming to the ecosystem, it can be a little confusing There's layer one, there's layer two, which layer two do I go to in practice? I think a lot of the language we talk about it is also important, so we can abstract a lot of that away from users.

Arbitrum If you go to a centralized exchange, Coinbase, Binance, you name it, you'll be able to withdraw Directed, Arbitrum, the same for many layer twos So for most users, they don't actually don't need to Interact and deal with the fact that as a layer two, they could just think of it as a blockchain that happens to be secured by Ethereum, so they can actually abstract that away from them.

They don't need to deal with the complexity There's a lot of mental load though I found when you tell users it's a layer two and they think they have to do something, Ethereum, there's a lot of confusion So a lot of it's education, but there are also components of how can we make this feel like a unified ecosystem?

How can we make it Easy to go from chain A to chain B and how can we make it easy to do something on chain B? If your funds are on chain A, you don't have to worry about getting the gas token over chain B, maybe one's in ETH and one's in USDC, and now you have to buy gas token But all you wanna do is trade this other asset it can get very complicated very quickly.

And so what we're doing at off chain Labs to solve interoperability is number one, creating fast and seamless bridging between Any Arbitrum chain, but really any EVM chain, right? We're not limiting, to your point, our interoperability just to the Arbitrum stack if the technology allows it, and in many cases it does.

We're looking to unify, not Arbitrum We're looking to unify the broader Ethereum, and that's the technology that we're building So we've built this universal intense engine, which is a bridging set of contracts that any chain can use that will allow them to opt into this ecosystem and then be able to tap into this interoperability.

That's number one And then looking forward as well, there will be deeper ways where we can build this interoperability tech as well But fundamentally, the experience that we're going after and one can accomplish an ecosystem You move your funds anywhere in the Ethereum ecosystem and you can easily access at the wallet level, at the front end level, do things anywhere else in the Ethereum ecosystem and not have to worry about moving from one chain to another.

It all gets distracted away for you And I think there's broad alignment in the Ethereum ecosystem and that's the experience we need And I think we have really good clarity as an ecosystem of how to get there And we at Chain Labs are looking towards that very directly.

Will:

Is the problem solvable across?

Ethereum and Solana and Aptos and other L one non solidity or even non-smart contract based chains, is that a solvable problem?

Steven:

I think so It'll never be the same as building on one chain There will always be some added friction, but I think we can do a lot to make that experience better And again, my goal is not to create.

Unnecessary walls where they don't belong Similarly to my first goal is unify Ethereum, and if there are ways to unify Ethereum with Solana or with other ecosystems, we should absolutely do those right? I don't believe we should be building walls artificially Now, there may be technical limitations, like just, Hey, all EVM chains can run the same code.

That's easy, that's efficient We'll have to write separate codes to connect these things to Solana That might take longer, so there may be efficiency reasons why, certain things get prioritized differently on the roadmap Ultimately, as I look forward, the goal here is not to artificially advance one ecosystem over the other.

The goal is the user and the goal should always be the user To provide the user the best experience And if you have a user that wants to do something on Arbitrum and also wants to do something on Solana, then we should provide that user the absolute best experience to do that.

Will:

Makes sense So then final point, it's always the most boring one from a.

Crypto native standpoint, the most salient one from a finance standpoint You mentioned Phoenix I don't actually know that project, but it sounds like they're building a, I think you said privacy chain You also mentioned that there are examples of people building institutional KYC based chains They're obviously a very.

Broad and detailed and time-tested set of requirements when it comes to doing finance And if you're using this infrastructure, then you need to meet those same regulatory and legal requirements Are there any challenges in say, I'm just thinking about the examples You said someone spins up a chain that's dedicated to doing institutional finance and enforcing a lot of those say compliance requirements, but then you're rolling up to a completely public permissionless chain.

Does that create any challenges? Is that in and of itself a sufficient solution? Or one, are there enough tools or levers that builders have where they can just build natively on, say Arbitrum one or even Ethereum main net, because things like whitelisting, maybe it's sold out NFTs, maybe it's certain permissioning that people can build into contracts and tokens are sufficient.

Or do you think there's some sort of like new paradigm, new tool set that ultimately will need to evolve to really bring institutional finance on chain?

Steven:

There's a lot there I would say a few things Number one is I think the tools are abundant that exist today, and a lot of it is taking the tools and building the right product experience, and there's no right answer.

It depends on what the regulatory requirements are for this particular institution, where they're regulated, what sort of KYC that they need to do, what the product looks like All these things are going to form what the correct solution is, and some of them may be willing to launch on a public channel, like Arbitrum one, some of them may launch something that's.

White listed on a public genetic Arbitrum one, and some of them may decide to launch on a chain like Kento or Millicent one, which are these institutional focused, Arbitrum morbid chains And some of them may decide to launch their own chain where they have full control over that And a lot of it's a product decision.

If you require KYC, you can have your zone on a public chain You can also have your own chain There might be more reasons of efficiency, where that's better and that's easier So you know, alright, everyone just KYC is out the door, all the assets on this chain are institutional and that might just be better for some, maybe worse for others.

It really depends on the product experience and also where you're trying to attract liquidity from the practice There have been over the years, I think, many different teams that have tried to build privacy The truth is that privacy, which ties deeply into some institutional requirements, has never really taken off previously.

To my surprise, to be honest, I was, I've always been a big believer in Zcash and I thought actually, for example, even early on, there'd be much, much more quick adoption of technology like that, which, we've seen be relatively slow over the years But I do think there's a new environment today for a few reasons.

Number one is institutions are coming on board This could be institutional customers or retail customers that have a certain expectation of privacy, right? Even as a retail banking customer, you don't expect any of your information to Publicly visible And that's something that's going to be more and more expected as the norm, as users come on board.

And this idea of crypto native people have become comfortable with is gonna be different than what this new class of people are gonna be comfortable with, which I think actually creates a really big opportunity for a renewed interest in privacy solutions There's also a regulatory shift now, certainly in the United States.

Is going to potentially enable new frameworks to be created and codified that give us more clarity in how to build these systems in a compliant way, which I think has also been a hurdle, particularly for institutions that are on the edge of crypto So there are two types of companies There are companies that are like all in crypto and they're willing to sometimes go and do these long processes and can actually try to figure this out when there's no clarity with other institutions that are on the edge, which is I'll try crypto, but it's not really my core business.

And the gonna be very helpful getting Institutions like these comfortable to actually come and try out crypto So I think the convergence of just the institutions coming more generally, but also the, their regulatory environment is going to, in my opinion, create increased demand for all sorts of these products.

Whether it's a KYC privacy product on a public chain, whether it's a chain that's institutionally friendly right outside the door..

I think we'll see innovation in all these I don't know exactly what will stick and what won't stick, but I'm confident that assuming that institutions don't go anywhere, some of these definitely will stick because these are solutions that are broadly necessary And I do think also that in order for this to be interesting, we do need to find the paths of integration with this and with Defi, we don't want there to be just, oh, the KYC institutional stuff,

Will:

100 percent

Steven:

these things have to flow together.

And there are really interesting ways And designs where they can and will I think we're still early on in the innovation stage there.

Will:

Totally That's the whole power of this opportunity I think there are two things in particular. 1, 24/ 7 instant settlement Finance, which can happen on blockchain rails, which will never happen on Tradfi rails and all of the workflows that you can build around that.

And then when you layer on automation through smart contracts, it's a totally different paradigm And then second to your point, looping in Defi, obviously in a fully compliant, fully institutional grade way But these are at the end of the day, financial applications that are running on chain In many cases, they're proxies for manual off chain processes that have been present in traditional finance for many years.

So being able to basically bridge and unify these two things, I think is what ultimately creates such a powerful opportunity ahead of us I'm totally aligned with you.

Steven:

Absolutely.

Will:

Listen, Steven, incredible conversation I really appreciate your time.

Steven:

Thank you Really enjoy the conversation as well. Great to be here.