Did L2 Fragment Ethereum? - With Yuval Rooz, Co-founder & CEO of Canton Network

Public blockchains are often seen as costly databases, but their true value lies in the composability of multiple assets. Yuval Rooz, co-founder and CEO of Canton Network, argues that moving stablecoins between wallets is essentially a central database update, lacking genuine decentralization. He believes that all assets will eventually have digital representations, allowing for on-chain management of trading, settlement, collateral, and loans. Privacy in transactions is crucial, especially for financial institutions, as it differs from anonymity, which can complicate regulatory compliance.

Rooz expresses concerns about relying on cryptographic technology for financial systems, citing past bugs in zero-knowledge (ZK) implementations as significant risks. While ZK technology could theoretically prove compliance without revealing personal information, real-world implications raise concerns, particularly regarding unauthorized access and onboarding individuals from sanctioned lists. He advocates for transparency in financial transactions, especially concerning collateral in lending, emphasizing that visible collateral is essential for secured loans.

Canton Network positions ZK technology as valuable for scaling rather than privacy, with plans to demonstrate effective uses in the near future. The network's structure allows users to create multiple Cantons, each operating under its own rules, similar to the autonomy of Swiss Cantons. This design enables diverse applications within the same protocol, with the smart contract, Damal, allowing applications to dictate their behavior independently of layer one constraints.

Cantons facilitate decentralized exchanges, enabling seamless trading of assets like wrapped Bitcoin and USTC across different Cantons. Unlike Ethereum, where transactions between ERC20 tokens require API calls and bridges, Cantons ensure that transactions either fully succeed or fail, eliminating reliance on external solutions. The conversation highlights the cost and efficiency of public blockchains, noting that while they offer composability for complex transactions, simple use cases like stablecoin transfers may not require their use.

Privacy is a key theme, with Cantons allowing sophisticated transactions while maintaining user confidentiality. An example is provided of a life insurance application on Canton, where personal information is securely stored, enabling stablecoin payments without revealing sensitive details. Cantons provide a unique on-chain transaction experience, granting owners full control over their design and governance.

The relationship between Cantons and Ethereum Layer 2 solutions is discussed, with Rooz arguing that L2s may detract from Ethereum's value by diverting economic activity away from the main network. In contrast, Cantons allow for private transactions without incurring mainnet fees, which is crucial for preventing users from opting for cheaper off-chain alternatives. The conversation reflects on the trade-offs between trustlessness and decentralization when dealing with real-world assets, emphasizing the importance of decentralized ledgers for permissionless transactions.

Concerns about centralization arise, particularly regarding the control of sequencers by entities like Coinbase, which could lead to censorship and undermine the trustless nature of public networks. Canton allows for both centralized and decentralized sequencers, with its Layer 1 validators being permissionless. The approach to validators focuses on utility rather than financial barriers, with super validators selected based on business proposals rather than monetary investment.

The discussion also touches on the DTCC's initiative to tokenize securities, with Canton chosen as the first blockchain for this purpose. The goal is to launch tokenized US treasuries, enhancing liquidity and impacting trading strategies by enabling on-chain holdings of treasuries. The potential for trading long treasuries with real-time conversion to stablecoins is emphasized, highlighting the need for more efficient money market instruments that utilize on-chain assets.

The conversation explores other use cases for Canton, including wrapped cryptocurrencies to facilitate private asset movement and the potential for private trading to mitigate the visibility of collateral movements. Various applications in sectors such as music, sports wagering, prediction markets, life insurance, annuities, and commodities are discussed, showcasing untapped opportunities in trade finance for crypto.

The future of Canton and its relationship with other blockchains is examined, questioning the binary classification of private versus public chains. The speakers argue against oversimplifying these classifications, noting the complexities that exist. There is hope for Canton to become a central hub, while acknowledging it may not be the only platform for blockchain activities. The conversation concludes with a recognition that economic realities will eventually influence the crypto space, along with a shared hope for a shift towards more sustainable practices.