What Do I Need to Know About Ethereum L2s?

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1:30Welcome back to another episode of Real Vision Crypto Daily Briefing, asking for a friend. I'm Nico Bruga, and with me today is Mike Rainbow, co-founder of Rainbow. Welcome back, buddy. How are you? What's up, Nico? Thanks for having me back. I'm so excited to have you back. As everybody remembers, a couple weeks ago, Mike and I went deep into decentralized exchanges. He showed us how we can connect to Uniswap and buy all of those fun meme tokens that we would like. Of course, not financial advice. But today, Mike, I think we're going to get into Layer 2s. So we obviously all know Layer 1s, Ethereum, Bitcoin, Solana.

2:10But tell me, what just are Layer 2s exactly? Yeah. So layer twos are blockchains that derive their security guarantees from a layer one. And additionally, they almost, I guess typically almost always have a very similar runtime as the layer one. So, for example, on Ethereum, we have a number of popular Layer 2s. Two of the biggest ones right now are Arbitrum and Optimism. Both of those run the same EDM that Ethereum does. So what that means is that developers who are building apps for Ethereum can super easily deploy that same application on these Layer 2s. And Layer 2s in general come with dramatically lower gas fees.

2:57we're talking about you know 25 cents for example uh to make a swap compared to like 15 dollars on ethereum for example actually just before you go on mike i think we actually have an image we can show just sort of breaking down some of those fees and how it sort of compares to each other yeah i mean just looking at this real quick you see stark net is 16 cents and ethereum would be$1.75. I mean, that's absolutely insane. Yeah. So these layer twos, like the main goal of them is to scale Ethereum. And really what that means, right, is making transactions cheaper, transactions faster, really with the goal of broadening, you know, the accessibility of this technology, right?

3:42There's, you know, not everyone in the world can afford to spend$50 on an Ethereum transaction to deposit money into something. And I think that what's exciting to me, at least about these Layer 2s, is how they create an opportunity for people to kind of play around with these applications without having to waste a lot of money on gas just to play around with them, right? Because I do think that playing around with these applications is the best way to actually learn how they work. Absolutely. And you showed that when you did your amazing walkthrough of Uniswap and SushiSwap and the Rainbow Wallets and everything the other week.

4:20And that was incredibly helpful. So besides from sort of lower gas fees, are there any other advantages to these Layer 2s? Yeah, I just kind of mentioned it as well. But so transactions on these Layer 2s confirm or like settle nearly instantly, right? I guess, you know, off the top of my head, I don't know the exact actual confirmation time that they have. But, you know, from the end user's point of view, they happen nearly instantaneously. So that's really cool. You know, on Ethereum mainnet, transactions can take anywhere from like 10 seconds to a couple of minutes. Right. So that's another big benefit as well.

4:59Yeah, let me think. I guess, yeah, really, the headline benefit here is the cost of transacting, without a doubt. Fascinating. Fascinating. And one thing I do want to sort of take a step back and touch on when we were talking off air just before we went live that I found fascinating and then plays directly into this L2 question is the idea of liquidity and automated market makers on SushiSwap. Can you sort of or Uniswap, can you sort of walk us through what that is and how layer two sort of become ideal for these purposes? Yeah. So, yeah, I was explaining to you, yeah, before the call, one of my favorite kind of example use cases of why Layer 2s are cool for regular people, and particularly beginners, is because doing things, so Uniswap v3, you know, you can add liquidity to it as a liquidity provider, and you can earn fees from people trading in that trading pair.

5:59Now, on Ethereum mainnet, in order to deposit money to become a liquidity provider, that can cost sometimes$50 or$75 in gas alone. And that kind of prevents, that makes depositing a much more sort of serious action. You have to kind of be pretty sure about what you're doing if you're going to deposit in there. But what's exciting to me about layer twos is it creates an opportunity for people to play around with these things for really low stakes. So, for example, again, on mainnet, it could cost$50 to deposit funds in there. Now, what that means is that that kind of rules out simply depositing$5.

6:39If you only wanted to deposit$5 just to play around and see how it works, you're kind of priced out on Ethereum mainnet. But on layer twos, like Arbitrum and Optimism, you totally can deposit only$5 into Uniswap. And more than that, it also allows you to do things like, so on Uniswap, when you deposit funds and you earn these trading fees, they kind of get collected off to the side. And you, the user, have to click claim to kind of claim those fees. And that costs gas too. So on mainnet Ethereum, you have to earn enough fees to justify claiming them because clicking claim is going to cost you$15 in gas.

7:22right whereas on these layer twos you know you could be far more sort of just like liberal or aggressive with the claiming of those fees and i find that to be just like a really um like i think that that is quite fun for a beginner like i think that that is like a really kind of like fun activity like clicking claim uh on on fees that you've earned is just like a really satisfying experience. And layer two is just kind of, yeah, broaden the accessibility of that, and make it just a far lower stakes to kind of just jump in and play around. Hey, everyone, we're going to take a quick pause and hear a word from our partners.

8:03We'll be right back.

8:08One of my questions then, and I think we're all realizing that asking for a friend, that friend is really me. And I somehow have been in this space and still have lots of stupid questions. But one thing I was curious then is like, why doesn't then OpenSea use a layer two to settle their transactions or do they? Because it seems like then that everywhere, every sort of marketplace, especially in the NFT world, where there's a ton of volume should be on an L2 so that gas fees are lower and transactions process more. So what's the deal with sort of OpenSea and L2s? Yeah, great question. So as an industry, layer two adoption is really just taking off now.

8:49And we're seeing the most sort of traction, you know, as far as adoption goes on the DeFi side of things. So OpenSea today does support these layer twos. The reason that you might not realize that or that, you know, many people might not know that is simply because as of right now, there's not a ton of popping NFTs that exist on these layer twos. So it's more of like a supply, you know, it's more of a supply issue. There's simply not enough sort of, you know, interesting NFTs that exist natively on these layer twos for it to kind of have taken off. Now, that's something that I think is going to be changing really soon.

9:27Rainbow, at least, is really focused on making layer two NFTs, you know, really happen this summer, for example. And I know for sure that there's other actors in the industry that are also kind of making a big push as well. So I do expect layer two NFTs to really blossom over the next, you know, six to 12 months, like without a doubt. Yeah. But yeah, that's kind of why it hasn't fully taken off on OpenSea yet. No, that makes perfect sense. So before we keep going, I just wanted to remind our viewers to join us in the conversation. Put down your questions in the chat wherever you're watching. We'll ask the best ones on air.

10:07Remember, Real Vision members take priority, but the good news is crypto membership is free. Go to realvision.com backslash crypto to sign up. And if you're watching on YouTube, tweet this link and follow Real Vision at Real Vision. So, Mike, one of the things I want to get into with layer twos is based on a conversation I had with someone who was like, okay, this crypto thing seems really cool, but I'm a small business owner. How can this make my life better? Are layer twos at the point or will they ever be at the point where they almost function like apps? So if I'm running my local wine store, I could create a inventory system on the blockchain just running on that L2?

10:52Or are we still a bit away from that? Great question. So, you know, you ask, are there, you know, are people using these L2s, you know, as applications? The answer is yes, but not really in the way that you described. So, you know, your question was, hey, as a small business, can I utilize this? The unfortunate answer is not yet. Crypto right now is still kind of a sort of a digital first ecosystem or sort of economy. And I, you know, I'm quite confident that this technology is going to benefit small businesses. Like I actually think a lot about that. And I really do think that once crypto actually like hits small businesses, it's going to be like a, you know, capitalist renaissance essentially, but that's not, that's not happening yet.

11:39And I do think it's a couple of years away. Honestly, the U S regulatory environment really hinders sort of the real world impact that crypto can make. The applications that are building their own layer twos tend to be, you know, crypto centric applications. For example, I know of some projects like there's an NFT related project that is building their own layer two. And there's, you know, some financial applications that are building their own layer twos. The reason that they're doing this is essentially because you can think of a blockchain as a highway. And sometimes, you know, the more people there are on the highway trying to use it, it can get congested and there could be traffic.

12:19But, you know, creating your own layer two, what you're doing is essentially creating your own highway. And if you're the only person on that highway, it can't really get jammed up, right? So by building your own layer two, these applications essentially kind of free themselves from the larger market kind of activity. So it's like if Ethereum gas prices are going crazy because everyone's doing lots of transactions, your users can still access your application reliably without having to worry about that congestion happening over there. Yeah, does that answer your question? Yeah, and so part of what I'm trying to get at is this sort of the future of what Ethereum and these L1s look like.

12:59And it sounds to me, and correct me if I'm wrong, that a lot of it is the way we will interact with these two years, five years, 10 years down the line will be primarily through L2s. And we won't even necessarily know that we're dealing with the Ethereum or the Bitcoin or the Solana L1. We're just existing sort of on all these various layer 2s. I do think it's going to end up something like that, for sure. Not all layer 2s are equal. you know, there are differences between layer twos. And I do think that it's not gonna be completely abstracted because if it was completely abstracted, then users might sort of unwittingly put their money into something that like isn't safe, for example.

13:47But I do completely agree that that's the end game. At Rainbow, you know, we're an Ethereum wallet, but we also support all of these layer two networks. And something that we're really focused on is making Layer 2s like a first-class citizen in our product. And what we're iterating towards is actually making Layer 2s the default experience in Rainbow. So if you're a newcomer and you get Rainbow and it's your first wallet and you go and try to use our in-app fiat on-ramp to basically buy some crypto, our goal is to have really soon here on-ramp people directly into layer twos, right? Because from an end-user experience point of view, like it's just an objectively better kind of first-time experience, right?

14:37The gas fees are significantly lower. Yeah. Hi, everyone. We're going to take another quick break and hear a word from our partners. We'll be right back with the Real Vision Crypto Daily Briefing.

14:52I want to sort of go back and touch on, I believe, I got all of these names you and I were talking about, they all sound like terrible sci-fi, like unobtainium and stuff. Yeah, it's a bit of an issue for our industry and maybe we'll fix it, maybe not. But Optimism and Arbitron, can you tell me a little bit about why those two have become so popular and sort of blown up in recent months on crypto Twitter? Yeah. So yeah, it is funny. These things have, you know, Optimism, love the name of Optimism. Arbitron and Ethereum, I think are just funny names. I think that they just sound super like nerdy.

15:28So yeah, Arbitrum and Optimism have both really blown up and seen a lot of attention in the last six months to a year, primarily because they are really kind of front runners here in building like secure layer twos, right? So the mechanisms that actually power these, you know, Optimism and Arbitrum, you know, like they are on a good path, right? Everyone believes in the path that they're on. And again, you know, from, you know, from an ecosystem perspective, a lot of projects out there that are building dApps, like whether they're financial or NFTs, et cetera, they all feel this pain of the Ethereum mainnet gas price, right?

16:10They hear from their users, hey, like, you know, I just want to buy this NFT that cost a dollar. Like, I don't want to pay$15 in gas to buy this$1 NFT. So, you know, you ask, like, why are these, why is Arbitrum and Optimism really popping off? It's because, like, there's a real demand for improving the end user experience of, you know, of Ethereum, essentially. So, yeah, like, more and more developers are thinking in this kind of, like, layer two first mentality, right where lots of projects actually you know will first launch now on these layer twos and kind of you you know that's their primary like are they using it like a beta testing and then they'll move on to ethereum or are they just going to stay as an l2 that's a good question honestly each you know i've seen it play out a few different ways and i've seen it play out exactly like you're saying like where they use the l2 as kind of uh you know a good example of Aave.

17:04So Aave had Aavev3 and Aavev3 had existed for, I don't know, off the top of my head, I'm going to say like six to eight months had existed as only being deployed on these layer twos. And then after kind of, again, like six to eight months of, you know, a clean track record, right, where the system was working properly, you know, there were no security issues, only then did they actually deploy Aavev3 on Ethereum mainnet. So, yeah, I do see it happening like that as well. I've seen other projects, though, where they deploy on Layer 2s and that's their end game. God, such an interesting ecosystem.

17:45How do you feel about taking a couple of questions from the audience, Mike? Let's go. Awesome. All righty. Richard Lirano, I hope I pronounced that right, Richard, on YouTube asks, Hey, Mike, when does the Rainbow extension drop? And this is a question I have too. So, Mike, can you first tell us what the extension is and give us a little bit of an update? Yeah. So, Rainbow, you know, we're an Ethereum wallet. Right now, or, you know, and historically we've existed purely as a mobile app. But, you know, a lot of Ethereum users use desktop computers as their primary device for interacting with these dApps.

18:25So Rainbow's been working on a browser extension version of Rainbow. And with that, we're going to finally have platform parity with MetaMask, meaning, you know, Rainbow is going to basically become, you know, a wholesale replacement for MetaMask with like a significantly better user experience. So, you know, Richard asking, when are we when is that dropping? Right. When are we launching that? And the answer is check your emails very soon, Richard. We are rolling out access to the extension to all of the people on the wait list in the next, like, I don't want to, I'm not going to commit to a date right here.

19:00But, you know, within the next two weeks, we're going to be start rolling it out to that larger wait list and shooting for a full release in Q3. Oh, very exciting. Very exciting. We'll definitely have to have you back just to talk about that and also drop some knowledge already. Next up, Ralph Humphrey, one of our favorites. He asks from the RV platform, what are some predictions you might make, Mike, about innovation in the blockchain space and for the impact of regulation? That is a whopper, obviously. Yeah, let me think. I guess predictions for innovation, you know, I predict the innovation will continue.

19:40I'm quite, I think that Ethereum, the pace of development in the Ethereum ecosystem is just mind-blowing to me. And I guess I'm more inspired and sort of excited and energized by the developments and the innovations in the ecosystem, like, you know, now more than ever. As far as the impact of regulation, I, you know, I think that, yeah, like, obviously, regulators can have quite an impact. Now, I think that if everyone, you know, everyone's following the situation, I think that it's quite clear that this is not your typical sort of regulatory regime here. The regulators are, you know, choosing to regulate via enforcement instead of, or, you know, aka regulation by surprise is a funny way that I've seen it stated.

20:28Now, I guess I call me naive or whatever, but I'm kind of a perpetual optimist here. And I don't think that America will make really critically bad decisions here. I'm quite confident that, yeah, that our representatives are going to sort of jump in here. I do think that, you know, clearing up the rules can make a huge impact, right? So honestly, so yeah, actually the answer to that question is like there could be huge positive impact from clearing up some of these rules and to basically lay out like a really clear regulatory regime. In doing so, I think would one, bring back a lot of liquidity to this space.

21:08And second, I think it would also just further entrench, you know, the United States as a leader in this industry. Right now, we are certainly at risk, like at serious risk of losing that dramatic lead as basically the industry's most talented people seek, you know, alternative jurisdictions, right? That's super unideal. We're talking about good people trying to build good faith projects that like actually improve the world. And they don't feel safe doing that in America, which is super lame. So we have to fix that. Absolutely. And we've seen this recently. I believe Galaxy Digital announced the other day that they're moving overseas or they're opening up some foreign offices.

21:49But it sounds to me, Mike, and I think this is why we get along so well. I'm a cautious optimist, although most people just consider me a complete optimist. It sounds like you have no plans to join some of the other crypto folks and skip out of the U.S. You guys are you've staked your claim here. Yeah, we love America too much. Yeah. Yeah, no plans of leaving. yeah yeah i mean it's it's i think it speaks to um it makes total sense there's no way we're going to change things here in america if we all pack our bags and you know take our football home with us we gotta stick we gotta work with our local um representatives and you know make our voices heard um god wow i'm getting up on my soapbox i'll uh i'll take my uh lennon cap off and We'll save the revolutionary talk for another time, good sir.

22:42Alrighty, last question before we wrap up. K Champagne or Key Champagne on YouTube asks, do you have any favorite L2s? And I know we talked optimism and Arbitron, so let's throw those out the window. Anything else besides those two? Anything else besides those two? You know, Polygon's awesome too. I think Polygon's cool. So Polygon is like, you know, people will get into semantic arguments about, oh, is Polygon a layer two? Or is it this other thing? Blah, blah, blah. Let's not get into that. Yeah, Polygon is cool as well. Yeah, really, I guess, you know, as a user personally, I primarily use Arbitrum Optimism and Polygon.

23:19I'm quite excited about some upcoming layer twos, though, because, again, it is this like, you know, came through an explosion where we have a lot of really interesting platforms kind of coming out. So, yeah, I'm quite excited about some of these new ones. you know i've got my eyes on this project called like fuel i think that that's very cool does feel i mean before you continue do they spell it like we assume they spell it or is it fuel yeah fuel like gasoline you know okay good they're not like phantom y in there no no no no i would tell you yeah don't worry nico um there's other ones you know even on this list that we had you know earlier in the video we flashed that like l2 fees.info website you know some of them the networks on there, for example, like StarkNet, StarkNet is still sort of like not a finished technology, you know, it's still in kind of its alpha or beta stage.

24:09But I'm quite excited about the future of StarkNet, for example. There's like a lot of things that can only be done on StarkNet, like StarkNet enables new, entirely new use cases, for example, like purely on-chain games and things like that that simply aren't even possible on these other Layer 2s. But, yeah, so I'm keeping my eye out watching StarkNet. Wow, absolutely fascinating. Mike, before we close out, any final thoughts you want to leave our audience with? Yeah, I mean, I highly recommend everybody play with Layer 2s. You know, download Rainbow. You can use the app to bridge between these networks, so it's super easy to take some ETH and, you know, send it between optimism and Arbitrum and mainnet, et cetera.

24:56Cannot sort of emphasize enough how like playing with these dApps is the best way to learn about how crypto works and how these DeFi applications work. Highly recommend just throwing in a hundred bucks. You know, that's all you need on these layer twos to really kind of like actually play around. So definitely, you know, recommend that, you know, play around, see what happens, learn how this stuff works, have fun. I love it although this speaks to how long we've been in this space but when you said throw 100 bucks it reminded me that that could buy you half of the heat in this year in 2020 like we gotta start building that time machine Mike the aliens Nico you know they might be here with that time machine pretty soon so and everybody if you ask enough maybe we'll turn asking for a friend into a full-blown alien Q &A episode where Mike and I will go galaxy brain on what the hell is going on with our beloved ETs out there.

25:55We don't want to, you know, that might set some new sort of records though for Real Vision all-time high like viewer count though. I'm not sure if we would want to, you know, rock the both that much. We'll see what the audience says, but thank you so much for joining us, Mike. Thanks for having me, Nico. Pleasure. Awesome. Well, that's it for today. Check out the Real Vision website. Today is the final day of our Festival of Learning campaign focused all on AI. You can get seven days of Real Vision premium access and insights for free. Head to realvision.com backslash festival of learning. No crypto daily briefing on Monday due to the Juneteenth holiday, but we have some stellar guests coming up later in the week, including Caitlin Long and our very own Raul Powell.

26:43See you Tuesday at 9 a.m. Pacific, noon Eastern, and 5 p.m. London time. Thanks for watching, everybody.