Empire - Why Layer-3s are Inevitable ft. Steven Goldfeder

In this episode of Empire which took place on April 17, 2024, Yano and Santi hosted Steven Goldfeder from Offchain Labs to discuss the evolution and dynamics of Layer-2 and Layer-3 blockchain solutions, Arbitrum ecosystem, Ethereum scaling, future trends, and more! Read our notes below to learn more.

Background

Yano (Host) – Founder of Blockworks, Host at Empire & Pleasr

Santi (Host) – Co-host at the Empire podcast

Steven Goldfeder (Guest) – Co-founder at Offchain Labs

Insights on Arbitrum’s Evolution and Layer-2 and 3 Blockchain Technologies

Steven explains that Offchain Labs initially built Arbitrum, leading to the public Arbitrum One and Arbitrum Nova, which are decentralized and controlled by the Arbitrum DAO and Foundation. Offchain Labs remains a core contributor and continues to develop new programs using the technology.
Steven says that Layer-2 solutions are still developing, with Arbitrum being the most advanced in terms of maturity and technology. He notes the increasing popularity of Layer-2 solutions, which has spurred a need for more blockchain space and control over transaction fees.
Steven gives the example of Arbitrum Nova‘s gaming chain, which experienced high transaction volumes and increased fees, leading to calls for more control over the network environment.
He discusses the emergence of custom blockchains such as Pirate Nation, which migrated from Polygon to Arbitrum Nova, and others who have moved to their own custom chains using Arbitrum’s technology for fee control and feature customization.
Steven mentions the demand for chains where specific tokens can be used as the fee currency, highlighting the flexibility of Arbitrum’s technology to accommodate such requirements.
He elaborates on other custom chain features like enforced creator royalties and privacy enhancements using cryptographic techniques.
Steven highlights the diversity of uses for Layer-3 technologies, ranging from customizability and branding to deep technical customizations, all while maintaining security through Ethereum and leveraging Arbitrum’s advanced technology stack.
Santi asks about the distinction between building a Layer-2 using the Orbit stack versus a Layer-3.
Steven explains that the Arbitrum Orbit program began over a year ago with the launch of the DAO in March 2023, designed to be community-owned rather than just open or closed source, which he describes as “community sourced.”
He says that initially, Arbitrum Orbit was intended only for Layer-3 projects on the Arbitrum blockchain, but they encountered challenges with teams wanting to build Layer-2s but not wanting to publicly disclose sensitive projects to the DAO for approval.
Steven mentions that there is now a self-serve option for building either Layer-2 or Layer-3 chains, aligned with the Arbitrum DAO, which requires contributions back to the community to support ongoing development.
He discusses the developer’s choice between a Layer-2 and a Layer-3, noting a stigma associated with being a Layer-3, as teams prefer to be seen as independent Layer-2s despite technically still operating on top of another blockchain like Ethereum.
Steven says that this stigma will likely diminish over time, acknowledging that while some teams prefer Layer-2 for community perception, there are practical benefits to opting for Layer-3.
He highlights two main reasons for choosing Layer-3, focusing first on the significant cost reduction in user onboarding. He explains that transitioning users to a new chain via Layer-2 transactions is much cheaper than through traditional Layer-1 transactions on Ethereum, offering a 99% cost reduction.

Future of Blockchain Interoperability: Offchain Labs’ Strategy and Challenges

Steven explains that Offchain Labs is working on improving interoperability between blockchain networks through their Arbitrum Orbit technology, highlighting coordinated movement among chains. He predicts enhanced interoperability due to collective efforts across multiple projects.
Steven highlights that newer blockchain networks will face initial challenges in interoperability. He points out that some features will enable easier integration, while others will rely on support from entities like Espresso or LayerZero, indicating a gradual improvement over time despite persistent onboarding costs.
Steven discusses the necessity for blockchain networks to post data back to Ethereum, detailing the costs associated with these transactions. He illustrates the financial burden new chains might face, especially those with irregular transaction volumes.
Steven contrasts the cost-effectiveness of using Layer-3 technologies over Layer-2 for transaction aggregation, which significantly reduces user onboarding costs.
Steven clarifies the strategic alignment between building on Arbitrum, whether on Layer-2 or Layer-3. He highlights the importance of contributing back to the ecosystem, detailing the licensing terms that require revenue sharing with the Arbitrum DAO and a developers’ guild to foster community support and technological development.
Steven talks about the flexibility of the Arbitrum license, which allows developers freedom in using the technology while mandating a contribution to the ecosystem. He mentions the possibility of negotiating with the DAO for special terms, highlighting community involvement in decision-making processes.

Stack Usage, Fee Enforcement, and Chain Building Strategies

Santi asks if there have been cases where someone uses the stack without paying and how enforcement of the 10% fee is handled, assuming it is not enforced at the contract level but more informally.
Steven says it is early days and he isn’t aware of any non-compliant teams, believing that reputable teams interested in building community-oriented projects will comply. He notes that all early signs point towards compliance, especially since the process is managed through the Arbitrum Foundation.
Steven explains that the fees don’t go to Offchain Labs or the Arbitrum Foundation but directly to the Arbitrum DAOs on-chain wallet. He describes the DAO’s growing on-chain portfolio, highlighting the transparency and community focus of the fund allocations.
Steven highlights the importance of contributing back to the community that funds and sustains the technology, noting the high level of flexibility and optionality for teams to align with community goals or seek custom arrangements through the DAO.
Steven advises that the decision to launch a chain should be based on whether there is a compelling reason for such infrastructure. He suggests that most DeFi apps would benefit from being on an established chain like Arbitrum One due to liquidity and infrastructure considerations.
Steven differentiates between general-purpose chains and application-specific chains, suggesting that special-purpose chains could be designed for specific ecosystems or functions, like gaming.
Steven explains that L3 and app chains are similar in that they allow customization and can restrict who can launch apps, thereby controlling congestion and ensuring that the chain remains aligned with its intended purpose and brand.
Steven adds that those aiming for general-purpose chains might lean towards L2, while those focused on specific applications could prefer L3.
Yano considers the future possibility of Arbitrum moving away from Ethereum, questioning if, in the long term, L2 chains might launch their own L1 networks.
Steven expresses strong opposition to the idea of L2 chains like Arbitrum becoming independent blockchains, highlighting his commitment to Ethereum’s security and scalability, which align with Ethereum’s long-term strategic roadmap.
Steven further discusses the risk of L2 chains detaching from Ethereum and the importance of utilizing Ethereum’s security features, which would be undermined if L2 chains start operating independently.
Steven highlights the essential benefits of Ethereum’s security, decentralization, and data availability, stressing the importance of these elements in maintaining the integrity and reliability of L2 solutions.

Exploring the Complexity of Fraud Proofs and Blockchain Ecosystem Dynamics

Steven explains that fraud proofs appear simple on the surface but involve complex edge cases and protocol nuances. He describes the evolution of fraud-proof protocols and mentions the ongoing challenges and lessons learned from nearly a decade of study.
Steven details the roles within the Arbitrum ecosystem, explaining the functions of sequencers and validators. He highlights that while the sequencer orders transactions, validators provide chain security and engage in fraud proofs to ensure transaction integrity.
Steven adds that the current Arbitrum system features a distributed group of validators including major organizations, maintaining a centralized sequencer that orders transactions on a first-come, first-served basis but cannot manipulate transaction outcomes without validator consensus.
Santi asks if he has considered open-sourcing their interactive fraud-proof technology to let others explore and possibly replicate it, rather than creating their own versions.
Steven explains that their code has always been public and source-visible, allowing anyone interested to inspect it. He shares that, to his knowledge, no one has attempted to copy it directly.
Steven highlights that while the code is publicly visible, they envisioned a community-source model as more beneficial. He mentions that many chains are currently utilizing their technology under the Arbitrum Orbit program, which is open to any entity willing to comply with the licensing terms.
Steven stresses the importance of Ethereum’s role in the future of blockchain technology, pointing out that ongoing developments are aimed at reducing costs further without compromising on the benefits of the Ethereum network.

Insights on Coinbase’s Tech Choices and Blockchain Layering

Santi asks Steven for insights on why Coinbase chose specific technologies for their stack.
Steven states that he doesn’t know why Coinbase didn’t choose Arbitrum, noting he wasn’t involved in the deliberation processes and isn’t aware of the diligence processes they undertook. He mentions a financial aspect, recalling that Coinbase received about 2.75% of the $OP token supply for certain decisions.
Steven adds that the future seems promising for various technological implementations on Layer-3 platforms, despite past decisions, and discusses the ongoing developments and potential of the Arbitrum stack.
Steven illustrates how disputes on decentralized protocols are ultimately resolved by the underlying layer’s rules, stressing the influence of centralization in such scenarios.
Steven argues that significant benefits from layering do not compound beyond Layer-3, explaining that while Layer-3 offers substantial reductions in onboarding costs and efficiency, these benefits do not increase with additional layers.
Santi suggests that a company like Nintendo could represent Layer-3, with various game franchises acting as subsequent layers in a blockchain analogy.
Steven supports this view, discussing the potential for ecosystem growth where a Layer-3 may spawn multiple layer fours within its framework, driven more by ecosystem needs than by technological advancements.

Exploring Blockchain Scalability and Adoption

Steven says that many people misunderstand the scalability levels beyond L3 on blockchain networks, thinking they can endlessly escalate to reduce costs or enhance efficiency, but he clarifies that practical financial perspectives anchor the realities of these layers.
Steven acknowledges the logic in moving from an L3 to an L2 might be influenced by significant cost reductions and potentially easier onboarding without immediate exchange support. He argues that major brands like Nintendo could achieve this seamlessly, but transitioning to an L1 involves complexities they might want to avoid.
Santi notes that using established protocols like Ethereum could provide security benefits to new chains, hinting at the possible integration and mutual benefits within the blockchain ecosystem.
Steven envisions a future where blockchain layer distinctions become irrelevant to users, focusing instead on seamless interactions and security. He highlights that success in blockchain infrastructure should lead to user-centric simplicity and abstraction of complex layers.
Steven talks about how network effects are crucial at the chain level, particularly for applications requiring liquidity. He observes that these effects attract not only crypto-native companies but also traditional financial institutions, foreseeing a gradual convergence of decentralized and traditional finance that leverages these network advantages.

Overcoming Ethereum’s Challenges: Scaling, Specialization, and EVM Evolution

Santi says that most crypto networks have anti-network effects, focusing on fee degradation as more users join, which used to result in high transaction costs on Ethereum. However, he notes that recent improvements and scaling solutions like L2s and L3s have shifted the focus to user experience and composability in the ecosystem.
Steven explains the problem of network congestion in early Ethereum, comparing it to having only one TV channel for all shows, which worsens the user experience. He advocates for organizing blockchains by verticals to optimize discoverability and efficiency, similar to specialized TV channels for different genres.
Steven discusses the strategy of self-charting to manage blockchain specialization and avoid overwhelming any single network, highlighting the balance needed between general and specialized blockchains.
Santi asks for thoughts on criticisms of the Ethereum Virtual Machine (EVM) being flawed and the ideas of parallelization and local fee markets. He mentions Monad‘s approach to addressing these issues.
Steven responds by highlighting a study from Polygon showing that only 50% of operations are parallelizable, indicating that perfect parallelization would only yield modest improvements. He argues that parallelization and localized fee markets can be independent solutions and discusses the broader conversation about evolving the EVM without breaking its current implementation.
Steven elaborates on Arbitrum’s approach of adding capabilities to the EVM without altering its core, allowing for more efficient programming in languages like Rust and C++ alongside traditional EVM operations.
Santi acknowledges the challenges of changing the EVM due to backward compatibility and the necessity of maintaining social consensus.
Steven agrees with the difficulties of changing the EVM and expresses enthusiasm for returning to discuss resource allocation and load balancing, drawing parallels with challenges faced during the internet’s expansion.

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Show Information

Medium: YouTube (Video)

Show: Empire

Show Title: Why Layer-3s are Inevitable | Steven Goldfeder, Co-founder at Offchain Labs

Show Date: April 17, 2024