Canvas Research Report: Privacy-Focused Second Layer ZK-Rollup

Author: Web3CN

1. Project Name

Canvas is a DeFi Layer2 infrastructure based on StarkWare ZK rollups, serving as an expansion solution for DeFi. By enabling fast, zero gas fee transactions, it unlocks Ethereum DeFi DApps, allowing users to access the DeFi world in a cheap, simple, and secure manner.

2. Project Vision

Compared to other blockchain trading platforms, Canvas's vision is to become a decentralized trading platform that provides users with fast, cheap, and secure trading services, while offering a user experience similar to centralized exchanges, maintaining the advantages and security of decentralization.

Specifically, Canvas aims to enhance transaction processing capabilities through ZK-Rollup technology, achieving high throughput and low-cost transactions while handling massive transaction volumes. Users can achieve the ideal of instant transaction completion without paying exorbitant transaction fees.

Its CEO stated, "Our mission is to bring the next billion people into DeFi. We believe Canvas Connect will fundamentally change the way people trade on Layer 1 blockchains and unlock DeFi for everyone."

3. Project Features and Advantages

(1) High Throughput and Low Transaction Costs

Canvas utilizes ZK-Rollup technology to bundle numerous transactions into a single transaction, which is then packaged into a single Ethereum transaction submitted to the main chain, thus achieving high throughput and low transaction costs. This allows Canvas to handle more transactions without users having to pay high transaction fees.

(2) Decentralization and Security

Canvas is a decentralized trading platform that employs StarkWare's technology, enabling it to provide a user experience comparable to centralized exchanges while maintaining the advantages and security of decentralization. Canvas's transaction data is encrypted and verified and stored on the Ethereum main chain, ensuring the security and immutability of transactions.

(3) Simple User Interface

Canvas features a more streamlined and user-friendly interface that helps users trade more easily. Its goal is to provide users with a more convenient and intuitive experience, thereby attracting more users to its ecosystem.

(4) Multi-Asset Support

Canvas currently supports assets including ETH, USDC, DAI, WBTC, etc., allowing users to trade with various digital assets, providing more choices and flexibility.

The potential market for CBDC in foreign exchange (FX) trading and international remittances is significant. According to the Bank for International Settlements, the average daily turnover in the traditional foreign exchange market is $7.5 trillion. The total amount of remittances for global cross-border payments in 2020 was $23.5 trillion.

However, traditional services like SWIFT do not support 24×7/365 cross-border payments. This limits flexibility, leading to delays and higher costs. Public blockchains like Ethereum offer an alternative, but they lack privacy, scalability, compliance, and regulatory capabilities.

Canvas has developed blockchain-based market infrastructure to facilitate instant trading and transfer of CBDCs and foreign currency stablecoins.

Canvas Connect is a second-layer ZK-Rollup focused on confidentiality, designed to build the transfer, trading, and investment of digital assets in the financial sector, providing guarantees of privacy, confidentiality, instant transactions, and low fees. The platform adopts an API-first architecture aimed at supporting financial institutions in integrating digital assets, currencies, and CBDCs into their products and trading in the digital economy.

The founding of Canvas is based on the belief that blockchain technology, digital assets, and tokenization will fundamentally change finance and capital markets in the next decade, with trillions of dollars in securities and currencies being tokenized and traded 24/7/365 in a globally interconnected digital economy.

4. Development History

2018

Canvas was created as a research project by a group of blockchain and cryptography experts aimed at exploring how to use zero-knowledge proof technology to expand the processing capacity of the Ethereum network.

2019

Canvas became a partner of StarkWare and began developing a decentralized trading platform based on StarkWare's Layer 2 protocol.

Canvas released its white paper detailing its technical implementation and business model.

2020

Canvas announced the completion of a $2 million seed round of financing and officially launched its trading platform.

Canvas collaborated with well-known projects such as Chainlink and Kyber Network to provide more services and support.

Canvas released its V2 version, introducing many new features and improvements.

2021

Canvas launched its NFT trading market, allowing users to trade and circulate NFTs using Canvas.

Canvas announced the completion of an $8.5 million Series A financing round led by Multicoin Capital and other well-known investment institutions.

Canvas collaborated with Ethereum 2.0 developers to advance the development and application of Ethereum's Layer 2 technology.

2022

Canvas launched its testnet.

In the future, the Canvas team stated it would continue to focus on improving the performance and user experience of its trading platform and actively participate in the construction of the decentralized finance ecosystem.

5. Team Background

David Lavecky is the CEO and co-founder of Canvas. David previously served as COO and EVP of Pure Commerce, one of Australia's earliest high-growth fintech companies. After selling Pure Commerce to Euronet, David continued to drive global business growth and collaborated with major banks and significant merchants worldwide.

David is an experienced investor and entrepreneur known for mentoring portfolio companies in the startup community. He believes that the Web3 economy represents a paradigm shift in technology that will fundamentally change finance (and many other industries) in the next decade.

Earlier, as the managing partner of DoubleBay Capital, Daniel and his team invested in early-stage startups that disrupted traditional industries through innovation, disruptive technology, or new market approaches. He is also the founder and CEO of Pure Commerce, which he established in 1997 and sold to Euronet Worldwide (NASDAQ: EEFT) in 2013.

During his tenure at Pure Commerce, Daniel led the company through a period of explosive growth, managing millions of dollars annually to billions, with clients including Citibank, Fiserve, New Zealand Bank, and Korea Exchange Bank, among some of the largest financial institutions in the world. In 2013, he was hired by Euronet as CEO of Pure Commerce to continue the company's global growth. Pure Commerce's investors received over 10 times their return.

At Double Bay Capital, Daniel and his brother David have invested in some of the most exciting fintech startups globally. It can be said that Daniel's entire career has been about building and expanding companies.

Tim Moddel is the product lead and co-founder of Canvas, serving as a management consultant in the technology consulting field for over 15 years. As an experienced technology expert, Tim has long been interested in blockchain technology and began exploring blockchain startups and technologies as an investor in 2016. He believes these new technologies represent a paradigm shift that will fundamentally change the financial world and many other industries in the next decade. He is passionate about democratizing blockchain to enable the next 500 million people to easily access new fields of financial and investment opportunities.

His experience spans multiple countries, industries (financial services, logistics, retail, and manufacturing), and organizations in both the public and private sectors. He has led these organizations through complex digital transformations and cross-business application implementations (e.g., finance, supply chain, customer relationship management), helping them overcome industry barriers by developing new operational models and process frameworks.

6. Financing Information

No financing information for Canvas has been found in public records.

7. Development Achievements

(1) Canvas Connect

Canvas Connect is a Layer 2 solution based on StarkEx technology that uses STARK Proofs to batch DeFi transactions, specifically providing centralized investment and trading services for financial institutions. Connect overcomes the barriers of traditional blockchain infrastructure, offering faster, cheaper, and more confidential value transfer and payment-related information on Ethereum. For financial institutions, governments, and enterprises, it enables rapid implementation of blockchain-based finance without needing to understand Solidity or other blockchain programming languages.

The privacy, confidentiality, instant transactions, and low fees associated with asset transfer, trading, and investment are advantages of Canvas Connect. Additionally, it adopts an API-first architecture designed to support financial institutions in integrating digital assets, currencies, and CBDCs into their businesses and participating in digital economy trade.

Canvas Connect consists of the following smart contracts: StarkExchange, Committee, SHARP Verifier Proxy, SHARP Verifier, FriStatement Contract, Merkle Statement Contract, Memory Page Fact Registry, Cairo Bootloader Program.

For the current system, directly using DeFi technology is too difficult. In response, the market has seen centralized CeFi companies like Voyager and Celsius. However, CeFi faces many issues, and when CeFi companies pause withdrawals and go bankrupt, many investors lose everything. These companies take user deposits and place them into an opaque black box—this disconnects DeFi from the chain. On-chain DeFi allows investors to have complete control over their personal assets.

Self-governing DeFi projects like AAVE, Compound, and Ribbon have proven they can withstand multiple market crashes. This is because the platforms always maintain custody of collateral, ensuring loans are always solvent or liquidated immediately before insolvency, eliminating counterparty credit risk.

Canvas Connect allows traditional Web2 businesses to easily integrate into DeFi targets without trusting any centralized or off-chain activities, eliminating any centralized counterparty risk, providing a simple, fast, and secure solution for any Web2 business to access all the benefits and security of DeFi.

The larger the ecosystem on the blockchain, the greater the value. Ethereum is the largest L1 smart contract platform—it has the most dApps, the largest TVL, and transaction volume, meaning it contains the greatest opportunities and best prices. However, the problem with Eth L1 transactions is that they are very expensive, causing most investors to hesitate.

Ordinary users entering the DeFi space for the first time will choose a small portion to invest (also considering wallet balance, as a lack of balance to pay gas fees can lead to transaction failures), but when a single transaction's gas fee can reach hundreds of dollars (in and out), DeFi strays from its original intention.

Another challenge is dynamic pricing. If many people are trading on-chain, those willing to pay higher gas fees will jump to the front of the queue.

But Canvas Connect has zero gas fees, allowing users to trade freely without worrying about wallet balances for gas fees.

Canvas believes the three key features of DeFi trading are:

Investment—Ethereum L1 dApp of any amount, no gas required.

Trading—A new way to buy/sell/trade on L2 without paying gas fees.

Transfer (Payment)—Instantly transfer from one wallet to another without paying gas fees.

(2) Canvas Market Applications

Canvas Lend—Open-term lending market

Canvas Lend is an application that enables market participants to deposit tokenized collateral and borrow during open periods. Canvas Lend offers significant savings on transaction costs and increased transaction transparency.

Participants can choose fixed or floating interest rates based on their preferences and circumstances. All lending transactions are recorded on a distributed ledger accessible to all parties involved in the transaction. This not only ensures transparency but also reduces errors and reconciliation risks during the lending process.

Canvas Repo—Secured fixed-term loans

Canvas Repo is an application that allows financial institutions to exchange tokenized collateral for cash. Borrowers and lenders can access funding through new liquidity pools with flexible terms, lower risk, and year-round operation. Canvas Repo aims to improve banks' liquidity management processes and reduce operational risks.

Using blockchain technology, Canvas Repo transforms the repo process by enabling instant transactions and settlements at reduced costs. Canvas Repo can facilitate loan terms of days or even minutes, which is impossible in the current system. Participants can choose terms, borrowing amounts, collateral commitments, deposit amounts, and payment currencies.

CFX—Tokenized foreign exchange trading

Canvas's CFX is a low-cost, low-risk, year-round foreign exchange trading platform.

CFX enables frictionless, year-round trading of CBDCs and digital currencies in foreign exchange trading and international remittances. Compared to traditional foreign exchange trading and remittance networks, CFX significantly increases speed, reduces risk, and lowers costs.

All transactions on the CFX platform are settled atomically, reducing counterparty risk and improving reconciliation. This ensures that financial institutions can execute transactions with complete confidence and reduces the risk of transaction cancellations.

Prime—Digital asset portfolio management

Prime is Canvas's portfolio management system, providing financial institutions and their clients with a web-based comprehensive reporting system for managing the entire portfolio of digital assets.

Prime features four native modules: Valuation and Performance; Analysis and Research; Trading and Execution; Ecosystem Partners.

Sicuro—Confidential information transmission

Sicuro is a communication system that utilizes Canvas Connect (privacy Layer2) to enable secure financial transactions and confidential information transmission between parties on a public blockchain. This system ensures secure communication between parties on a public blockchain while protecting the privacy and confidentiality of transaction details. Information packets are encrypted by Ethereum, and the confidentiality of messages prevents unauthorized access to sensitive information.

Canvas Pay—Payments and liquidity

CANVAS Pay is Canvas's real-time payment infrastructure that enables instant transfers between multiple banks and currencies. Canvas simplifies cross-border payments by providing an instant end-to-end solution, allowing financial institutions to transmit CBDCs, tokenized bank deposits, and stablecoins. Transaction information is protected by Canvas Connect Layer 2, meaning immutable transaction data is written to the blockchain but is not visible to the general public.

8. Economic Model

Canvas currently does not have a token.

9. Fundamental Analysis

Analyzing Canvas's fundamentals begins with the most basic business it needs to address. One of the biggest challenges facing DeFi on the road to mainstream adoption is the excessively high transaction fees users encounter on Layer 1 (L1) blockchains like Ethereum. Its logic is similar to a person flying on a private jet, where all fuel costs are borne by one person. Like fuel prices, L1 fees can fluctuate dramatically, making investing in L1 DeFi a risky game, as users cannot determine the costs of entering and exiting. Moreover, these fees pose a significant barrier to mainstream adoption.

What Canvas is doing is through DeFi pooling, CANVAS Connect batches multiple DeFi transactions into a single proof, allowing investors to "share the L1 bill," benefiting from efficient, gas-free, and ultra-low-cost transactions while continuing to enjoy the security provided by the Ethereum mainnet. The analogy is similar to a significant transformation in the airline industry when Airbus and Boeing launched high-capacity commercial aircraft (like the A380), providing the general public with low-cost, high-speed air travel opportunities, as the more passengers there are, the less each person's costs are shared.

The Canvas team stated that Canvas Connect aims to become the leading airline, providing users with cheap tickets to the most popular DeFi destinations on Ethereum L1. At the same time, it aims to make it easier and more intuitive for more ordinary users to invest in DeFi.

Currently, Canvas's TVL (Total Value Locked) is $8.43 million, which is relatively low compared to Starknet's project TVL of $43.6 million. The TVL data also indicates that networks focused on DeFi projects tend to have lower scale and value anchoring than comprehensive networks.

10. Industry Analysis

Looking at the entire development history of DeFi, it began to emerge in 2019, defined as the "Year of DeFi," when the total locked value (or "TVL") of DeFi was $270 million; 2020 continued this momentum until Compound launched its governance token COMP, sparking a wave of liquidity mining, marking the first call to action for liquidity mining. Subsequently, DeFi's TVL began to grow.

According to industry data, by early 2022, the total value of the DeFi market had exceeded $40 billion, while at the same time in 2021 (early in the year), it was only $2 billion (as of November 3, 2021, TVL had reached $269 billion). In the first quarter of 2023, DeFi TVL exceeded $83 billion (DappRadar).

Compared to traditional finance, DeFi's decentralization and openness, the autonomy and control of assets, as well as the low entry barriers and costs for users to access DeFi, have made DeFi increasingly popular.

Currently, DeFi projects also show a trend of mutual competition, with Maker Protocol, Compound Lending Protocol, Aave Lending Protocol, decentralized exchange SushiSwap, liquid staking Lido Protocol, DEX Curve, etc., all attracting more users into the DeFi space with their respective advantages.

In particular, liquid staking attracted a significant market share in 2021-2022, primarily driven by the Lido Protocol. The Lido Protocol is built on the Ethereum chain using Proof of Stake (PoS) consensus, allowing validating nodes to stake the blockchain's native tokens to gain the right to process transaction blocks and earn block rewards. It allows users to stake the blockchain's native assets in exchange for staking rewards and tradable tokens for their staking positions.

Another factor contributing to the growth of DeFi TVL is yield protocols, which reward users for staking or providing liquidity on their platforms rather than directly on the target protocols. The driving force behind this is Curve.

From Canvas's development achievements, it mainly addresses the issues faced by traditional finance, including staking, liquidity, security, privacy, and services, while involving less of the core of the DeFi space. For example, the Canvas Repo application merely tokenizes collateral, which the author believes is still superficial.

11. Risks and Opportunities

Opportunities

The Digital Finance Cooperative Research Centre in Australia, in collaboration with the Reserve Bank of Australia, announced the invitation of a few companies to explore 14 use cases for eAUD (digital Australian dollar), covering everything from facilitating offline payments to providing tokenized invoices for businesses and even livestock auction services, with Canvas being one of the few companies involved. It will pilot foreign exchange settlements using Circle's USDC stablecoin and eAUD in collaboration with StarkWare.

In Canvas's view, the Web3 economy formed by blockchain, digital assets, and DeFi will be the driving force behind paradigm shifts in the next decade, fundamentally transforming finance and capital markets.

Canvas's CEO stated, "The digital information of the internet world, Web3 will revolutionize the way we interact, trade, and share digital assets. Investors can execute investment strategies simply and securely using Canvas. Issuers can tokenize assets, unlock liquidity, and enter new blockchain-based global capital markets."

Risks

The risks for Canvas are almost identical to those of the DeFi market.

Security Risks: DeFi projects often require users to store digital assets in their smart contracts, which may have vulnerabilities or be at risk of attacks.

Legal Risks: DeFi projects typically involve unregulated financial activities, and thus may face legal challenges from regulatory bodies.

Market Risks: The token prices of DeFi projects are influenced by market supply and demand factors, including market volatility, competitor activities, and the overall performance of the cryptocurrency market.

Liquidity Risks: If a DeFi project's market depth is insufficient or lacks enough liquidity providers (LPs), users may be unable to trade at desired prices or withdraw assets.

For Canvas, risks such as smart contract vulnerabilities, policies, market price fluctuations, and liquidity are all challenges it faces.