Bullish on Ethereum: It has the potential to become the global financial settlement layer

Original Title: “What is Ethereum”

Author: Tim Robinson

Translation: Deep Tide TechFlow

Ethereum is the settlement layer for global finance, and it is the only blockchain capable of fulfilling this role.

If you are surprised by this statement, then this article is for you. Other blockchains will still host many useful applications and play roles in specific areas, but the global financial system will run on Ethereum.

What is a Settlement Layer?

A settlement layer is not a chain for consumers to use applications and trade with friends, but rather a foundational chain upon which other chains are built. It focuses on the following five aspects:

• Protecting other chains by storing data and verifying its correctness
• Deploying tokens and assets that will be used across the chain ecosystem
• Managing states that should be shared across multiple chains
• Providing native bridging for all connected chains, eliminating bridging risks
• Offering interoperability between all connected chains to transfer unlimited liquidity in the safest way without counterparty risk

These chains built on Ethereum are referred to as rollups or Layer 2, as they aggregate data into a blob and store it on Ethereum.

Ethereum's design as a settlement layer rather than a single chain explains why its market capitalization is so high, even though on the surface it appears slower and more expensive than other newer chains.

Why Can't the Global Financial System Run on a Single Chain?

Many blockchains claim to handle 10,000, 50,000, or even over 100,000 transactions per second, and if they can achieve that level, that would certainly be great.

The problem is that the scale of the global financial system will be at least 3 to 4 orders of magnitude larger—close to 10 million to 100 million transactions per second, or even more, especially after AI agents come online.

"But credit cards only need to handle 50,000 transactions per second to process all global payments," comes a response from someone.

That number is correct, but you have yet to realize the massive scale of the future financial system.

Think about how much television programming, books, and general information existed before the internet emerged in the 1980s. At that time, the creation and distribution of this content were limited to a few publishers, and almost everyone was forced to obtain information from a handful of distribution channels.

Then the internet arrived, and anyone could create blogs, video channels, or simply share their views with the world, becoming influencers.

The amount of content didn't increase by 10 times or even 100 times; it increased by a million times.

When finance is truly unleashed, and anyone can invest in or trade any asset—not just a few bonds, stocks, and real estate like today—the financial system will experience a similar explosive growth.

Stocks and bonds will seem as boring as traditional television does to the YouTube generation.

What will people do?

• They will invest in their favorite games, bands, songs, artists, bloggers, influencers, authors, books, and videos. They can fund any project anywhere and gain some returns or rewards from it.
• Collect and trade game items—millions of players will trade across thousands of games.
• Engage in the financial transactions currently happening on Wall Street, but scaled globally, allowing anyone who wants to participate to do so.
• Bet on anything.

Not only humans will be making these trades, but millions of bots and AI agents will be trading billions of assets everywhere, trying to gain an edge in millions of markets.

Do you still think all of this can run on a few PCs that can be globally replicated?

Perhaps none of this will come to fruition, and governments may stifle the fun, leaving us forever stuck trading boring stocks and bonds, but I doubt it. The younger generation is setting the tone for the future, and they are more interested in trading meme coins and game items than traditional financial assets, just as they are more interested in YouTube than television.

Why Does Global Finance Need a Settlement Layer?

Strictly speaking, it doesn't necessarily need one, after all, we already have a financial system running on many independent databases. However, when your system connects to all other systems through a standardized layer, the improvements in speed, security, and interoperability are obvious. 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 its neutrality—countries or companies that are even adversarial to each other can use this platform to settle transactions. In the past, when two countries were at war, they would use gold to settle debts because they did not trust each other's currencies or financial systems. Now, they can transact in any neutral cryptocurrency on Ethereum.

Why Does Every Financial Institution Want Its Own Rollup?

When Ethereum first emerged in 2015, many financial companies began experimenting with the technology, not to become part of the network, but to run their own private blockchains among cooperating companies. JP Morgan started the Onyx chain, Microsoft launched Ethereum Blockchain as a Service, and Amazon created AWS Managed Blockchain. Companies wanted private blockchains to maintain control—so they could implement compliance, KYC (Know Your Customer), AML (Anti-Money Laundering), and pause the chain in the event of a hack.

These private blockchains have not succeeded because they overlooked two useful reasons for blockchain: composability and permissionless innovation. Amazing things happen when people collaborate, creating complementary and extending each other's products, and anyone can contribute. When you remove these two elements, you end up with just a slower database.

Because Ethereum is a Layer 2-centric ecosystem, you can freely build your own sub-ecosystem with your unique features while still being part of the larger Ethereum ecosystem. ------ Vitalik Buterin

Through rollups, companies can enjoy the best of both worlds—they can create chains with any restrictions or controls while maintaining interoperability with the Ethereum ecosystem. They can implement KYC, AML rules, manually review transactions, and weed out bad actors, all just like they do on centralized platforms.

Now users can seamlessly migrate to their platforms in minutes, which also attracts developers to deploy useful applications for their customers. If their rollup uses the same language as other rollups, these applications can go live in a day. Developers earn revenue through fees, while companies get many additional services for free.

Coinbase pioneered this strategy; their Base chain was launched just a year ago and already has over 250 applications, and Coinbase didn't spend a dime to build them! Coinbase provides developers with incentives, including access to millions of users and billions of dollars in funds through smart wallets, creating a win-win situation.

This strategy of scaling products through rollups is gradually gaining popularity in the crypto ecosystem, with Kraken, OKX, and Crypto.com all launching their own Layer 2.

The world's largest asset management company, Blackrock, has already realized that the tide is changing and adjusted its direction ahead of other institutions. They recently launched a $100 million fund on Ethereum, and Larry Fink is optimistic about tokenizing everything for better interoperability and less overhead than other financial systems. Launching their own rollup and building an ecosystem before others is just a matter of time.

When financial companies realize what Coinbase is doing and what Blackrock is attempting, and they can gain users, liquidity, and a vast free developer base, launching their own rollup will be an obvious choice.

Why Can Only Ethereum Support This?

Ethereum is the only blockchain that is highly focused on supporting thousands of chains while maximizing decentralization, maintaining high uptime, and ensuring security. The current user experience of this ecosystem is poor, but this is a short-term sacrifice Ethereum is making to scale to millions of TPS within the next decade. Fixing the user experience is much easier than rebuilding the underlying infrastructure, and many projects are already working on cross-chain issues.

This system, serving as a support layer for thousands of other chains, is not something any other network can simply replicate; it requires a comprehensive overhaul of the entire ecosystem. You must create bridges, interoperability layers, shared sequencers, cross-chain MEV solutions, wallets capable of handling multiple chains, and applications that can recognize cross-chain assets. Ethereum is currently experiencing all these growing pains to prepare to become the foundational layer for finance.

Moreover, Ethereum has been highly optimized for this world:

1. It is designed to run on minimal hardware and only requires a regular internet connection, allowing nodes to be distributed globally and making it nearly impossible to destroy.
2. It is highly decentralized at the staking layer, with no single entity holding more than a few percentage points of the staked tokens. Any attack on the chain would require coordination among many companies globally, which is nearly impossible; even if someone attempts a takeover, they can be slashed by the community.
3. It is also highly decentralized at the software layer. Ethereum has 5 execution clients (Geth, Nethermind, Besu, Reth, Erigon), with 4 more in development (Megaeth, Monad, GPU-EVM, Ethereum Rust), and 6 consensus clients (Teku, Lighthouse, Prysm, Nimbus, Lodestar, Granadine). These clients are written by different teams in various programming languages around the world. This greatly reduces the likelihood of defects in the network; even if one client has a severe vulnerability, it is not enough to cripple the network.
4. All major upgrades are designed to support this settlement layer architecture. Ethereum aims to provide as much data as possible for Layer 2 and focuses on quickly verifying ZK proofs and other necessary technologies that make rollups work and achieve cross-compatibility.
5. The Ethereum community is more concerned with maximizing decentralization than any other chain. There is a large crowd in the community staking from home, running their own validating nodes, urging large companies to diversify their staking clients, and encouraging users to switch from large staking providers to smaller ones.

Yes, other ecosystems may try to pivot toward this rollup world, but they all face the innovator's dilemma—no company or group is willing to explore technologies that would disrupt their current working products. Moreover, all those wanting to build monolithic chains have already jumped ship from Ethereum to other projects, and almost everyone concerned with this highly scalable multi-chain world is engaged in Ethereum development or research. No other team can achieve this vision shift and acquire the resources and talent necessary to build the required ecosystem to compete.

What About Bitcoin?

Bitcoin is the most likely competitor to become this settlement layer because, like Ethereum, it focuses on decentralization and security, sacrificing almost everything else. Unfortunately, Bitcoin's greatest strength is also its greatest weakness—it never undergoes hard forks. The fact that Bitcoin does not perform hard forks means it cannot add many disruptive changes that are necessary to make rollups feasible. Without these changes, adding rollups and all the infrastructure that makes them trustless, secure, cheap, and fast is an extremely complex task.

Even assuming all its visions about Layer 2 come to fruition, it would still be slower, more expensive, and more complex than Ethereum, and it would lag many years in ecosystem development, making it difficult to compete.

What’s the Problem with Making the Base Layer Faster?

Everything in technology has trade-offs. When the base layer takes on more work, the requirements for running nodes increase, reducing the number of people and locations capable of running it, which lowers its degree of decentralization. It also has a higher risk of failure, leading to downtime, and downtime is the worst thing for a base layer because every rollup built on it would also be interrupted.

With the magic of ZK proofs, base layer nodes can verify millions or even billions of transactions across thousands of Layer 2s in just a few milliseconds. Nodes that process these transactions and create ZK proofs need to be very powerful, but nodes that verify them can be quite small. This means the only real task of the base layer is to store data, verify ZK proofs, and stay online. The lower the hardware requirements, the better it can perform this task.

Why Do We Need a Chain Ecosystem Settling to Ethereum?

Currently, there are some chain ecosystems that can interoperate with each other—Cosmos is one of the largest. These ecosystems make more sense than believing a single chain can do everything, but their common flaw is the lack of a maximally secure settlement and interoperability layer between them.

Without this foundational layer, you must individually check and trust the security properties of each chain, which is very difficult to reason about. And as tokens flow throughout the ecosystem, you not only have to trust the origin chain but also all the chains that these tokens pass through on their way to the final destination.

Having this shared foundational layer also creates a place to deploy cross-chain tokens or maintain shared states, ensuring they are protected by this layer and can be seamlessly transferred across all rollups.

Is This Inevitable?

In the long run, this trend seems as inevitable as Linux taking over the server space, only accelerated by financial incentives. Having a common standard platform that everyone uses but no one can control or restrict, or charge rent for, is very powerful and attractive for companies and various users.

The current financial system is fragmented, decentralized, and difficult to fix because there are almost no truly neutral participants to coordinate it. Moreover, once these neutral participants gain a monopoly, they often seek rent or impose their own moral codes. By eliminating human control over the network, we will achieve a financial system that best serves everyone. This is the financial internet we have been waiting for; it is just a matter of time before everyone realizes it.