"I Do Believe Ethereum Will Flip Bitcoin in the Next Four Years:” Balancer's Fernando Martinelli
And Illia Polosukhin, Near Protocol co-founder says "it's totally possible." Martinelli is bullish on Ethereum even as he believes DeFi will also thrive on other chains like Near.
In this week’s Defiant podcast episode, I speak with Illia Polosukhin, cofounder of the Near Protocol and Fernando Martinelli, co-founder and CEO of Balancer Labs. Near is one of the up and coming Layer 1 chains, Balancer is a prominent DeFi protocol and application on Ethereum that will now also be on Near and other blockchains.
Fernando explains why he wants Balancer to live on other chains, not just on Ethereum, and why Near is the first one he’s working with. As for Near being labeled an “Ethereum Killer” Illia says Near is “not trying to kill anybody” and still views Etehreum as the safest place for high-value financial transactions. He thinks finance is just a stepping stone for all the use cases enabled by blockchains and that Near can be the place where those consumer apps are built.
We talk DeFi summer with Fernando who believes liquidity mining is about making protocols more decentralized, with a healthier token distribution. He thinks using token rewards is not a fad and will be here to stay.
Fernando and Illia also talked about the Eth1 to Eth2 transition, and Illia says he thinks the best way forward is for people to opt-in to the new chain. while Fernando is optimistic about a more automatic switch.
About a multichain future, Fernando says DeFi will live on many different Layer 1s, but he sees the space expanding into less than 10, not hundreds of chains. He remains very bullish on Ethereum and is betting on a flippening with Bitcoin in the near future, which Illia agreed would be “totally possible.”
🎙Listen to the interview in this week’s podcast episode here:
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Fernando Martinelli: I'm a mechatronics engineer. I did a Masters in Vision Processing in robotics. I also did an MBA and tried the entrepreneurial route a bit. Naturally, I started founding companies very early on, and got involved in crypto in early 2013. At first, I think, as usual, I thought that Bitcoin was a Ponzi scheme, but was lucky to realize that it was not the case in early 2013.
When Ethereum came out, I was really excited with the idea of smart contracts. Because I had always had the idea that in order to get to mass adoption, Bitcoin needed to have some stability, or some type of stablecoin, and smart contracts are perfect for enabling that to happen. That led me to get involved very early on with the MakerDAO team with whom I collaborated and met the team in person very early on. This is how I got to know Nikolai and also, Mike McDonald, who is our CTO today.
Balancer was born from the early days MakerDAO community. Balancer was born in early 2018, so over two years ago. My motivation was to find ways in which AMMs could be serving as an index fund mechanism or protocol. So how can an AMM not only be an exchange. I had the idea of Balancer even before Uniswap was launched, but then Uniswap took more the exchange side of things. I had more the idea of having more flexibility to allow people who are providing liquidity to use the AMM as a portfolio management tool. So this is more or less how Balancer was born.
“My motivation was to find ways in which AMM could be serving as an index fund mechanism or protocol.”
Camila Russo: I think for those listening (or reading) who maybe aren't as familiar with Balancer, to me, it was really helpful to understand Balancer as kind of a way for anyone to create their own index fund. The way to do that is you're able to add many different tokens in a liquidity pool as opposed to just one token plus ETH on Uniswap. What that does is it gives you exposure to this basket of tokens and you get a token that's like a derivative of that pool. So effectively, you have this kind of investment in a basket that looks a little bit like an index of tokens. The other side of it is that people can actually trade in the liquidity of those pools, so you have kind of the asset management side and the DEX/AMM side. Really cool project.In the beginning when I first heard it, it was like a little bit hard to understand. But that's kind of the way that I understood it.
FM: Unfortunately it is. But you summarized it very well.
CR: Illia, let's get into your background and how you started with Near.
Machine Learning Roots
Illia Polosukhin: My background is actually in machine learning. I worked for about 10 years at a few places. Specifically, my last big company gig was at Google Research, where I led a team working on question answering, machine translation. I was always really excited about open source, a lot of machine learning is open source and actually was one of the biggest contributors at the time to TensorFlow when it was just getting released by Google. For people who don't know, TensorFlow is probably like, top five open source projects on GitHub, in the world overall.
So that was really exciting actually working in a big company, and at the same time really releasing something into the world, and really contributing and also working together with a lot of people around the world. There are really cool things where people would use TensorFlow for like classifying random things at their homes.
But in general, Google, even though inside, it's a very open place, but it has a lot of constraints just being a big company. I left it to start a startup because I wanted to leverage things that I learned and some of the machine learning tools in the wider world. Me and my co-founder, Alex, we started the company called Near AI, which was supposed to teach machines to code. So we really wanted to have a machine learning model that a normal person who does not know how to do programming would be able to explain what they want, and the computer would write codes for them. It's a very challenging task, a lot of people have been working on it.
Problems Paying People Globally
We had an interesting approach to collecting data. We built this platform, where student engineers usually around the world would actually contribute tasks. So they would write code and write some language for these things. It was kind of like what Gitcoin right now is doing was these tasks. At that time, we did not know what Gitcoin is, but we had a ton of problems paying people around the world. We had people in China, we had people in Russia and Ukraine, Poland, all these places have very different capital control requirements. This is like 2018, not that long ago.
We looked at crypto and Ethereum smart contracts as a way to solve our own problem. We were thinking, can we use pretty much crypto to pay people? Can we use smart contracts to actually create a more open, transparent marketplace so we can actually get more people to be participating and maybe pretty much creating more, like putting more money into this process so we can collect more data?
The problem is, even if it's 100 people, so we were paying about $0.30 per task, and people are doing them like once a minute. It actually would cost us at the time, about the same as we were paying in transaction fees on Ethereum. Probably right now, it's even more. So even at that time, just like a pretty simple task, and again, we had “hundredish” users, it's not even that big. It was pretty clear that Ethereum, albeit serving a very specific purpose is not actually kind of fitting what we call a more wide set of use cases.
We started looking at what are other platforms out there were able to serve this. Being from a technical background, my co-founder built sharded databases that are used across big companies like Goldman Sachs, Uber. At Google, we were pretty surprised by the state of blockchains. This is really where Near came out, really looking at, well, if we cannot even solve this pretty small problem, and as we were getting deeper into blockchain, we're getting more in the spirit of how these types of platforms can unlock new types of marketplaces that are impossible, really hard to do. With millions, and ideally, billions of people using them, you do need a scalable platform. So this is how Near started with that premise in mind.
“With millions, and ideally, billions of people using them, you do need a scalable platform. So this is how Near started with that premise in mind.”
CR: The market problem you were trying to solve, was it to enable a distributed network that was able to process smaller payments like micropayments and faster transactions, is that kind of the use case you started out with?
Handling Millions of Users
IP: Well, so the way we wanted to build that was really we wanted to do a lot of things on-chain because we wanted to create a whole application on-chain where people would contribute tasks, they would be recorded, and then as it gets used, people get paid through that and stuff like that. I mean, when you start designing things is on the whiteboard, there's a lot of things.
So really, we wanted a smart contract platform that can handle millions of users, at the same time processing things that maybe attached values that were reasonably small. Right now in Ethereum, if you're not sending $100, you probably shouldn't do it. Obviously, if it's more there's a lot of opportunity to make money, it's a great platform. But first, for anything, that's a task or a process or buying an item or a transaction of low value that, it's not worth it, just because there's such a big competition for the resources on Ethereum. So really, it was, how can we scale this up to an extent where you can build what we call now open lab applications, applications that go beyond just finance, go beyond just marketplaces, but actually can handle a lot of more logic and processing and connecting to real-world storage and all sorts of things.
CR: How did you go about achieving this more scalable network?
IP: The background again, being in building sharded systems, and pretty much our first approach is to build a sharded blockchain. At the time, actually, there was not much work done yet on how to actually build sharded blockchains. We've talked with a lot of people. We actually talked with Ethereum 2.0 team back then. We actually wrote a blog post, I think one of the first blog posts that was actually detailing how the sharded design looks like, we talk with a lot of teams.
But at the end, it is a sharded system, but the way, we were focusing on this making sure that developers have a reference that is pretty much not that different from building on non-sharded blockchains. Because there's a lot of things go into building a sharded platform, but we realized pretty early on that developer experience really matters, and it's really important to make sure developers don't need to break all their flows.
“[Near] is a sharded system, but the way, we were focusing on this making sure that developers have a reference that is pretty much not that different from building on non-sharded blockchains.”
CR: The way that you were able to make a more scalable blockchain was using this sharding model, which is what Ethereum wants to move to in ETH 2.0. Awesome. So, Fernando, what about Near attracted you to build there as well?
Flexible, Cheap, Strong UI/UX
FM: We are a very small team still, we're trying to expand. If anyone's interested in joining Balancer labs, please make sure that you get in touch. So we don't have enough resources in terms of people. We're still 100% committed to building with Ethereum or on Ethereum. But we know that there are other great solutions, like Near and all the other ones that we would love to experiment and test and see if there's product-market fit there. So what we're doing is we're giving joint grants with those teams to allow others, third party teams and hackers and audit teams, to build those integrations or to port Balancer to other Layer 1s and 2s.
Near is definitely one of the first Layer 1s other than Ethereum that caught our attention because they are, well, it's flexible, it's cheap, and it has a very strong focus on UI/UX for developers. So we believe that those are traits that are necessary for another Layers 1 to compete with Ethereum. We believe that there might be different use cases and different things, even within DeFi, there might be different types of users that would prefer to go to a faster, more scalable, yet probably less secure, at least in the beginning Layer 1s like Near. Because they're just providing $1,000 of liquidity or $100 worth of liquidity.
So it's not worth it to go to Balancer on Ethereum, or pretty much any product on Ethereum as Illia said, if you have $100, it will probably not make sense. There's definitely the need for more scalable, cheaper solutions for DeFi and other blockchain applications.
CR: What you're providing is grants for developers who want to build Balancer on Near and on other Layer 1s and Layer 2s as well?
FM: Near was the first Layer 1 partnership that we had along those lines. There are some other ones that are being kind of worked on, but probably soon we're going to release more and more on that.
Regarding Layer 2, we're still, let's say sitting and waiting and learning from other people's experiments. If we were to pick a choice, we're more bullish on ZK-Rollups. Because while we think Optimism is great, and optimistic rollups are great, but we believe that anything that will be successful has to be composable, has to keep this great feature that makes DeFi and Ethereum, great, which is composability.
The challenge, and the fact that it's not so easy to communicate with optimistic roll-ups, it's something that we believe could be a deal-breaker. Our stance today is we're not saying that this is going to be the winner and putting our chips on that. We're observing the space and already having some talks with ZK-Rollups teams.
CR: Illia, about this kind of composability of DeFi and Ethereum, DeFi applications going to Near, how can you keep that same composability with DeFi elsewhere beyond Near? I know you have this bridge that you’re building. How composable can DeFi or Near be with Ethereum on potentially other chains?
Keeping DeFi Composability
IP: There are a few things here. One is DeFi and Near specifically. I think it's pretty clear Ethereum right now is the source of DeFi in general, and it's, it's going to stay like that. Balancer’s main use cases, and main user group and liquidity will be on Ethereum just because this is where all the assets are originating.
I think there are definitely two things happening. One is a lot of new developers coming in for whom building on Ethereum right now, does not really make sense. They would like to build something where they can appeal to a broader user base, they can build sounds and more wider set of use cases. Also, just deploying contracts on Ethereum is also expensive now.
This is what Near fills in, and we still maintain this link to Ethereum through the Rainbow Bridge that you mentioned, which allows to pretty much communicate all the assets and all the tokens between the chains. Actually, Rainbow Bridge in architecture itself, it allows to call contracts between chains, but it is done through what's called an asynchronous manner. So it's not, usually when you have one transaction in if something fails, then there's a kind of everything rolls back, the whole transaction is invalid. But if you're doing an asynchronous thing, if something failed here, you just receive that it failed. You kind of need to deal with the stuff yourself.
The Bridge itself allows a contract on Near to call something on Ethereum and get back a response pretty much later, maybe a few minutes or hours later. So this suggests it does not provide the same composability as what people on Ethereum have, but it still allows to build some of the use cases.
“The Bridge itself allows a contract on Near to call something on Ethereum and get back a response pretty much later, maybe a few minutes or hours later. So this suggests it does not provide the same composability as what people on Ethereum have, but it still allows to build some of the use cases.”
I think generally, the Rainbow protocol itself is actually pretty generic. We actually are talking with few teams who would be interested in building it for Cosmos and even for some of the Substrate chains. You can actually connect to my Cosmos club or to maybe other newer chains that are launching soon. So it's possible to actually connect to anything that has a light client and some form of programmability on-chain. Bitcoin doesn't work, but everything else works.
CR: To understand better how the Bridge would work in practice: what I've seen in many of these solutions is that what you do is that you transact on one chain and then you use these bridges to turn Ethereum tokens to the tokens of the other chain, and that's basically the connection you get. But with this Rainbow Bridge, would it be possible to, for example, you have tokens on Near but you want to trade them on Uniswap on Ethereum, and would you be able to do that directly with new tokens? Or do you have to go through that process of exchanging your Near tokens to Ethereum token doing the trade on Uniswap and then going back?
Rainbow Bridge Architecture
IP: Architecturally, it's done how you describe it. As the tokens get locked on one chain, a mirroring version of a token gets minted on the other chain. From a user perspective, they just say, I want to send a token into another chain, and they just show up in their other wallet. So it's just like two wallets and they see the tokens disappear in this wallet and appear in this wallet. For a prospective user, it's just kind of one click, and so that depends on finality on things and timing. But then they show up and then you do your thing and then you can keep it there or send it back.
The interesting thing is the Rainbow Bridge, architecture wise, it actually allows the developers to build not just the token, but any information sending between chains. So if there are better ways, there's actually at one of the hackathons we had, somebody was trying to build a cross-chain pool, like an AMM pool, it's actually pretty complicated to do. But in theory, if somebody figures out the way and people are trying, you can actually build it on top of existing infrastructures that we have. It's fully composable such that you can build on top of it permissionlessly.
“The interesting thing is the Rainbow Bridge, architecture wise, it actually allows the developers to build not just the token, but any information sending between chains.”
FM: Just curious, does that pool have some assets on one chain and some other assets?
IP: Pretty much. The way they were suggesting to do it is that they would have pretty much pools on both chains, and then it coordinates to maintain the same level between them asynchronously from the user. The user just interacts with the pool as if it's a global pool, because the information still propagates. But the pool itself bounces out through the Bridge.
“The user just interacts with the pool as if it's like a global pool, because the information still propagates. But the pool itself bounces out through the Bridge.”
It's pretty complex, so I would not expect that to launch soon, soon, but I think it's a pretty interesting idea. I mean, it's like the Bridges are out there and people have been trying to build these things on top of it. We had almost, I think, 80 submissions for the hackathon, so pretty cool.
CR: Fernando, that would be a great use case for Balancer, right, you could have cross-chains pools?
FM: Absolutely. That's the reason why I asked. I think the biggest challenge for a protocol not only Balancer to be on many chains, is how to show that to the user and how to not make this confusing and complex. So I think solutions like that would be really a big leap forward.
IP: I think even on Ethereum, when there's a bunch of smart contracts, users finding their money across all the places is hard, even we have that already on Near, like our wallet is trying to show you all the things you have. It's already becoming complex and we just launched a few weeks ago.
But I think especially when many chains come into play, that's for sure becomes a very interesting problem. Where is your money? Which chain is it on? Especially, let's say you have Balancer multiple protocols, you have some other things like what does your portfolio actually look like? Also, how to manage it across all those. But yeah, I think it's really interesting. One of the grants we have together with Balancer is to implement it in Near wallet. What Near wallet is trying to become, is this kind of portfolio viewer as one of its points. It will show you all of your assets where they are and it actually makes sense to add Ethereum assets as well over time because people will have them across multiple chains.
CR: Fernando, I wanted to take a chance to chat with you about this crazy DeFi summer we had and how Balancer was a part of it with liquidity mining and the crazy governance exploit that you had within that program. It was a pretty crazy time. So I'm interested to hear your thoughts on the lessons you learned from this craziness. What did you think about rewarding users with tokens for liquidity? Is that something that that you see you’ll continue doing, going forward? Was it more like a fad? What are your thoughts?
Lessons from “DeFi Summer”
FM: I think it was great and I think it's here to stay. The main point of liquidity mining is not to incentivize people to provide liquidity, or to distribute rewards. It's really about making your protocol more decentralized and having a healthier distribution. We never wanted to be a VC coin, or VC protocol. It kind of comes back to our origins of the early MakerDAO guys were really libertarians.
The idea is that we want to give ownership and distribute that ownership for a lot of different people that are involved and care about the protocol. We believe that this is the only way it will survive and thrive in the long term. I think there are different ways you can do that. ICOs were very popular two years back, or airdrops, and we think that those two really were effective. I think liquidity mining is so far the best tool we have for that.
I believe that, of course, when anything new comes around, and people talk a lot about it, and there's a lot of hype, then DeFi tokens went up a lot. Then I think it's part of a market cycle that people get more their feet on the ground and see things with more, yeah, I'd say, more technically, prices corrected. I don't think it's a fad. I think Balancer and other protocols will keep distributing tokens to users of the protocol. There are different ways you can identify who are the users. There are lots of other projects actually that use Balancer as their tool for distributing tokens. If you contribute liquidity into that pool, or if you vote on Snapshot, which is a tool that actually we created, and meet totally open for all the other projects.
“I don't think [liquidity mining] is a fad. I think Balancer and other protocols will keep distributing tokens to users of the protocol.”
CR: I didn't realize that you created Snapshot.
FM: So it's a Balancer tool. Well, we never really brag about it. Or we never wanted to put Balancer or our logo there, because we really wanted it to be very neutral, and for everyone to use it. I think Ethereum and blockchain, it's all about people creating tools that everyone can use and everyone building together.
I really think that we learned a lot. You mentioned all the different ways people try to tweak and game the system. We knew that there were a lot of shortcomings and things that were not 100% perfect with the liquidity mining program as we launched it on day one. But we knew that and we wanted the community to realize those shortcomings and propose ideas to improve them themselves. We really want the community to make sure that Balancer evolves in a decentralized way.
Even though we're very young, we're trying to ready to be as little involved in terms of decisions, in terms of governance, and how to distribute tokens as possible. But of course, it takes some time to get decentralized. I think it's been a great ride and I am very happy actually with how everything played out. Other projects will keep doing liquidity mining or other types of mining like user mining in a way, rewards, give your users some ownership of your protocol. Because that's how you make something great by having the future decisions made by people who are actually involved in using the protocol.
CR: It's a great point that for Balancer, you benefit potentially from liquidity mining but also from other people using your protocol for their own liquidity mining as well. So in that sense, does the protocol itself, does Balancer Labs itself, earn fees from people trading? Or does it go just to liquidity providers for now?
FM: Fees go just liquidity providers. Balancer, the protocol doesn't take any fee at all. Many protocols will eventually consider, and it's definitely up to governance. In the same way Uniswap has this switch where governance can turn on one-sixth of the fees going to Uniswap, the company. Probably in the future, Balancer, in newer versions, there's going to be this option for the community, the BAL token holders, the governance to turn on a fee, and what level, what amount of what percentage of fees, it's going to be all up to governance, to all token holders.
“Fees go just liquidity providers. Balancer, the protocol doesn't take any fee at all. Many protocols will eventually consider, and it's definitely up to governance.”
CR: Makes sense, because otherwise, it's not very sustainable. How does the product make money and pay developers?
FM: Absolutely. Yeah.
CR: Illia, so I want to hear more about what's going on with DeFi on Near. What is that ecosystem looking like?
DeFi on Near
IP: As I said, we launched like a few weeks ago, so it's only bootstrapping. I mean, our positioning on this, in general is when it brings the core financial components, so AMM and portfolio management for Balancer is one of them. There's obviously a need of oracles for price feeds. So we've been working with Chainlink on that, there is a need in some lending, a need in some, risk management, prediction markets. So really trying to bring those core components and then this would enable all the developers to really build on top of, trade and combine this.
Near originally started by promoting WebAssembly so we can bring more new developers into the ecosystem. We have support for Rust and Assembler script, which is like the TypeScript language. This is easier to bring new developers in, but obviously, the existing developers and existing code is harder. We’re actually launching EVM support, which really allows a lot more existing Ethereum developers and new Ethereum developers to experiment on Near and launch, maybe even existing protocols. Or the things that people like to do where they take code from few things, mix it up a notch, and then launch that, so it really kind of enables developers to experiment with that. I'm really excited to see how this will evolve in future hackathons and hopefully future launches as well.
CR: It seems like it's still in very early days and just figuring out how to get developers to build all the main pieces needed to get the financial ecosystem growing, right?
IP: Near launched on fully decentralized on October 13th, so yeah. Right now's the time to lay out the basic infrastructure, both like financial, like Rainbow Bridges, like cross-chain infrastructure, we’re also looking at some indexing and everything, really starting to build toolset. I guess, the developer if you talk with anybody in the Ethereum ecosystem right now, they have like a list of things they expect that they want to build on top and so really kind of need to be ready for that. But at the same time, there's a lot of people excited to work on something and try new things as well. Been really exciting to support them.
CR: How do you see a Near’s relationship with Ethereum? The term “Ethereum killer” is thrown around a lot with new Layer 1s. Do you see Near competing directly with Ethereum? Or do you see it going to a different set of applications? Because it does sound like you are trying to also become a DeFi chain and that's directly what Ethereum is known for at the moment.
Friend or Foe
IP: I wouldn't say we're trying to become a DeFi chain. We are trying to have a core set of financial instruments such that developers can build using them. I mean, obviously, this will need some liquidity, it will need some usage. But at the end, I think the current Ethereum will continue operating. It is kind of the most secure place we have. If you want to issue new assets, it is probably more secure place to start. But at the same time, for anything that's complicated logic, complicated processing, Ethereum is becoming a really small place to be staying.
For example, taking Balancer. People want to build more, people want to build on top. People want to take contracts and build more things in. At some point, the amount of gas that you need to process, the amount of processing and logic that people want to build, it just doesn't fit. This is finance, but there have been so many ideas on how to use blockchain and none of them really pan out because they are way more complex, and require quite a lot more logic.
So I think, that is what Near provides. It's a place for people to actually build all those use cases that have been envisioned and experiment more while still having this connection to Ethereum. We're definitely not trying to kill anything, and so actually tweeted a few days ago that we wanted support Ethereum development itself, because at least when I looked at it, it didn't look like OpenEthereum was being developed much. I was actually mistaken, it was developed in a separate repo.
“We're definitely not trying to kill anything.”
But in general, we’re supportive and a big part is because we need Ethereum to continue working, but also, because we actually use parts of the OpenEthereum code base as well, and so when our support financially and development-wise, how we can talk with folks as well. So like not trying to kill anything, I mean, we have always been pretty friendly with everyone.
For whoever didn't see we have this whiteboard series, which is a YouTube series where we interview a lot of other protocols and pretty much get those people to explain and we also ask them very interesting questions, so we cover a lot. We had Ethereum 2.0 there, we have Polkadot, Cosmos, pretty much a lot of protocols. We have Maker, we had Augur. So really trying to bring more knowledge and also support to others, like on the code level where we can, with research where there's alignment as well.
CR: You mentioned that thread and I wanted to ask you about it because it was a little bit controversial, right? I think the point that I wanted to talk about with you was this idea that you won't be able to port ETH 1.0 to ETH 2.0 and that ETH 1.0 is kind of the Ethereum chain that will be here moving forward. It sounded like you were being pessimistic about the development of ETH 2.0. So wanted to ask you if that was the case, or what was your point with the thread?
ETH 2.0 Transition
IP: To start, it was definitely hard to express what I wanted in those very chunked Twitter threads. I'll need to learn more how to express what I mean in that. I think, so there's few things. This is not the pessimism for the development of ETH 2.0. I believe people can build ETH 2.0, but I believe ETH 2.0 is a new network. It's a new network that's launching separately that obviously has a connection to ETH 1.0. By this connection, at least right now, at the beginning is actually more of like a bridge type of connection.
This transition from ETH 1.0 to ETH 2.0, there's a lot of moving pieces. To be honest, I haven't seen some of the recent posts and both Hudson and Vitalik actually linked me to some of them, so I'll catch up and update my opinion. I'm totally, totally ready to acknowledge if I'm wrong. But from my perspective, ETH 1.0 is a proof of work chain, and proof of work has very different parameters and different economic and security parameters than proof of stake and especially sharded proof of stake. It's like we build a sharded proof of stake, so we know all the potential fallouts.
Is this transition from proof of work to sharded proof of stake is very different. It's a transition that changes a lot across the whole ecosystem. I mean, just counting like all the projects that are providing tooling, not projects building on top, but tooling. Then all the people who are running nodes, and also people who subscribe to data, all of the things that need to change and it needs to change without skipping a beat to continue working.
From this perspective, there's demand for ETH 1.0, people want to use this. As I mentioned, I think ETH 1.0 right now is a great place to issue assets is a great place to continue securing them. Even if some percentage of hash power continues doing that and does not switch to proof of stake, which they have a lot of incentive to do. Then it will continue operating. There can be a fork that will run on proof of stake. But this one that everybody's working on right now will continue operating. So that's the point. There's motivation for people to continue running ETH 1.0 and there is a demand for it to run; the proof of stake is very different parameters.
“There's motivation for people to continue running ETH 1.0 and there is a demand for it to run; proof-of-stake has very different parameters.”
CR: Fernando, I wanted to ask your thoughts on this transition from ETH 1.0 to ETH 2.0, and how does it look like from a DeFi protocol’s for perspective?
FM: Well, there are still some uncertainties, but we all, I think, are counting on the team's ability to make sure that it's a smooth transition. So as Vitalik posted, I think it's a while ago, but the idea is that at some point, the consensus of ETH 1.0 is going to be made by the beacon chain, and then we all going to wake up a fine day and realize that it's not the proof of work nodes that are actually finalizing the blocks, but it's actually the proof of stake already, ETH 2.0.
I do think that of course, there's talk about rent and other things that would be really breaking things a lot. So I don't think anyone is prepared for paying for rent in smart contracts. But I do expect that before something breaking that we're given enough notice to really change things. I'd say, at least a year, like protocols have to know at least a year in advance if there's going to be rent in Ethereum to prepare for that.
I don't think it should be so traumatic. I do think that everyone in Ethereum knows that if such a traumatic event happened, then it would be kind of a great occasion for Ethereum to lose support and to lose developers and to lose assets, which none of us want. I don't think it's in our best interest to make it hard to transition to ETH 2.0. So I do believe it's possible to make a smooth transition. I don't know how long it will take, but I think we're doing the first step with the Beacon chain being launched early next month hopefully.
“I don't think it should be so traumatic. I do think that everyone in Ethereum knows that if such a traumatic event happened, then it would be kind of a great occasion for Ethereum to lose support and to lose developers and to lose assets, which none of us want. I don't think it's in our best interest to make it hard to transition to ETH 2.0.”
CR: I understand that there will be lots of steps taken so that it's more beneficial to be for miners, for stakers, for developers to be on ETH 2.0 than on ETH 1.0. I think it'll become progressively harder and harder to mine on ETH 1.0. I think that's the idea going forward. But I agree with Illia for sure that it sounds sort of like moving pieces and things that need to go right.
At least so far, it seems like development, the ideas it's been slowly but surely. So, it's taking so long to launch just like Phase 0. I think it's reasonable to expect that things going forward will be this way, just being very conservative in launching and just waiting until everything is tested and audited and put together before launch. I think that's a good thing, but it requires lots of patience from everyone involved. It requires ETH 1.0 to be kind of working on supporting DeFi in the meantime, and hopefully L2 as well, and obviously new Layer 1s that are supporting DeFi protocols as well.
Also, wanted to ask you, Fernando, on what Illia was saying too on the vision of how Ethereum and other Layer 1 chains will work together. For you, what does this multi-chain ecosystem look like? What role does Ethereum and Near and other teams play in it?
A Path to the Flippening
FM: I've always been an Ethereum fan, but I've always also criticized or never liked Bitcoin maximalists because they just don't see anything else other than Bitcoin, and I think this is very short-sighted. I do think that there will be a few chains that are successful in the future, I don't think it's going to be just Bitcoin and Ethereum. I think other Layer 1s will be successful, but they will have to focus on specific niches.
I don't think that DeFi will only be on Ethereum. I think DeFi can be on Near, on Solana, on Polkadot, whatever other Layer 1 that's going to be successful. But maybe we have different tradeoffs, right, most of the DeFi applications or most of the liquidity that will be on Near, at least in the first year or first years, for Balancer will be probably smaller pools that wouldn't have a chance to compete with the bigger pools on Ethereum Balancer. I think that's definitely not a winner takes all market. I think it's going to be plural.
“I think that's definitely not a winner takes all market. I think it's going to be plural.”
But I don't think there's going to be like tens or hundreds, I think it will be like below 10. Well, let's see what the future shows us. But I think it's going to be definitely a few Layer 1s that are successful and have traction. It's hard to define what successful means in the first place. But I think traction and active environment of developers and bringing people creating great things on top of different Layer 1s, I think there's going to be a few of them.
Ethereum, in my opinion, will always be the strongest one and I have tweeted something like that. I do think that people will just realize that Ethereum is superior to Bitcoin in every aspect today, other than the issuance, that can fluctuate, and it's not well defined. But with proof of stake, I think people will realize that the incentives that are being given are so much greater. Because Bitcoin requires a lot of money to be just burnt electricity and proof of stake doesn't. So to me, it's kind of a clear path to the flippening.
CR: To the flippening.
FM: I do believe that in the next four years, Ethereum will flip Bitcoin.
“I do believe that in the next four years, Ethereum will flip Bitcoin.”
CR: Interesting. What do you think about that Illia?
IP: I mean that's totally possible. As I said, I think Ethereum as it currently is, definitely has a very strong position as a financial chain, just because of all the protocols, of all the assets, of all the ecosystem built on top. From our perspective, we always think finance is just a stepping stone for all the use cases we want to enable beyond that. As Fernando mentioned, I think, we need to have all those components, we need to have connectivity to DeFi, and then enable developers to start using all those components to build the use cases.
What I mentioned, when we started building this kind of a marketplace for work. Let's say we do want to create, l’ll say a governance token, so it's actually governed by the users themselves. But we need a Balancer type of thing to now create liquidity for people to open up the work they doing, like exchange it, etc. All those components they enable all these new use cases. As I said, I don't think it's possible to do them on Ethereum and will not be possible until maybe years and years later.
I do want to mention that I think from my perspective, the best way forward from ETH 1.0 to ETH 2.0 is actually an opt-in where people actually opt in to transition to ETH 2.0. That is way easier to do and it's way more straightforward and can happen on a way faster schedule, versus trying to this automatic, like do through merge mining, goes through this step where everybody needs to be proof of work and proof of stake until it's transition to proof of stake. That is just a suggestion.
CR: It's so complicated, we'll see how it all plays out. It seems like the development team working on that is continuously improving and changing the model for how that will happen. So Illia, I'm really interested to hear your thoughts on these new applications that can be built on Near and not on Ethereum. What are some of the things that you'd love to see getting built on Near say, next two to five years?
Building the Gig Economy
IP: The things that we actually have been internally talking about a lot, we haven't talked outside that much, but what I mentioned, the gig economy, and passion economy. So this is really things like that are uniquely enabled by a global economy. They uniquely benefit from being able to remove the middleman. I mean, even like for you, you use Mintbase as a way to connect directly to your fans.
Right now, also marketplaces from eBay to Amazon, all of them are rent-seeking, they push on how much they can extract from the people who produce stuff. They pretty much manipulate people to buy more on the consumer stuff. If you think of creators, like using Patreon, they get charged a ton on top of it. If we think of social applications, their data is being exposed to all things and, data breaches.
So all those use cases, they can leverage blockchain, it's kind of this core trustless layer, and then build on top of it, like a set of protocols. On top, you can have a lot of applications using that. Even kind of what I mentioned, the marketplace itself is very simple. Somebody wants a task to be done, somebody does it, and gets paid for it. There's a very simple protocol. On top, you need the conflict resolution, you need stablecoin, you need like a bunch of pieces that feed into this.
But then using this protocol, you can build Instacart, you can build food delivery, you can build what we were trying to do like crowdsourcing. You can build all these applications that use one common protocol. Same for selling creative work, transferring ownership of creative work, same thing, you build a protocol, and then you're now connecting to all those different audiences directly.
I also have some kind of, I call it ownership mining, some way of distributing ownership into even your creative work yourself. You can have crowdsource, maybe opinion and what's the next book should be or something. There's so many new things you can build, which none of it is really possible economically, but also even developer services just doesn't really fit in the current frameworks that people are used to on Ethereum. So, that's like what we're really excited and always we're excited by that's where we started. Kind of bootstrapping into this, making sure we have all the critical pieces in place. That's kind of been our journey to here.
CR: It sounds like from the conversations I've been having, that I'm this path to full Web 3.0 started out with getting the key financial pieces together and that Ethereum was the main chain for that. But next will come like the social media layer, passion economy layer, and maybe other chains will be more suitable for those use cases. But it's interesting to see how all these pieces are coming together to create an actually a more open and decentralized web like the Web 3.0 dream, so very cool to see.
I guess, to start wrapping up, we talked about the big picture, but just in the near future, what's coming up for both of your projects? So, Fernando, if you want to start with Balancer?
Flexible Smart Pools
FM: We're very bullish on smart pools. So the idea of pools that evolve over time, they're not immutable. Imagine you have more demand for trading, so Black Thursday, and people are crazy to trade, you can increase trading fees. The dynamic fee, liquidity pools, that's something we're very excited about, and many other types of smart pools. Projects that sell their tokens, they do an initial offering on Balancer, so they provide liquidity in the way it’s split, which is a type of smart pool. Many, many different applications that this opens up.
We're also excited about Balancer V2, which will increase a lot the efficiency of the protocol, will make it a lot cheaper to create new pools to trade, and will also bring other nice features that we're soon going to be disclosing more about. We're focusing very much our time around V2, and making sure that Balancer gets a lot better than the next version.
CR: Do you have a timeline for V2?
FM: We're hoping to do that in the beginning of next year, first half year, hopefully, first quarter.
CR: That's exciting. On the smart pool, just to understand, the smart pools are pools, where you can upgrade the different parameters after you launch the pool, right?
FM: Yes. So imagine someone creates a pool, and they have rights. The creator of the pool keeps some rights, and other people still can provide liquidity. All of us here, we'd run liquidity to a pool and the creator says, when a trading fee can be increased or decreased. That can be just smart contract logic, for example, getting volatility information on chain, and automatically updating the trading fee when someone pokes the contract. So it can be fully trustless. Or it can be just someone saying, I want the fee to be higher now and we just trust that person, because we know who's the creator, we know the code of the controller of this smart pool.
CR: But so there are different options on how they will operate?
FM: Exactly. You can create a smart pool that can only change the trading fee. You can create a smart pool that can change the weights of the tokens, add or remove tokens. You can also have a whitelist. If you're doing something that's KYC or something you want to control, you can say my smart pool has a whitelist that I can update. So there's many different rights you can assign to your tourists smart pool.
CR: Awesome. Should make for a lot like a more dynamic market.
FM: Just last thing. Very nice example is the smart pool for Ampleforth. So Ampleforth has this daily rebase where the balances are changed. In normal pools, what you have is when the balance has changed, the prices change, like abruptly. You create an arbitrage opportunity for people to withdraw value from the pool, both shared pools and Balancer, and also Uniswap pools. What you can do, and we've done that with the Ampleforth team, is that at the same time, when you change the balances, you update the weights so that the price does not change. If the balance goes down on the Ampleforth side, we also go down with the weight so that the ratio doesn't change and the price is constant. So there's no arbitrage opportunity every time when there's a rebase. This is really exciting for elastic supply tokens.
CR: It reduces a lot of attack vectors, like a lot of the recent DeFi attacks have used that imbalanced in the liquidity pool.
FM: Exactly. It's all automatic. It's great. You can check it out on Balancer.
CR: So is that already live?
FM: It is. We're talking to the Ampleforth team to build that into the Geyser, which is the incentivize liquidity of Ampleforth. So hopefully, we'll see this pool being used in a Geyser so people can see that in practice, but it's already live and you can just provide liquidity to it.
CR: Love seeing all the innovation. Illia, and so what's immediately coming up for Near?
Leading to Governance
IP: The ecosystem is evolving, there's a bunch of stuff, that's probably I don't even know everything that's happening, and hopefully that just continues growing. I think, on our side, we focused on infrastructure level were sort of bridge’s pretty much have been in testnet for a few months now. We had a hackathon, so really kind of looking forward to actually releasing it on mainnet, and really starting to getting applications to use it. As I mentioned, EVM support is being rolled out as well. So there's a lot of existing applications or existing code being mixed, matched and launched on Near.
Near has built a sharded system, have actually been running with one shard. A big part of it was making sure that we launch sooner and we get space for application developers to start building. In parallel, it has been kind of testing sharding more, everything is implemented, everything is there. But actually the community have been running a separate sharded network, and been giving us feedback from there. So we've been really testing it and the plan is to early Q1, pretty much lead to governance for the protocol decide if they want to add more shards to pretty much fully enable it on mainnet.
Pretty much right now, we still suggest not to do it, even though it's totally possible. But pretty much we are going to finalize testing everything and let the governance decide when they actually want to turn on more shards. To be clear, right now we don't need more shards, so this is just an idea that there is capacity and there's an easy way to keep increasing capacity where you're just, right now, it's via governance, and then later, we actually will want to switch to automatic way to increase in capacity based on the demand.
CR: But right now, you said you don't recommend adding more shards, and is that just because you don't need it or because you think technically it's still risky to do?
IP: Right now, we definitely don't need it. But yeah, right now, we consider as still technically risky. I mean, as I said, we have testnets running, all of our testing is done on the sharded networks. But yeah, for our current network that we launched, we've been testing it for about a year. So sharded has only kind of been half a year, maybe less of extensive testing. Now that we launched and there's a lot more focus now on finalizing the sharding. I mean, pretty much it's finding small things. I mean, as you mentioned about Ethereum 2.0 and all those things like the protocol. Development is very complicated, there's a lot of moving pieces and making sure everything is fully tested. This is our priority before recommend doing like actually having that on mainnet.
CR: Awesome. When do you expect for Balancer to be actually operating, fully operating on Near?
IP: We've already tested it on inside the EVM that we're launching. As soon as that on mainnet, then pretty much hooking it into Bridge and people can start providing liquidity. Then was mentioning we have two bounties or grants open for front end to be modified. Both Balancer front end and our Near wallet to be modified. So that will pretty much launch as soon as the EVM launches.
CR: I didn't realize that your EVM hadn't launched yet.
IP: It hasn't launched yet. So this is like, it should be launched by end of this year, I mean, again, testing everything before. That's where my OpenEthereum, let's just call it rant where came from is because we've been using the codebase, and I haven't seen anybody developing. Which again, it's been done in a separate repo, which I don't think anybody was like at the time finding, but now working together with them, making sure that everything is secure and stable. That was kind of the main concern, if people are running insecure code that's been haven't been looked at for like six months, that's very scary for Ethereum and for us. But now like, it seems like it's all good, so we're going to be like finalizing that and shipping it.
CR: So next step will be the EVM launch. When that happens, Balancer we will be able to work on Near as well, and then moving forward, will be additional shards on Near.
CR: Awesome. Well, this has been super interesting, guys. Really, thank you so much for coming on. I loved the chat.
The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.
About the founder and editor: Camila Russo is the author of The Infinite Machine, the first book on the history of Ethereum, and was previously a Bloomberg News markets reporter based in New York, Madrid and Buenos Aires. She has extensively covered crypto and finance, and now is diving into DeFi, the intersection of the two.