Did L2 Fragment Ethereum? - With Yuval Rooz, CEO of Digital Asset, Co-Founder of Canton

So generally speaking, my view is that public blockchains are the most expensive database in the world inherently. And I'm not saying that as a negative thing. I'm saying it is because it's just a true thing. Public chains are an expensive database. So the question is why would you use it? So really the value of public chain is composability. That's in my view the only value of a public chain is composability of multiple assets. From just moving stable coins from one wallet to another, it's just a central database update. There's no value in decentralization in that place or anything like that.

Sure. So just real quick background, my experience is more from trading. I used to work for a company called DRW Trading, still called DRW Trading, but in 2012-13 they got into crypto and they created an entity called Cumberland Mining which is one of the largest crypto market makers today in the world. And me and my co-founder both worked at DRW and we left DRW at the end of '14 to start a company called Digital Asset. And the first thing that we've tried to solve is how do you trade Bitcoin more efficiently. And we believed that in order to do that you need to create on-chain financial infrastructure to manage digital assets. Hence the name Digital Asset. We believe that eventually every asset in the world will look like Bitcoin or Ethereum. It will have a fully digital representation and you would be able to manage everything from trading to settlement to collateral to loans all on chain. And that's kind of how we started our journey. And after thinking about the problem for almost two years, we decided that the only way to bring assets on chain is if you solve for certain technical features. And those were the years that Ethereum was created and have done tremendously well as we all know. But our view already then was that building financial rails that would convince global financial players to actually move a core part of their business on chain would take longer and would require a bit more thinking about how does it work, how does it operate, how is it governed. And one of the first things that we said must happen is you have to solve for privacy on chain, and not anonymity but privacy. And we can talk about that more, what's the nuance between those two things. And that's kind of how we started our journey and really we believe that Canton is poised to be kind of the leading network for on-chain finance which in my opinion is only going to happen if you can bring real world assets to exist natively on chain.

Sure. So I think that maybe we started with anonymity because I think anonymity is interesting because it's also gaining some popularity with Zcash and Monero. But again, the problem statement that we're trying to solve is well, how do we bring financial institutions on chain? So anonymity, at least in my view, is the ability to obfuscate any information related to a transaction. Meaning you and only you have this asset. Nobody else in the world would know. It's kind of like the equivalent of the cash you have in your wallet. Only you really know how much cash you have in your wallet and nobody else would know about it. And that's anonymity. And anonymity at some scale is important. I think that cash is a very important financial instrument. Anonymity at scale, I think, is a different question. And I think that when you start thinking about electronic financial systems at the moment, whether we like it or not, regulations require to be able to comply with KYC, AML, and therefore your bank would not be comfortable if their payment system had anonymity, meaning that they don't know what people do with their money, right? And that's a lot where zero knowledge is coming from. Inherently there is zero knowledge in what is happening inside the cryptography. You just trust that the output is correct. So one thing is that anonymity does not comply well with regulation. And then the second thing I think that there's inherent risk in anonymity because it relies on cryptography, very sophisticated cryptography. Maybe it's worth stating that we are three co-founders. One of the third co-founder is one of the researchers that created zero knowledge. So it's not that we don't have knowledge in what is the capabilities of the technology. And the reality is that we believe that building a financial system that is relying on black boxes of cryptography is pretty dangerous. And the reality is that we've seen already multiple examples where there were bugs in zero knowledge implementations and imagine you could mint stable coins out of thin air, that actually happened. So this is not theoretical debate. So that's why we believe, to us, anonymity in our opinion is not compatible with the real world at scale. Not saying that there are no use cases for that but at scale we don't think that it's compatible.

So theoretically speaking, what you're saying is correct, but I want to anchor us maybe just in reality for a second. And let's just take two examples. So let's say we use ZK. We know in the US you're not allowed to drink alcohol if you're over the age of 21. So imagine that you go to a bar and now instead of a bouncer looking at your ID now knowing your address, your name, how old you are, and all of that stuff. Instead of doing that, you scan your ID and there's a ZK proof there that actually just reads your date of birth and really just tells the bouncer, here's a proof that this person can drink or not. Now, great use case because we're effectively doing the same thing, right? We haven't leaked all of your identifying information and we've proved that you are eligible to drink according to the law. But as we experience in crypto, bugs do happen, right? Bugs do happen. So let's actually now play it a step further and let's just say that there is a bug and let's say you look mature to your age, but you're actually 16 and you go with that idea and it tells the bouncer green can drink. So what is the outcome? The outcome is that a 16-year-old drank a pint of beer or a few shots of tequila and not good because the law says otherwise but you didn't have an extreme scenario. Now translate that into the financial system. So let's take your example because I know that a lot of people are talking about that. What happens if there is a bug in the ZK and now you onboarded someone who is on the OFAC list and is actually a really bad criminal and now because you've just relied on a black box telling you yes or no, you have actually conducted financial services to a bad individual. But I'll take it one step further is imagine, like I said, that you have a stable coin that is minted inside of a ZK. And now someone finds a bug that you could actually mint stable coins out of thin air, but the ZK tells you that everything's fine. And now you just mint stable coins and you go and you buy bitcoins with them and you disappear. That's it. It's over. So it's not that in theory there's no real interest in the technology and there's not a lot of really good promises but the reality and again those examples that I'm just giving have happened so these are not theoretical. Zcash had that bug, it's called the money tree bug, and I think Solana confidential transfer had that bug. These things do happen and when we start thinking about, and these are on what I would say limited scope functionality. So the surface area is limited and still there are bugs and there's not that many people that can discover these bugs. So it's not only that you could have these bugs, it's also like who can find that these bugs are in existence. So when you end up thinking about that and then you're trying to say well how do I build a general purpose application that is going to do more sophisticated things like beyond just very limited functions. We just don't think that the risk-reward is valuable, right? Where I think that you could actually achieve privacy, which is this thing that says, well, if I have a financial or some kind of an outcome on the inputs being correct, I want to be able to see the inputs because imagine if you were a lender of money and you ask for collateral to give these loans. Well, if someone pledges collateral to you, right, it's extremely important because you're effectively securing your loans with that collateral. Well, now imagine that someone pledged that collateral into a ZK protocol and the ZK just tells you the collateral is there, whenever you need it, you'll be able to get it, but a few years later, you have some big defaults on the loans and you need now to call in the collateral and then you find out that there was a bug in there. Would you as a lender be comfortable with just trusting that a black box told you that it's there? And our view is that that's just a bit optimistic to what a commercial organization would say. No, I would say that most lenders would say if I give someone a secured loan, I want to see that the collateral is there and I'm not just going to trust a black box.

And maybe just to wrap things on ZK, I think that ZK actually is going to show a lot of value on scaling. So actually not on privacy but actually on scaling. And I think we're going to see a few things this year of how you could actually use ZK in a very valuable way but I just don't think for privacy. Our view is that privacy, again back to my point, is if you have a dependency on the inputs being correct, privacy to us is not anonymity. Privacy is the ability to share information on a need to know basis. So if you and I have a contract between the two of us, you and I need to know that all the inputs to the contract are correct because we might have some kind of outcomes that are relying on these inputs being correct. And we might actually designate in the contract that there's a certain few other parties that should know about the existence of this contract because for whatever reason to do their job. So to us, privacy is not hiding the inputs. It's actually sharing the inputs, but it's sharing them only with those parties that have a stake in the transaction being correct. So that's what Canton does. It doesn't automatically replicate data everywhere. It actually just replicates to relevant stakeholders to the smart contract.

Sure. So Canton inherently in its name is derived from the Swiss canton system. So it's actually a network of networks. So you can create endless amount of cantons which effectively makes the network infinitely scalable, like you could just keep on adding more cantons. What the protocol does is it gives you still a user experience as if you are on one physical L1. So I can compose transactions across all these different cantons as if they were all on one single ledger. That's what the protocol does. And the other reason for the name Canton is that beyond the fact that our tech was developed in Switzerland, was if you actually know the federal system in Switzerland, every Canton has its own kind of sovereignty and control. They have their own taxes. They have all kinds of rules. I tell people they don't even spell canton the same way across the different cantons. Yet when you go between different cantons, you're not like, 'Wow, I'm going from one country to another,' right? You're still in Switzerland. So again, our view was that applications, the real world is not homogeneous. We wish it was. The world would be much more simple if we were just one type of people and everything was the same, but the reality is that it's not the case. And there are different rules across different countries, across different use cases. And I think the reason why the internet for example has been so successful is that the internet can have something like chase.com alongside of wallstreetjournal.com alongside very bad websites.com, right, and they can all coexist on the same protocol and the companies behind those websites are comfortable being on the same protocol because they have some sovereignty and control over what they're putting on the internet. So Canton is kind of taking very similar thought process and then yes there's a smart contract called DAML on Canton which rather than the layer one dictating to the apps how do you behave on my chain, it's actually the smart contracts that dictate to the chain how they want their application to behave.

Who can create a canton? Everybody. It's open source. Everybody can create a canton.

No. So at the end of the day, depending, liquidity could be stated in all kinds of different ways. So we need to kind of specify what do we mean by liquidity. But maybe to explain, if cantons want to compose a transaction between the two of them, they have to do that with Canton Coin. They can't do that. So there's all these cantons, everybody can create their own canton but in order to interoperate with one another you have to go through mainnet effectively through the public network and the public network is a decentralized network that everybody can compose a transaction through it and the only way to do that is by burning Canton Coins.

Sure. So I mean today there's like literally last week launched a DEX with privacy called Temple and there are multiple assets on Temple. Some of them are let's say wrapped Bitcoin. So there's a company that launched the wrapped Bitcoin. They had their own canton. And then there's a USDC that have their own canton. And now when you want to do a trade, you want to do a DVP between the wrapped Bitcoin to USDC. You effectively compose those two transactions. When you want to do that kind of a transaction, I think that maybe the thing to kind of understand is like when you think about let's just take Ethereum. So every time you do a transaction in Ethereum, all of the assets, all of the ERC20 tokens exist on Ethereum. But if I have an ERC20 token on let's say Base and then I have another ERC20 token on Arbitrum, I can't actually compose a transaction between the two of them. Risk-free settlement. I can use solvers. I can use all of those things, but it's not a blockchain transaction. It's a lot of API calls and bridges and settlement risk and all of those good things which to me is effectively taking away from the whole value of blockchain. The nice thing about Canton is that when I compose a transaction between two different cantons, I have this guaranteed similar experience of an L1, those two settlements will happen or will both fail. Like meaning the transaction cannot be created and none of them will happen and I don't have to rely on solvers or liquidity providers that bridge those two things together. It just happens as if they were like my first example two ERC20 tokens on Ethereum.

Sure. So generally speaking my view is that public blockchains are the most expensive database in the world inherently and I'm not saying that as a negative thing. I'm saying it is because it's just a true thing. Public chains are an expensive database. No one can convince me otherwise. Any Postgres database or any NoSQL database that you just take on a server centrally will perform better and cheaper than public chains even the best performing ones. So the question is why would you use it? My view is that if let's say your use case was I just want to do stable coin transfers that's all I want to do. Let's imagine that you should not do that on a public chain because you're literally doing just a book entry between two accounts. You're not actually, right? The stable coin is a very centralized offering. You have one issuer and that issuer is just moving assets between wallets. It's like a Venmo just doing debits and credits within one ledger. The reason why you want to have a stable coin on a public chain is because you want people to use your stable coin against transactions that are not part of your asset. I want to settle it against other crypto assets. I want to do that in loans and all kinds of things. So really the value of public chain is composability. That's in my view the only value of a public chain is composability of multiple assets and therefore the transaction on Canton is more expensive than how much a transaction on a private database will cost but it's giving you the ability to compose very complicated very sophisticated transactions with privacy and therefore compared to how much it would cost to do it in the real world it's very cheap but it is an expensive database still nevertheless.

Composability with privacy. So here I'll tell you like just to make it a bit more real what you can do on Canton. I can build an application on Canton that is life insurance. We have seven life insurance companies on Canton that have all PII, personal identifying information. Everything is on the ledger. And you can imagine that if you want to now pay your life insurance with a stable coin, the last thing you want is the stable coin issuer knowing about your life insurance. It's none of their business. It's a payment mechanism. You just want to pay. No different than when you use Visa or Mastercard to swipe to pay your premium. They just know that you have authorized to release a payment to an insurance company, but they have no idea for what reason you did it. You might have a car insurance. You might have a home insurance. You might have a life insurance. Who knows what you have? They just know that this was a valid transaction. That's what Canton allows you to do. So the life insurance product will be very private. The stable coin might be pseudo anonymous kind of like how we're used to. You could still do a DVP transaction between those two applications without leaking information between the two in order to make it happen. That is extremely unique to Canton. We're not aware of anywhere else that you could do that. And again, when you start thinking about the real world, that's how you would expect things to happen in the real world. On other chains, in order to make something like that happen, you would really have to take a lot off chain to kind of get people comfortable to do that. And if you have to do a lot of things off chain, my question is why are you using a blockchain?

100%.

100%. They have full sovereignty and control how they want to design their account on. They can have a centralized sequencer. They can have a distributed sequencer. They can have permissionless access. They can have permissioned access. They can have privacy. They don't have to have privacy. When you create a canton, design it however you want. Think about it again like a website. When you design a website, design it however you want. Have all sovereignty and control of how you want to create it, what is the governance of this website, who can edit the website, who can access the website, but you could still interoperate across the internet with other websites.

No. So there's I guess similarities. I want to be careful. There's similarities, but at the end of the day, they're similar in the sense that like I personally don't view L2s as part of Ethereum.

Yes. I think it's a marketing. I think for the most part, all L2s try to maximize the TAM under their L2 and would much rather it staying like that. And it's nice to say that I'm part of the Ethereum ecosystem. I actually think that L2s, if anything, hurt Ethereum more than contributed to Ethereum.

Because at the end of the day, if you really think about it, like if all of the volume is happening on those chains, the economics move away from Ethereum. And therefore, you're effectively kind of subsidizing a technology from a development that happened somewhere else, but you're literally pulling all the economics away from. So in Canton, what we're saying is if you want to compose a transaction, you pay mainnet. If you're just a private chain, be a private chain. We don't care. That's not where the economics is.

Any composable transaction across cantons goes to a mainnet.

Yeah. Because it's again, public chains are not an economical database. So let me give you an example. If we stay with the life insurance example, when you think about the life cycle of a life insurance, there are so many updates to the ledger that are not economical activity. Every night you need to mark to market your policies. There's a lot of maintenance that happens. If you say to someone all of those activities have to go through mainnet, the cost would explode. It's just not worth it. And therefore, if you build an architecture that mandated that, then people would say, 'Well, cool. I'll do everything off chain on these cheap databases.' So you want to allow people to actually do everything on chain, but without having the economic penalty of doing all of this activity and having to pay mainnet kind of fees. It's only when you do composability, we believe that there's an economic value doing it and it's worth paying a very expensive database. And I think that that's why you're seeing a lot of stable coin issuers are saying like, we'll just create private ledgers because again, if I'm just moving stable coins from one wallet to another, it's just a central database update. There's no value in decentralization in that place or anything like that.

I disagree. I'll explain to you why. Because at any given point of time Tether and Circle can freeze your money. You can't really move things permissionlessly. You can move it permissionlessly as long as Tether and Circle are okay with that. If you're choosing to transact with Tether and USDC, but I mean you could just choose Ethereum, Ether, Bitcoin.

No, right. No, in the case of just like cryptocurrency, we're in total agreement there. The same would be for Canton Coin. My point was very much when you're talking about a real world asset. That's my only point. When we're talking about a real world asset, you are effectively giving up trustless and decentralization.

You have, that's it. Why to use it on the most expensive database? Go to the most efficient database if that's all you're doing.

Because before blockchain existed, there was this wonderful company called Venmo. You could have moved money real time 24/7 for zero dollars. 24/7.

There's nothing inherently in Venmo that prevents Venmo from giving everyone access to Venmo.

But that's a commercial decision. That's why I'm saying like I think we should not mistake technology with a commercial endeavor. That's my only point. There's nothing inherently in the way that Venmo will build their application that would have prevented people in Venezuela to open a Venmo account.

Harder than just saying a commercial restriction. I think like Venmo was just barred from having any business association with any business in Venezuela. Like they just can't open a bank account in Venezuela.

But they can't on-ramp people in Venezuela to Venmo because they would need a local bank account.

For people to transfer from Venezuela to US.

So that's how they on-ramp. So technically speaking, Venmo today that offer crypto, if they wanted they can create a thing that hey send us your crypto and we will allow to buy.

We're back to a commercial decision because they're a regulated company and blah blah blah blah blah.

Sure. In the case of Tether, like I said, they have the power of freezing wallets. But using Tether to make a stable transfer in Venezuela is a lot easier than buying dollars than using a Venmo account because there just is much fewer intermediaries to deal with when you're just buying Bitcoin or Tether OTC and opening a non-custodial Ethereum account.

Yeah. And people still do it.

Okay. So they don't have issuers and then I'm completely bought in into the argument we wouldn't have this back and forth.

If not then public chains is composability and censorship resistance for decentralized public chains. Okay. If you want just fast and efficient money transfers then why don't you just use Venmo.

Because you want to do composability of stable coins. You're not just trying to transfer a stable coin. That's my point is if the use case is just moving money between wallets, just give me a wallet address, I'll send money. Give me a wallet address, I'll send money. The reason why you want to use public chains, again, I went back to it in the beginning. I started with it is composability. I want to compose a stable coin transaction against something else. That's where public chains in my opinion are extremely valuable.

Yeah. If one entity can bring all world assets under one roof. If you're right, they don't need a public blockchain and that's exactly what those companies are trying to do. My view is that in reality that is a very hard task to do and therefore you could allow people to bring assets that they have a lot of influence over stocks, bonds, money, insurance, whatnot. And then you can use the public chain to build all of these financial products that are a combination of composing all of these assets to one another. But technically speaking, if we just take Robin Hood, if Robin Hood have been able into their own L2 bring cash, equities from all over the world, bonds and fixed income products from all over the world, private markets from all over the world, all of these things under just one roof. You're right, they don't need a public blockchain.