Hi everyone, welcome to another episode of Living on Blockchain. Today we are speaking to Karan Bharadwaj. Karan is serving as the CEO of Arithmic.
It is a company that is developing an L2 solution with native staking capabilities. They are touting this as the world’s first blockchain solution that enables and creates how L2 networks operate by introducing new mechanisms for yield generation and liquidity management. Karan has been working in this space for some time.
He’s worked as a CTO for several platforms before eventually starting his own. This was an interesting conversation, especially for the tech nerds and what these guys are bringing out in terms of the innovation with Arrhythmic. Their testnet is just about to launch.
I can’t wait for you guys to hear this. Let’s deep dive right in. Hi Karan, thank you so much for making the time to speak to me today.
How are you doing? I’m doing well, thank you for having me on your podcast. I am really pleased that you could make the time. Can you tell us a little about yourself and how you got into Web3? Yes, sure.
So my name is Karan Bharadwaj and I’ve been in the crypto space since 2016-2017. I have had the good fortune of building out on almost every level of the blockchain tech stack. I started out designing a hybrid blockchain protocol which had both enterprise use cases as well as public blockchain use cases for a project that has gone on to do very well.
It used to be top 100 coin market cap. Then I moved on to building out decentralized apps as well as some other protocol plays. I’ve had the good fortune of building out payment gateways, exchanges, OTC exchanges, a fair number of products in the crypto space.
Okay, awesome. So you’ve had quite an extensive journey with quite a background. You’ve worked on different kind of tools like you mentioned you’ve worked on every level of the tech stack in Web3.
So what led you to become the CEO of Arithmic and can you tell us a little about what the platform is all about? Sure. So about three and a half years ago, I came across proof systems. Proof systems are essentially what is behind ZK rollups, ZK slash Validity rollups.
And when I came across them and I really dug into them, really studied them, I realized that this had the potential of solving a lot of the technical bottlenecks that I had faced throughout my career building on the blockchain tech stack. And I got super excited by what proof systems promised. I found a chief scientist, my co-founder Vineet and I raised some funding and we’ve been building the Arithmic network which is a Validity layer 2 for the last about two, two and a half years.
Wow, wonderful. So like how did you decide that okay, this is the right time to perhaps start building on a platform like this? And can you tell us in perhaps one line, the USP of this particular L2 that you’re building? Okay, so what we found when we started building out in the L2 space is that there was a very serious problem of centralization, right? Now, I’ll put in context for you why centralization of L2s or any network is problematic, right? If you look at Bitcoin and Ethereum, over the last 10 years Farior so, more for Bitcoin, but let’s just look at a decade, they’ve had a lot of time to issue their token and distribute it. And how have they done it? So the way they’ve done it is they’ve invited multiple infrastructure providers, which can be individuals or pools to come to their network and take part in the consensus process in the essentially the proof of state proof of work consensus process, right? Now, for providing computation for proof of work, or in other words, for securing their networks, the protocols themselves would issue the base, the core currency, right, Bitcoin or Ethereum, and reward these people for providing computational services to secure their networks.
And over the last 10 years, they’ve issued and distributed on this model, right? And both have achieved a very high degree of decentralization, right? And the reason that they were able to achieve this issuance and distribution is because of the decentralization that they were able to achieve. L2, unfortunately, most L2 networks that have tokens, etc., they also want to issue and distribute tokens, right? They have their own tokens and they want to issue and distribute, but they are centralized. So there is a fundamental breakdown in creating a stable L2 network because of the centralization that affects L2 networks.
Okay, so you guys are changing that. Yeah, so now let me explain how we decentralize a L2 network and potentially decentralize the L2 ecosystem as well, right? So what we do, so we are building, we’ve built a ZKVM on the LassoJolt paradigm. And in order to secure this L2 network, what we do is we allow for retail users and institutions to come with state.
We take that state and we connect them to infrastructure providers who come and secure the network by offering computation. Now, on Layer 2, computation looks slightly different from Layer 1. We have proof made. So essentially, we have these nodes called provers that generate proofs.
So we have provers, we have sequencers, we have validators, we have data availability nodes, etc. So a lot of different kinds of nodes that exist on L2. So infrastructure providers that come and provide these services for securing the network, they are combined with the stake provided by retail and institutional holders of different currencies.
And once this basket of different cryptocurrencies, different currencies and tokens that retail or institutional investors, retail or institutional parties bring, the protocol rewards the infrastructure partners to a yield mechanism. And this yield mechanism is also then given to retail users who bring liquidity. Does that answer your question? It does answer my question.
See, so, you know, what happens is, and I would like to see you, you’re talking in terms of how the platform works, and I get it, but I would like you to perhaps put the USP in one or two lines, that would be jargon free. And, you know, folks who are perhaps not native to Web3 and not building, you know, in this space, but are curious about it can also understand what your platform does. Okay, so just like L1, L2 networks also require a lot of compute.
In fact, L2 networks require more computation than L1 networks to maintain the state or to maintain essentially the transaction list, the transaction, so account list, etc. What would be what that would mean in the conventional centralized sense, essentially the state of the network, right? And L2 networks require even more computation, because there’s a lot of proofmaking activity that happens. So there’s another level of computation that is required, right? Now, infrastructure providers, when they come and provide this computation, the protocol pays them for this service that they provide, right? But most L2 networks are already proof of stake or proof of work doesn’t really fit with L2 networks, right? So what the innovation that we’ve done is twofold, right? The first innovation is that we’ve allowed for a basket of different currencies to come.
So basically, a basket of multiple cryptocurrencies like Ether, BTC, certain LSDs, other L1 tokens like Matic, etc. Pretty akin to multi-chain staking protocols, right? Yeah, so we actually, it’s a multi-chain staking pool, essentially. So this multi-chain staking pool allows users to earn a high yield paid out by the protocol and for infrastructure providers to come and provide the computation that’s necessary to carry out proving, validation, sequencing, etc.
So what this helps us do is that this helps us issue our own token in a very organic manner. So against the computation that’s provided by infrastructure providers, so against proving activity, against sequencing activity, against validation activity, which is all decentralized, we are able to issue and distribute our token in a very organic and natural way. So not only do we fix the problem of issuance and distribution for a centralized layer to ecosystem, any network, but we fix the issuance and distribution problem as well, right? And what we further do is we extend this marketplace, right? Where multi-chain staking pools are coming, infrastructure providers are coming and getting matched together, we extend this marketplace to other L1s and L2s.
So now these infrastructure providers can provide computational services to other L2 networks. And so that allows our users to restate their currencies and tokens so that other networks are also secure. So what this allows us to do is it allows us to help decentralize the L2 ecosystem in general, and at the same time earning multiple levels of yield for retail and institutional stake.
Right. So the users are incentivized as well as the institutions are incentivized to use the network. So with any L2 or if you’re working on any sort of a blockchain protocol that becomes like the backbone for applications, and I’m saying this for the benefit of our users, you’ve mentioned how your protocol is different, but can you tell us a little more about the community building aspect and how are you incentivizing or bringing in more developers to actually build on your protocol? Great question.
So you should look, if I have to put what we do in a single sentence before I answer that question, I’d say you should think of us as the eigenlayer for layer 2. So what eigenlayer does is eigenlayer allows for restaking for Ethereum and some other LST tokens, etc. But it’s essentially mainly targeting L1 Ethereum. The entire L2 ecosystem, which processes about 22 times the bandwidth of L1 has the potential of having an even larger lucrative restaking ecosystem.
Right. And so if I was to describe what we do in one sentence, it would be we are the eigenlayer for L2 that targets L2. And how do we actually attract community? How do we actually attract developers, etc.
So because we are a restaking platform, the restaking protocols have a natural, how should I put it, a very natural synergy with us. Because so far, what they’ve been doing is they have been restaking on L1 Ethereum and then issuing their liquid staking derivatives on the basis of that staking activity. Now an entirely new set of networks can open up to them where they can restake either the native tokens of these L2 networks, or if they accept certain kinds of LSTs or Ether, etc., restake to our network.
So there is a very natural synergy between restaking protocols or staking protocols to work with our network. Right. And on the other hand, for other L2s and L1s, there is an equally synergistic relationship that we can have because we essentially decentralize their infrastructure.
So rather than them focusing on coming up with siloed individual infrastructure providers, which is what we are seeing today, they can they can allow for our marketplace to sort of decentralize their networks and at the same time fix issuance and distribution even for their network. So there’s even greater synergy for infrastructure projects to connect to us. Understood.
So obviously the infrastructure providers have an added advantage if they do join and they connect with you, they collaborate with you, then they can utilize the tech that you’ve already built and make their own network more robust. Yes. More decentralized and fix their issuance and distribution models.
Right. So would you say that you’re more B2B facing than B2C facing as an infra layer? I think that in the blockchain space, I don’t think that networks operate as a typical business since their goal essentially is to decentralize. Right.
So as if you were a centralized business, your goal is to keep increasing the size of the company and in proportion to the revenue, in proportion to the profits, etc. But in the blockchain space, the goal is to decentralize so that more and more functionality of the network is owned by the community. So in that sense, no matter whether our relationship is with projects, or it’s with other builders, or it’s with retail users, it’s we always look at it in the form of our community or the extended community, whether it’s the L2 ecosystem or the L1 ecosystem.
Right. So in terms of perhaps creating and building and working on a community, going back to the question that I had asked, what are the kind of initiatives that you guys are taking to make sure that you have like a robust community at hand before you guys take perhaps your native token is to listing? Right. So in addition to the things I listed, what we have designed are some events around key moments in our network’s journey, right? One is the testnet launch.
So the testnet launch is accompanied by an event where users can participate and they can earn certain points that translate into something for the mainnet event. Right. In similarly, when the mainnet goes live, we have an event around it, where we attract both users and builders, and we incentivize certain actions for both users and builders around that event.
And the core thing at the heart of both of these events is going to be the multi-chain staking pool. So the more liquidity that users bring, proportionally, yield numbers also increase for users. So we have like a system that we introduced to the users around these testnet launch events, the mainnet event, and then the event that comes after that.
Okay. I was about to ask you, what is the big next milestone for you guys? What are you looking forward to? You’ve mentioned several events and all of these, but can you give us a timeline around this? So the next big event that we are coming up with is the testnet launch, the public testnet launch. So we’ve done an internal testnet launch so that we could test it out, make sure it’s robust, the proving activity is happening correctly, et cetera.
The protocol is secure, et cetera. And now we have a public testnet launch and a public testnet event that goes along with it. So that’s the next big thing that we are looking to do.
And we are looking to do that in about a month’s time. Awesome. Awesome.
So in terms of the early interest in the test that you guys have run, what is the kind of results that you have seen? Have you opened it up to a small beta group? Have you gotten, received any feedback? Or has it been internal to your team? So it has been internal to our team and certain groups of other builders. Okay. And what is the kind of feedback that you’ve received so far? In terms of the numbers, the feedback is extremely positive.
So there are two parts to building out a ZKVM-based network, right? One is getting the protocol right. So if there are vulnerabilities in the protocol, then that’s going to be very problematic in the future, especially as we move toward decentralization. When you’re running all of this in centralized infrastructure, then obviously you will not have as many, I mean, you control the infrastructure.
So therefore, it’s as safe as you desire it to be. But once you start decentralizing, et cetera, then the protocol has to be very robust. So that is one of the things that we spent a lot of time on making sure that the protocol has been robust.
The second thing is that while, so when you read all these papers on new proof systems, et cetera, you’ll have performance numbers, you’ll see performance numbers. But those performance numbers, when you turn them into systems, meaning you turn them into functional networks, those can change, become worse depending on how you implemented the proof system. So we spent a lot of time in trying to streamline and make our proof system very efficient.
In fact, we’ve built out a number of proof systems over the last two, two and a half years. So we started out building out a stack-based system. Then we built out a bunch of different intermediary systems.
And finally, we’ve built out our ZKVM on the LassoJolt paradigm, because we think this is essentially the future of how ZKVMs will be built. And we are probably the first ones to have done it. So, you know, you’ve mentioned the VM, like your VM is powered by lookup table arguments, if my understanding is correct.
So you obviously then, you know, you feel that that is the reason why it delivers faster proof generation. Can you explain how this works? And basically, why is it a significant improvement over the older VM paradigms? Sure. So the older VMs, like this, like Starfetch, Cairo, etc., we call them Gen 1.0 ZKVMs.
So they’re Generation 1 VMs. So what they essentially do is they do a lot of additional computation. So think about it this way, you’re taking a bunch of transactions that could have gone on L1, and you’re routing them through L2, right? So the verification activity that you were doing on L1, you’re trying to reduce that time on L1.
And on L2, you’re doing a lot of additional computation on top of those transactions. What ends up happening is that you can, if the system is not designed well, you can see up to 20,000x overheads per transaction on layer 2. So essentially, per transaction, you’re doing 20,000 times the computation. Right.
And that has been the problem that has plagued Gen 1.0 ZKVM. And we’ve had a chance to build out those two systems. So we know very well that one of the ways that you mitigate it is by reducing the bit lengths in different parts of the protocol, but that makes your protocol less safe, less secure, right? So with the last virtual paradigm, there are new ways of using lookup tables, which reduce these overheads significantly, because you’re not actively doing essentially evaluating circuits, not fully evaluating the circuits.
Then you are recording, or you have these tables, which have results of computations already filled in, putting it very high level, right? So you’re essentially reducing the overhead for computation that you need to do on layer 2. Basically, the time reduces, right? As you said, on a very broad level and the macro level, if you have to explain it, the time reduces. The proof time is reduced drastically, yes. Right.
So can you tell us a little about the restating mechanism as well? Because these are the two innovations that you’ve mentioned, the advanced VM as well as the restating mechanism, which has multi-chain staking pools, right? So if you could tell us a little about those and how they work and how does… I think the benefit to the user is very obvious, but nevertheless, if you could underline that a little bit and highlight it a little bit as well, that’d be great. Sure. So I’ll describe both the staking and the restaking that people can do through our network, right? So at the first level of staking, essentially when infrastructure providers secure our network and retail users put their tokens in multi-chain staking pools, they stake against the computational activity on our network.
And so they earn a level of yield from the staking mechanism on our own arithmic network, right? So that’s the first level of yield that users are able to generate, to earn. And then we also allow for restaking on other L2s and L1s. So now users are able to earn yield based on yield generated on other L2s and L1s.
So that’s the restaking bit. And since we allow for LSTs, certain LSTs to also be part of the pool and weighted differently than Ether or BTC, et cetera, where users can earn yield on their already staked Ether, perhaps on a different protocol, or if they stake ETH to our protocol, then even on the LSTs that are generated from that staking. So at once you can see that the users are able to earn many levels of yield.
Right. So this becomes very, beneficial for the user because they are earning on multiple levels, as you mentioned. So how are you going about educating the end user for this? Because this is something new that you guys have brought in and the learning curve would be perhaps there to a certain degree.
Is there a content that you’re creating? How are you bridging this gap? So we’re doing it in a few different ways. We have a white paper that describes this mechanism and we’re constantly adding to that white paper to add more and more details. We have a Gitbook that’s going to be live very soon, updated Gitbook that’s going to be live very soon, which also works different kinds of users depending on their technical ability.
Then we have our website, which also describes this at another level. We have blog posts and blog articles that come periodically that explain not only our technical work, but also how the staking activity will work. And soon we’re going to have explainer videos of how the protocol works, how staking can happen, how infrastructure providers can connect to us, what are the chains and staking protocols that we’re connected to.
So all of these we’re going to be building out. And of course we have our Discord community with our mods, et cetera, who are very helpful and very happy to talk to our community members, no matter who they are. Right.
So for this particular testnet launch, are there offline events as well that you know you’re planning to pull to get a more engaged audience on board? Is it decentralized in nature? That also, I think you should answer. So we are going to be having some offline events as well. These will be around larger crypto events that will happen around the world.
We have, for example, we’ll be attending Token2049. We’ll be attending some of the North American events as well. These we will announce later.
We will have side events with other partners at these larger crypto events also. And in addition to this, we’ve come up with a sort of, not exactly a hackathon with a grant-based model. It’s slightly different, but it’s a much longer development cycle.
It’s offline in the sense that people can do it from wherever they’re based and they build over a period of time. And we have certain grants attached to that activity as well. So that is also something that’s upcoming for builders and developers.
Wonderful. So, you know, you’re really going to make your presence felt before the testnet launches. Can you tell us a little about your team who have been your backers so far? Yes.
So our team has basically a bunch of researchers, engineers, and some non-tech staff as well. Designers, marketing people, founder staff, etc. But a bulk of the team is very, so the researchers are all PhDs, masters, etc.
Mathematics and CS, because that’s a big part of what we do. And then we have dedicated engineers that work on the production system, essentially the finalized network that goes up and that’s stable. And so we have this process in which research gets turned into the final network.
And I also want to tell you about some of the academic work that we do. So very recently, our chief scientist and some of our other researchers have managed to publish a paper in CCS, which is a crypto conference, very high tier one crypto conference, actually. The research that we do, the goal of doing research for us is so that we can build out parts of the network through that research.
And so this research to network development pipeline that we’ve come up with, while it has been challenging to come up with it, it’s been very rewarding. And we have two other papers in the pipeline that will bring real gains to the network as well. Nice.
So you’re focusing, your team has obviously researchers and scientists, and you’re focusing a lot on your R&D, which I think are almost very good project, focusing on the basics and getting that right. So is your team entirely remote? Or are you working out of the same location? So we work, so some of the research activities that has to be done, which requires collaboration, requires those people to be sort of on site, you will talk to each other, sit and do research together. But we do have a more decentralized model with other builders, where they can be located in other geographies and build with us.
So we do both, depending on what part of the network. And have you raised any money so far? We have raised our pre-seed funding. And we are currently raising our seed funding.
Okay, how much have you raised? How much are you looking to raise? So we raised about 3 million USD, and we are looking to raise about 10 million in the next round. Okay, awesome. And is there a timeline for you to close this round as well? So we are doing, of course, the raising and building sort of take up different, rather than different activities, but we’re looking to close our next round of funding within the next month.
Awesome, awesome. So can you tell us, like, you know, you mentioned a little about how you see the infrastructure providers coming in and collaborating with you. Do you see those infrastructure providers as your primary users? Or are you looking at creating a niche for them and, you know, make way towards the retail users ultimately? Infrastructure providers will be part of the community, just like retail users will be part of the community, builders will be part of the community.
So infrastructure providers have been central to every network that has become successful. And it is not possible to decentralize your network without having a robust infrastructure layer. And that essentially decentralize your network and provides computation, right? Otherwise, you’re running your own infrastructure, there is really nothing blockchain about you, right? And the L2 ecosystem is such that everyone’s building in a silo, everyone’s running infrastructure in a silo.
So this is not just a problem of individual projects. But at this point in time, it’s a problem across the entire ecosystem. And so what I see happening in the future is a infrastructure provider layer that comes up for layer two, that looks very similar to the infrastructure providers for Ethereum.
So Ethereum has this layer of infrastructure providers that provide validation activities, that all of these staking protocols connect to. So any staking or staking protocols that you look at, they connect further to another layer of these businesses and companies that provide those validation activity that end up validating for Ethereum. And so today, the number of validators for Ethereum is about 1 million or slightly less than a million validators, right? So this similar layer is going to be created for the L2 ecosystem.
And we are trying to empower that layer and other L2 projects so that we can decentralize and fix this siloed, fractured problem that affects the L2 ecosystem today. That’s how we look at it. Right.
No, and that’s a good way to look at it. Because as you mentioned, that is a very fractured ecosystem. And bringing it together is the way forward.
So you know, you mentioned that partnering up with these guys is crucial to decentralizing their network as well as your network. Partnerships become are very crucial, I think, in Web3, any which way. So can you share a little about any strategic partnership that you guys have made so far? So we’ll have announcements around these in the upcoming month.
And we’ll have it on our Twitter, we’ll have it on Discord, etc. on our website as well. So our partners will be mentioned very prominently on our website coming soon.
And, you know, we’re in talks with a lot of the major L2s and some L1s as well. Of course, when we decentralize L1s, while we do talk to like their foundations, etc. It’s a decentralized activity.
So it’s just a question of extending the infrastructure of the partnerships. Right. So now zooming out a little bit and talking a little about the ecosystem as a whole, the L2 space has also seen like rapid change, right? What are the kinds of trends you see that will shape the future of the L2 solutions? In say, perhaps next year? I think a lot of the… So I’ll talk about one large trend that perhaps will go away with time, which is, from our perspective, two distinct kinds of L2s.
There are one kind of L2s that are building on infrastructure. So you have the Stark team, the Starknet team that’s building on infrastructure, the Polygon team building on infrastructure, etc. ZKSync, etc.
And then you have wrapper L2s, which sort of reuse, whether they use the CDK, whether they are building on Cairo, connecting to one of the optimistic L2s. So we have the wrapper L2s. Because the goal of every infrastructure L2 is to have as much liquidity and volume as possible, they’ll make much easier for other people to build on top of these infra L2s.
So the wrapper L2 ecosystem has just ballooned. So there are many wrapper L2s today, so to speak. And these wrapper L2s are bottlenecked by what the infrastructure, essentially the infrastructure L2s can do in terms of processing transactions.
So this is one broad, unexpected trend that we are seeing, and have been seeing for the last, let’s say a few months. I think there’ll be some kind of equilibrium state that will be reached, right? As models for the wrapper L2s and the infrastructure L2s sort of begin to coincide. Because most of these wrapper L2s are state-based plays, and state-based plays on Ethereum.
So we’ll have to see how this part of the ecosystem actually plays out. So that’s one trend that perhaps we’ll see some equilibrium activity in the future. Another trend that we see is people realizing certain bottlenecks on the variety roll-up side.
So they’re seeing that there are certain technical bottlenecks that certain system designs are fixing. But in terms of market cap, you’ll see that there is still quite a bit of major discrepancy between the optimistic roll-ups and the validity roll-ups. And on the side of the optimistic roll-ups, you find complete centralization.
So currently the model is that their foundations sort of hand out whatever has to be distributed, and the protocol and sequences are still centralized. And I don’t know how long they want to keep that centralized. But I think a way of getting all these projects to decentralize faster is to have decentralized projects that are as performant, as user-friendly, and have as big a reach in terms of developers and partners.
So that should be a trend that would be upcoming. Then there’s the trend of the Bitcoin-focused layer tools. The Bitcoin-focused layer tools are all built around some variety of Bitmean, which is used as a decentralized bridging mechanism.
There are some intermediate steps to reaching a full-fledged implementation of a decentralized Bitmean, and we are seeing the beginning of that now. So these are some of the trends we see, perhaps on a technical and economic level. Yeah, and I think one trend that we’ll see in the future is a very large liquid state and derivative ecosystem that is focused on L2.
That is something that we will see in the future. Okay. Okay.
Those are interesting observations. Can you tell us a little about the challenges that come in terms of creating and scaling L2 solutions? Okay, sure. So building an L2 network comes with a bunch of challenges, right? One is that the proving activity, when you’re making proofs, that is a very collaborative activity.
So in the past, blockchain networks have always had nodes sort of competing against each other, or now in the proof-of-stake paradigm, operate differently, right? But on L2, when you are creating proofs, you have a bunch of different servers that have to collaborate together and build out proofs over a large number of transactions. And because the protocols themselves are a little bit in flux, meaning they keep changing quickly, it’s very hard to decentralize that running of infrastructure activity. Because you want the servers to talk to each other in a particular way.
If let’s say, at some layer, multiple machines go offline, or those providers shut down, then you have to mitigate that by either redundancy or having someone else or some server step in. So all of these concerns and questions sort of are not even being looked at right now, purely because the protocols are so complicated to implement. And that’s what’s been happening.
So this is one of the reasons for a lot of the technical centralization that you see across L2s, right? And on the other side, with optimistic rollups, the sequencers are so lucrative for these companies, that decentralizing it is maybe a difficult business decision. Originally, actually, what we thought was, if the sequencers aren’t doing very well, any project would want to pump that money back into the ecosystem, right? Taking revenue away from the network reduces the value of your own network. So we had assumed that that would be the behavior pattern for optimistic rollups.
But we were quite surprised to see the opposite, where the sequencer is still centralized, and a lot of the revenue is being sort of, it’s a hard business decision, basically, to decentralize the sequencer for these optimistic rollups. That’s how I put it. Okay.
Yeah, I think there are several challenges, like you mentioned, when you’re working towards creating an L2 solution, especially now, I think, when there are way too many, you know, folks who are trying to actually change on the infra layer of things by building either, like you mentioned, an L2 or a wrapper L2, which is not necessarily a bad thing, because I think all of us are striving for the same thing. We are trying to create a more cohesive ecosystem, where, you know, users can be comfortable and builders can thrive. So it’s all a part and parcel, I think, of this particular journey.
Can you now shed a little light about the regulatory aspect and the regulatory scrutiny that is there on decentralized technologies in general, and how it kind of impacts the growth of an L2 solution like Arithmic? Oh, I, this is a tougher question to answer, because I see a few, a few key areas where I think some regulatory scrutiny will come not today, but later. And this, I think, would affect the entire ecosystem, not just the L2s. One would be on the staking and restaking mechanism.
I don’t think the regulators have come around to truly understand staking, restaking, and what the implications are in terms of whether these are securitized assets, what exactly the, I think that that thought has not come from the regulatory side yet. But perhaps it will at some later point. And that would be, that might be something that the L2 ecosystem and players in the L2 ecosystem would think about.
Another challenge, perhaps, is the restaking bit where you have a certain amount of stake that’s being restaked on multiple different chains. And what does flashing mean in the context of this activity, right? So for example, with Ethereum, let’s say, so today, a large chunk of Ethereum is staked, let’s say 35% is staked, between 30 to 35% is staked. And let’s say certain providers become very big.
For example, let’s say Lido. What happens if Ethereum needs to slash one of the largest staking pools? Forget 30%, even if it’s like 5% or supply in the context of supply of that token, etc. Slashing that has very serious ramification.
And then when you think about what are the regulatory implications of that activity, then it starts to become not so clear. So I think there will be certain kinds of regulatory inquiry into this space. But I think it’s far too early for them to, I think, have spent enough time.
Because from what we’re seeing, Western regulators are currently looking at layer ones and purely their ones and their activity, and trying to figure out how they should regulate them. We haven’t really delved into layer twos, right, on the regulatory side for Western regulators. And a lot of times the Eastern regulators sort of fall in line behind Western regulators.
That is what we’ve observed in the past. And then second, I think, once people figure out what end-to-end ZK means, today, we are all validity rollups, where everything we do is transparent, everything that’s on the main chain is transparent. But tomorrow, when true ZK or end-to-end ZK is sort of built out, then what are the regulatory implications for that activity? So that’s another thing that perhaps would come to the fore, but I think that that’s still some time off, because I’m not sure people fully have grasped how to do end-to-end ZK and build it out, be performant, etc.
That has not happened yet. But that will attract regulatory attention for sure. Right.
Yeah, you’re right. Absolutely. But I think, as you said, that this is not something that they have fully understood, and they’re not looking at it right now.
But once they do start looking at it, I think it would have widespread impact as well on the ecosystem as a whole. So, Karan, this has been a great conversation, but I’m almost out of time. And I would like to ask you my penultimate question before asking you that one question that I ask everybody who comes on the show.
I would love to understand from you, how do you balance the drive for innovation with the need to create, say, practical, user-friendly solutions, because this is a rapidly changing industry? What is your perspective there? Please share your two cents. So we don’t look at these two activities as separate from each other. We combine them together.
So we look at how innovation or research can be done and things implemented to solve actual real problems that exist in the L2 slash blockchain space. So, which is why, if you go through some of the even more formal research papers that we publish, you will find that those are addressing real-life problems that we face when we build out these systems. So every time we innovate, we innovate around problems that we face and our users face.
So that’s sort of how we look at it. We don’t just look at innovation that happens in a silo. Actually, I’m not sure if that is even possible.
So that’s my perspective. I think what this question perhaps was trying to go in the lines of was that, at times, one has all of these innovative ideas, considering you guys are pioneering innovation in the L2 space by coming up with something completely new, unheard of. At times, we, as builders, get ahead of ourselves and we get in that echo chamber where we are building on those innovative solutions without really looking at it from perhaps the user’s perspective.
But what you mentioned at the beginning of that answer, that you don’t have to disconnect those two. Even if there is an innovative idea, perhaps connecting it to how the user will approach that particular solution is a good thing to keep in mind. So that the innovative idea does not completely alienate the user.
Absolutely. Because if you’re just building excellent, innovative L2s that are just not accessible to users, then really you’ve not done much. And we’re quickly approaching a point where these chains, whether it’s Ethereum or whether it’s L2 chains, they’re very complicated and very difficult to understand.
And so fewer and fewer people understand all of it or large parts of it. I’m talking about at the implementation level as well. And I think part of it can be mitigated by us builders communicating better, us builders involving as many other people to participate in the building activity as possible.
And then having this very precise and consistent chain of communication all the way down to the user. So that’s something that we’re very passionate and we think about and we have like a bunch of blogs and videos to aid this activity. I think it’s very important to keep those two aligned.
Now, coming to the last question that I usually ask everybody who comes on the show, you’re somebody who’s, as you mentioned yourself, that you’ve built on a different layer of the tech stack in Web3. But even prior to that, you actively chose to perhaps build in this space coming from back on fintech and deep tech. How did you decide to make that leap? And what would be your suggestions for other folks who are perhaps looking to do that so that they can start living on blockchain? I’d say that if you have been part of the space, so I’ll answer in a slightly different way.
So let’s say you’ve been part of the space and you’ve looked at financial instrument in the conventional, regulated, credit-based, almost structuring. There are certain models in the space that work very well in a decentralized space that are also de-risked in some sense. And with the upcoming RWA, many RWAs in fact, I think that we’ll see more and more of TradFi having related, associated products in the Web3, in the blockchain space.
So for the TradFi folks, it would be very useful for them to look at what is possible, what kind of financial instruments can be made here. For builders, I think that building in the blockchain space and building seriously gives you a lot of skills because you’re forced to build at so many different levels. You’re forced to build at the networking level, you’re forced to build at the backend level, sometimes you’re forced to build at the front-end level as well.
So it really rounds you off as a developer. If you’re a developer who likes challenge and likes building out challenging things, then I think blockchain is a great place for you to sharpen those skills. So I’d say understanding where you fit within the Web3 ecosystem, what motivates you, where you feel excited and of course, there seems to be some liquidity as well.
These would be configurations for anyone who wants to be part of the blockchain and Web3. I think yeah, those are good suggestions and I think all our listeners should pay heed to them. Now, we need to wrap this up Karan, any parting thoughts before we do? Yeah, thank you for having me first of all and I think that we are very passionate about, so in spite of there being so many L2 projects, so much activity in the L2 and L1 space, serious builders are still fewer in number, much fewer than you would expect.
Very true. And even when we like to hire people, when we want to hire more people, it’s very hard for us to actually find good engineers. So we essentially train in-house, right? But that is very tedious as well.
But yeah, I understand why you need to do it. I’ve been there, done that. Yes, sometimes you have no choice.
You have to do it. Yeah, exactly. So serious builders, serious developers, Web3 would really benefit from having more of these people and we really want to help the L2 ecosystem by being very serious builders who also build look economically lucrative models so that people are also able to generate, you know, generate money, etc.
So we want to balance both. I think both is necessary today in the L2 space. Yeah, I think that is as good as any way to perhaps close this particular episode.
Thank you so much once again Karan for making the time to speak to me. This has been a very, insightful conversation and I’m sure that our listeners will have fun listening to it. All the best for everything.
Thank you, Tarusha. It was very nice being on your podcast.