Author: Tim Robinson, Mirror; Translated by: Tao Zhu, Golden Finance
Ethereum is the settlement layer for global finance.
It is the only blockchain that can do this.
If you are surprised by the above statement, then this article is for you. Other chains will still host many useful applications and play niche roles, but the global financial system will run on Ethereum.
What is the settlement layer?
The settlement layer is not the chain that consumers use applications and trade with friends, but the chain that other chains are built on top of. It focuses on 5 things:
Protect other chains by storing data and proving data correctness;
Deploy tokens and assets that will be used throughout the chain ecosystem;
Managing state that should be shared between multiple chains;
Native bridges that protect all connected chains, so there is no bridging risk;
Providing interoperability between all chains connected to it, it is the safest way to transfer unlimited liquidity without any 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 was designed as a settlement layer rather than a single chain, which is why many people find it confusing why its market cap is so high when on the surface it appears to be a slower, more expensive version of other new 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 it would be great if they could reach that level.
The problem is that global finance will be at least 3-4 orders of magnitude larger than this - closer to 10-100 million transactions per second, or even more, especially when AI agents are brought on-chain.
“But credit cards only need 50k TPS and they can process all the payments in the world” ~ Respondent
That number is correct, but you don't realize how big finance is going to become.
Think about how many TV shows, books, and general information there were in the 1980s, before the internet, when the creation and distribution of this content was limited to a handful of publishers and almost everyone was forced to consume from a handful of distribution channels.
Then came the internet, where anyone, anywhere could create a blog, a video channel, or become an influencer to share their opinions with the world.
The amount of content has not increased 10x or even 100x, it has increased 1,000,000x.
The financial system will experience a similar explosion when finance is truly unleashed and anyone can invest or trade anything, rather than just a few bonds, stocks, and real estate as is the case today.
To the YouTube generation, stocks and bonds will be as boring as watching traditional TV.
What will people do?
Invest in their favorite game, band, song, artist, blogger, influencer, writer, book, video. The ability to fund anything, anywhere and receive some benefit or reward for doing so.
Collect and trade game items — from millions of players across thousands of games.
Execute the financial transactions that Wall Street currently does, but scaled up to the entire world so that everyone who wants to participate can participate.
Bet on anything and everything.
And it’s not just humans making these trades, there will be millions of bots and AI agents everywhere trading billions of assets between each other, trying to gain an advantage in millions of markets.
Still think all of this can be run on a few PCs replicated around the world?
Maybe none of this will happen, governments 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 as they’re more interested in YouTube than TV.
Why does global finance need a settlement layer?
This isn't necessarily the case, after all we already have a financial system that runs on many different databases. However, the gains in speed, security, and interoperability when your system connects to all other systems through a standardized layer are hard to deny. Ignoring this is like trying to run your company on a private intranet after the internet has already begun to take over the world.
Another key attribute of Ethereum is that it is neutral - even hostile countries or companies can use this platform to settle transactions. Previously 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 use any of these neutral cryptocurrencies on Ethereum to trade.
Why every financial institution wants its own Rollup system
When Ethereum first emerged in 2015, many financial companies began experimenting with the technology, but with the intention not to become part of the network, but to run their own private blockchains between partnering companies. JPMorgan Chase launched Onyx Chain, Microsoft launched Ethereum Blockchain as a Service, and Amazon created AWS Managed Blockchain. Companies wanted private blockchains to allow them to maintain control — so they could enforce compliance, KYC, AML, and suspend the blockchain in the event of a hack.
None of these private blockchains have been successful because they ignore the two reasons why blockchains are useful: composability and permissionless innovation. When people work together to create products that complement and extend each other, and anyone can contribute, amazing things happen. When you remove these two components, databases become slower.
Because Ethereum is a layer-2-centric ecosystem, you have the freedom to independently build a sub-ecosystem with your unique functionality while also being part of the greater Ethereum. — Vitalik Buterin
With rollups, companies get the best of both worlds — they can create a chain with whatever restrictions or controls they like, while still retaining interoperability with the rest of the Ethereum ecosystem. They can enforce KYC, AML rules, do manual checks on transactions, kick out bad actors, do whatever they’ve always done on centralized platforms.
But now that users can seamlessly move 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 up and running in a day. Developers get income from royalties, and companies get many additional services for free.
Coinbase pioneered this strategy with their Base chain. Launched just a year ago, Base already has over 250 applications, and Coinbase didn’t spend a dime to build them! Coinbase added incentives for developers, including access to their millions of users and billions of dollars in funds through their Smart Wallet, making it a win-win situation for everyone.
This strategy of exchanges expanding their offerings through rollups is now 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 correcting course before other institutions notice. They recently launched a $100 million fund on Ethereum, and Larry Fink is bullish on tokenizing everything for better interoperability and less overhead than other areas of finance. It’s only a matter of time before they launch their own rollup and build the ecosystem before anyone else.
When financial companies realize what Coinbase is doing, what Blackrock is experimenting with, and where they can get users, liquidity, and a large free developer base, it will be a breeze to launch their own rollup.
Why is Ethereum the only one that can support this?
Ethereum is the only blockchain that is laser-focused on this mission, to be able to support thousands of chains while maximizing decentralization, uptime, and security. Today, the user experience of using this ecosystem is very painful because Ethereum sacrifices short-term fragmentation in exchange for the ability to scale to millions of TPS over the next decade. It is much easier to fix the user experience than to redesign the underlying infrastructure, and there are already many projects solving the cross-chain problem.
This system that is a supporting layer for thousands of other chains is not something that any other network can copy and paste, it requires a complete overhaul of the ecosystem. You have to create bridges, interoperability layers, shared sequencers, cross-chain MEV solutions, wallets that can handle multiple chains, applications that understand cross-chain assets. Ethereum is going through all of these growing pains now in order to get out of this and become the base layer for finance.
Furthermore, Ethereum is already highly optimized for this world:
It is designed to run on minimal hardware, with an average internet connection, so nodes can be everywhere and are almost impossible to shut down.
It achieves maximum decentralization at the stake layer, with no single entity holding more than a few percent of the staked tokens. Any chain attack would require coordination of many companies around the world, which seems extremely far-fetched, and even if someone were to start trying to take over, they would be slashed by society.
It achieves maximum decentralization at the software layer. Ethereum has 5 execution clients (Geth, Nethermind, Besu, Reth, Erigon), 4 more in development (Megaeth, Monad, GPU-EVM, Ethereum Rust), and 6 consensus clients (Teku, Lighthouse, Prysm, Nimbus, Lodestar, Granadine). These are all written by different teams in different parts of the world using different programming languages. This makes it extremely unlikely that there will be any defects in the network, and even if any of these clients have some serious bugs, they will not run enough of the network to bring it down.
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 focus on quickly verifying ZK proofs and other things needed to make Rollups work and cross-compatible.
The Ethereum community cares more about maximizing decentralization than any other chain. There is a huge community around staking from home, running your own validator, pressuring large companies to diversify their staking clients, and moving users from large staking providers to smaller ones.
Yes, other ecosystems can try to move to this Rollup world, but they all face the innovator’s dilemma — no company or group is willing to work on technology that disrupts their current working product. In addition, 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 hyper-scalable world is working on Ethereum development or research. It is impossible for any other team to realize this vision and obtain the resources and talent to build the ecosystem needed to compete.
So what about Bitcoin?
Bitcoin is the most credible contender for this settlement layer because, like Ethereum, it focuses on decentralization and security at the expense of nearly everything else. Unfortunately, Bitcoin’s greatest blessing is also its greatest curse — it never hard forks. Bitcoin’s never hard forking means it can never add major changes, many of which are necessary to make Rollups viable. Without these changes, adding Rollups and all the necessary infrastructure to make them trustless, secure, cheap, and fast is an extremely complex task.
Even assuming all of its ambitions for L2 are realized, it will still be slower, more expensive, more complicated to use than Ethereum, and will be many years behind in ecosystem development, making it unlikely to compete.
What's wrong with making the base layer fast?
Everything in technology has tradeoffs. When the workload of the base layer increases, the requirements for running a node also increase, and fewer people can run nodes from fewer locations, thus reducing the decentralization of the nodes. It also has a higher risk of failure, resulting in downtime, and downtime is the worst thing for the base layer because every Rollup built on it will also be interrupted.
With the magic of ZK proofs, base layer nodes can verify millions or even billions of transactions on thousands of layer 2 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 small. This means that the only real job of the base layer is to store data, verify ZK proofs, and stay online. The lower the hardware requirements, the better it can do.
Why do we need an Ethereum-based chain ecosystem?
Currently, all blockchain ecosystems work together — Cosmos being the largest of them all. This makes sense, and makes more sense than thinking that one chain can do everything, but the common flaw is that they lack the most secure settlement and interoperability layer between all chains.
Without this base layer, you must individually check and trust the security properties of each chain, which is difficult to reason about, and as tokens flow throughout the ecosystem, you must trust not only the originating chain, but all the chains those tokens moved 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 they are protected by this layer and can be passed seamlessly between all rollups.
Is this inevitable?
In the long run, this seems as inevitable as Linux taking over the server world, but accelerated by financial incentives. Having a common standard platform that everyone can use but no one controls and can restrict/rent-seek is very powerful and very attractive to all kinds of companies and users.
The current financial system is fragmented, broken, and difficult to fix because there are few truly neutral actors coordinating it. Furthermore, these neutral actors, once they achieve a monopoly, tend to rent-seek or enforce their own moral codes. By eliminating the ability of humans to control the network, we will get a financial system that works best for everyone. This is the financial internet we have been waiting for, and it is only a matter of time before everyone realizes it.
