The Rise of Layer-2 Blockchains: A Game-Changer in Crypto and Fintech

In the world of cryptocurrency, the success of Coinbase's layer-2 (L2) network Base has set a precedent for the future of the industry. According to OP Labs, the builder of Ethereum overlay protocol Optimism, it's only a matter of time until every crypto exchange and fintech firm runs its own blockchain.

The logic behind this trend is straightforward. Base, built using Optimism's OP Stack, has attracted an incredible ecosystem of users and developers, and its combination with Coinbase's bitcoin-backed loans allows for the monetization of dormant crypto assets through lending. This no-brainer solution has been a major driver of its success, according to Sam McIngvale, head of product at OP Labs.

"I expect every crypto exchange and every fintech company to run their own blockchain in the next five years," McIngvale said in an interview. "If you own bitcoin on Coinbase, in one button, they will take that bitcoin, move it to Base, which then lets you borrow USDC from it. And now you can go do whatever you want with that USDC."

Optimistic rollups, like those used by Optimism and rival Arbitrum, assume a transaction is valid with potential fraud detected through permissionless fault proofs. These rollups process transactions off-chain to reduce the computation load on Ethereum's base layer, deriving security by publishing transaction results on the underlying, or layer-1, blockchain. Another approach is to use zero-knowledge proofs to create rollups that publish cryptographic proofs of validity for off-chain transactions.

McIngvale, who was instrumental in building the custody business at Coinbase, also points out that simply holding crypto in cold storage on a platform can be relatively expensive due to security implications. "Traditionally, there's been a cost to custody a lot of crypto, because of all the security implications," he said. "Unlike custodying equities, where you don't really pay for that, those equities are lent out and things happen to them under the hood. Crypto is still much more nascent, but it's moving in that direction."

The trend towards layer-2 blockchains is evident in the crypto land. Global exchange Kraken has introduced Ink, a layer-2 blockchain that also uses Optimism. Bybit, Bitget, OKX, and fintech firms like Robinhood are also exploring their own L2s linked to Ethereum.

Optimism's modular vision of an interoperable "Superchain" would ideally allow users to go from one blockchain to another just as their browser moves from one website to another. "Early adopters in crypto were way more willing to put up with kind of crappy UX," McIngvale said. "People would wait 12 seconds for something to confirm and pay $50, because it was this new technology that they were exploring."

As the industry continues to develop and mature, the adoption of layer-2 blockchains is likely to become a norm rather than an exception. The future of crypto is looking bright with these innovative solutions that aim to improve user experience and reduce costs while maintaining security and interoperability.