By Tim Robinson
Compiled by: TechFlow
Ethereum is the settlement layer for global finance, and it is the only blockchain capable of fulfilling this role.
If the above statement comes as a surprise to you, this article is for you. Other blockchains will still host many useful applications and play a role in specific areas, but the global financial system will run on Ethereum.
What is the settlement layer?
The settlement layer is not a chain for consumers to use applications and trade with friends, but a foundational chain on which other chains are built. It focuses on the following five aspects:
Protect other chains by storing data and verifying the correctness of data
Deploy tokens and assets that will be used throughout the chain ecosystem
Managing state that should be shared between multiple chains
Protect native bridges of all connected chains and eliminate bridge risks
Providing interoperability between all connected chains, transferring unlimited liquidity in the safest way without counterparty risk
These chains built on top of Ethereum are called rollups or Layer 2 because they aggregate data into a blob and store it on Ethereum.
Ethereum’s design as a settlement layer rather than a single chain explains why it has such a high market cap, even though on the surface it appears to be slower and more expensive than other newer chains.
Why can’t the global financial system run on a single chain?
Many blockchains claim to be able to process 10,000, 50,000, or even 100,000+ transactions per second, and that’s great if they can get there.
The problem is that the scale of the global financial system will be at least 3 to 4 orders of magnitude larger - closer to 10 million to 100 million transactions per second, or even more, especially once AI agents come online.
“But credit cards only need 50,000 transactions per second to process all payments in the world” from one respondent.
That number is correct, but you don't yet realize the sheer scale of the future financial system.
Think about how many TV shows, books, and general information there were before the Internet in the 1980s. At the time, the creation and distribution of this content was limited to a few publishers, and almost everyone was forced to get their information from a few distribution channels.
Then the internet came along and anyone anywhere could create a blog, video channel, or simply share their opinions with the world and become an influencer.
The amount of content has not increased 10x or even 100x, but 1,000,000x.
When finance is truly unleashed and anyone can invest in or trade any asset, not just a few bonds, stocks, and real estate like today, the financial system will experience similar explosive growth.
Stocks and bonds will become as boring as traditional TV to the YouTube generation.
What will people do?
They invest in their favorite games, bands, songs, artists, bloggers, influencers, authors, books, and videos. They can fund any project anywhere and get some profit or return from it.
Collect and trade game items - Millions of players will be trading across thousands of games.
Conduct the financial transactions that currently take place on Wall Street, but on a global scale so that anyone who wants to participate can participate.
Bet on anything.
It’s not just humans making these trades, there are millions of robots and AI agents trading billions of assets everywhere, trying to gain an advantage in millions of markets.
Do you still think all of this will work on a few PCs replicated around the world?
Maybe none of this will ever come to fruition, the government will kill the fun and we’ll be stuck trading boring stocks and bonds forever, but I doubt it. The younger generation sets the tone for the future, and they’re more interested in trading meme coins and gaming items than traditional financial assets, just like they’re more interested in YouTube than TV.
Why does global finance need a settlement layer?
Strictly speaking, not necessarily, after all, we already have a financial system that runs on many independent databases. However, when your system is connected to all other systems through a standardized layer, the speed, security, and interoperability gains are obvious. Ignoring this is like trying to run your company on a private intranet after the Internet has begun to take over the world.
Another key attribute of Ethereum is its neutrality - even countries or companies that are hostile to each other can use this platform to settle transactions. Before, when two countries were at war, they would use gold to settle debts because they did not trust each other's currency or financial system. Now, they can trade in any neutral cryptocurrency on Ethereum.
Why does every financial institution want its own rollup?
When Ethereum first emerged in 2015, many financial companies began experimenting with the technology, not to become part of the network, but to run their own private blockchains between partnering companies. JP Morgan started Onyx Chain, Microsoft launched Ethereum Blockchain as a Service, and Amazon created AWS Managed Blockchain. Companies want to have private blockchains to maintain control - so they can enforce compliance, KYC (know your customer), AML (anti-money laundering), and pause the chain in the event of a hack.
None of these private blockchains succeeded because they ignored the two reasons why blockchains are useful: composability and permissionless innovation. Amazing things happen when people collaborate to create products that complement and extend each other, and anyone can contribute. When you remove those two elements, all you get is a slower database.
Because Ethereum is a Layer 2-centric ecosystem, you are free to independently build a sub-ecosystem that belongs to you, with your unique features, while being part of the larger Ethereum ecosystem. - Vitalik Buterin
With rollups, companies can enjoy the best of both worlds — the ability to create a chain with any restrictions or controls, while maintaining interoperability with the Ethereum ecosystem. They can enforce KYC (know your customer), AML (anti-money laundering) rules, perform manual audits of transactions, and weed out bad actors, all just like they would on a centralized platform.
Now that users can seamlessly migrate to their platform in minutes, it also attracts developers to deploy useful applications for their customers. If their rollup uses the same language as other rollups, these applications can be online in a day. Developers earn income through usage fees, and companies get many additional services for free.
Coinbase pioneered this strategy, their Base chain launched just a year ago and already has over 250 apps on it, and Coinbase didn’t spend a dime to build them! Coinbase offers incentives to developers, including access to millions of users and billions of dollars in funds through Smart Wallet, and it becomes a win-win situation.
This strategy of expanding products through rollups is now becoming increasingly popular in the crypto ecosystem, with Kraken, OKX, and Crypto.com all launching their own Layer 2s.
Blackrock, the world’s largest asset manager, has realized the tide is changing and is taking the lead in pivoting before other institutions notice. They recently launched a $100 million fund on Ethereum, and Larry Fink is optimistic about tokenizing everything for better interoperability and less overhead than other financial systems. It’s only a matter of time before they launch their own rollup and build an ecosystem before anyone else.
When financial companies realize what Coinbase is doing and what Blackrock is trying, and that they can get users, liquidity, and a large free developer base, launching their own rollup will be an obvious choice.
Why is Ethereum the only one that can support this?
Ethereum is the only blockchain that is highly focused on supporting thousands of chains while maximizing decentralization, maintaining high uptime, and security. The current user experience of using this ecosystem is poor, but this is a short-term sacrifice Ethereum makes to achieve scaling to millions of TPS in the next decade. It is much easier to fix the user experience than to rebuild the underlying infrastructure, and there are already many projects solving the cross-chain problem.
This system of being a supporting layer for thousands of other chains is not something that any other network can simply replicate, it requires a complete overhaul of the entire ecosystem. You have to create bridges, interoperability layers, shared sorters, cross-chain MEV solutions, wallets that can handle multiple chains, applications that can recognize cross-chain assets. Ethereum is going through all of these growing pains now to prepare to become the base layer for finance.
Furthermore, Ethereum is already highly optimized for this world:
It is designed to run on minimal hardware and requires only a normal internet connection, which allows nodes to be spread across the globe and is nearly impossible to take down.
It is highly decentralized at the stake layer, with no single entity holding more than a few percent of staked tokens. Any attack on the chain would require coordination among numerous companies around the world, which is nearly impossible, and even if someone attempted to take over, they could be slashed by the community.
It is also highly decentralized at the software layer. Ethereum has 5 execution clients (Geth, Nethermind, Besu, Reth, Erigon), 4 more are in development (Megaeth, Monad, GPU-EVM, Ethereum Rust), and 6 consensus clients (Teku, Lighthouse, Prysm, Nimbus, Lodestar, Granadine). These clients are written by different teams in different programming languages around the world. This makes the possibility of defects in the network extremely low, and even if one of the clients has a serious vulnerability, it is not enough to paralyze the network.
All of the biggest upgrades are to support this settlement layer design. Ethereum is trying to provide as much data as possible to Layer 2 and focusing on fast verification of ZK proofs and other necessary technologies to make rollups work and be cross-compatible.
The Ethereum community cares more about maximizing decentralization than any other chain, with large numbers of people staking from home, running their own validator nodes, pushing large companies to diversify their staking clients, and encouraging users to switch from large staking providers to smaller ones.
Yes, other ecosystems may try to move to this rollup world, but they all face the Innovator’s Dilemma — no company or group wants to work on technology that will disrupt their current working product. Furthermore, everyone who wanted to build a monolithic chain has already jumped ship from Ethereum to other projects, and almost everyone who cares about this multi-chain, highly scalable world is working on Ethereum development or research. No other team can pull off this shift in vision and get the resources and talent to build the necessary ecosystem to compete.
What about Bitcoin?
Bitcoin is the most likely contender for this settlement layer because, like Ethereum, it focuses on decentralization and security at the expense of almost everything else. Unfortunately, Bitcoin’s greatest strength is also its greatest weakness — it never hard forks. Bitcoin’s lack of hard forks means it cannot add many disruptive changes that would be necessary to make rollups viable. Without these changes, adding rollups and all the infrastructure that makes them trustless, secure, cheap, and fast is an extremely complex task.
Even assuming all of its Layer 2 vision comes to fruition, it will still be slower, more expensive, and more complex than Ethereum, and will be many years behind in ecosystem development, making it difficult to compete.
What's wrong with making the base layer faster?
Everything in technology has tradeoffs. When the base layer takes on more work, the requirements to run a node increase, and fewer people and places can run it, making it less decentralized. It also has a higher risk of failure, resulting in downtime, and downtime is the worst thing that can happen to a base layer because every rollup built on it will also break.
Through the magic of ZK Proofs, base layer nodes can verify millions or even billions of transactions across thousands of Layer 2s in milliseconds. The nodes that process these transactions and create ZK Proofs need to be very powerful, but the nodes that verify them can be very small. This means that the only real tasks of the base layer are to store data, verify ZK Proofs, and stay online. The lower the hardware requirements, the better it can do this job.
Why do we need a chain ecosystem that settles to Ethereum?
There are already a few ecosystems of chains that interoperate with each other - Cosmos being the largest of them. These ecosystems make more sense than thinking that a single chain can do everything, but their common flaw is the lack of a maximally secure settlement and interoperability layer between them.
Without this base layer, you have to individually check and trust the security properties of each chain, which is extremely difficult to reason about. And as tokens flow throughout the ecosystem, you have to trust not only the origin chain, but all the chains those tokens passed through on their way to their final destination.
Having this common shared base layer also creates a place to deploy cross-chain tokens or hold shared state, ensuring that they are protected by this layer and can be passed seamlessly between all rollups.
Is this inevitable?
In the long term, this trend seems as inevitable as Linux taking over the server space, just accelerated by financial incentives. Having a common standard platform that everyone uses but no one can control or restrict and charge rent is very powerful and attractive to companies and users of all kinds.
The current financial system is broken, fragmented, and difficult to fix because there are few truly neutral actors to coordinate it. Moreover, these neutral actors, once they gain a monopoly, often seek rents or enforce their own moral codes. By eliminating humans' ability to control the network, we will get a financial system that best serves everyone. This is the financial Internet we have been waiting for, and it is only a matter of time before everyone finally realizes it.
