Bankless - SotN #41: Scaling DeFi with dYdX and StarkWare

Starting point is 00:00:01 All right, Bankless Nation, welcome to another episode of State of the Nation. This is the episode where we talk about something big that is happening that has happened in the last week. We relate it to some of the bigger picture topics we discuss on the podcast and write about in the newsletter and then we drop some insights and action items. This comes out every Tuesday. We live stream it on YouTube. If you're watching it live now, hello.

Starting point is 00:00:38 This also comes out on the podcast on Wednesdays. David, how are you doing today? Absolutely. Fantastic. Another great day in the world of Ethereum. Something new comes every single week. And at this point, it seems like every single day of every single week. And today of this week is a new announcement from D-Y-D-X and Starkware, which is going to, I think, rock people's world.

Starting point is 00:01:02 And so we're going to get into that as well as a number of other subjects. This is one of my favorite announcements because it's not just like an announcement that something is coming. It's an announcement that, oh, we just shipped to Mainnet. And what they shipped is really cool. This is a combination, a collaboration from DYDX and Starkware. I think of this, not their words, but I think of this is kind of a bitmex killer. So like a centralized perpetuals derivatives exchange killer, that's how cool it is. But this episode is unique because we have two guests.

Starting point is 00:01:31 So we have one from DYDX, the founder of DYDX, who we're going to introduce in a little bit, and also the founder of Starkware to talk about this collaboration. And I think there's two stories here for the bankless community, David. The first is this is the story of a defy-app, a story of a decentralized non-custodial exchange called DYDX, and its trajectory of eating its more centralized competitors. That's kind of the first story. And I think we'll talk about that mostly in the first half. And the second story is a story of a network.

Starting point is 00:02:04 This is the story of how Ethereum scales, how Ethereum might come to start to eat some of its more centralized competitors, maybe some of the ETH killers out there. This is the story of Ethereum scaling through technology. So I think these stories are sort of interwoven and really exciting to talk about. And these are the perfect guests to go through them with us. Yeah, yeah, you said that right,

Starting point is 00:02:28 where so it's been frustrating when we're on the bankless program when we talk about like, oh, this L2 will be deployed in two to six months. Like that's been kind of the through line that we've had for like the last year now. It's like, oh, yeah, this is coming. And now it seems to be that the wave of like, oh, is the thing that we talked about, it's here now.

Starting point is 00:02:47 And so hopefully this is the first of many to come. We could really use some scale on Ethereum. And like you said, this is the story of DYDX, which is an Ethereum application that is exactly like similar legacy financial applications or products, but now it's on Ethereum and it gets all the benefits of what Ethereum has to offer. And so hopefully this is an anecdote of a greater story of Ethereum scaling while maintaining decentralization and permissionlessness.

Starting point is 00:03:17 The layer two wave is coming. This is just, you know, the first part of that wave, the crest of the wave, if you will. We've got some other new stuff that's coming up and has come up in the bankless community lately. One is, speaking of stories, this amazing story with the founder of Uniswap, Hayden Adams, another Adams on the podcast, David. It was a year in the making, but just like a fantastic episode. kind of the canonical episode of the story of Uniswap, which I'm shocked is not told in mainstream yet, but you're hearing it on Bankless. This is the story of Uniswop and the shipping of V3. So cool. That came out on Monday. David, any words from that episode that you want to highlight? Yeah, we made sure to take as much of Hayden's time as he would give us because he's made his time

Starting point is 00:04:03 so scarce up until now. We were going for two hours and then we had to pause the interview and I was like, Hayden, like, we still have like a number of subjects. There's more, Hayden. Can we, yeah, can we keep going? We need more time, Hayden. Yeah, we need more time. And he said, yeah, I'm just going to not go to my next meeting. And he stayed chatting with us for the full two hours and 35 minutes.

Starting point is 00:04:22 The complete story of when Uniswap was just a blog post on Reddit to Uniswap V3 and where we're going into the future. And also, also a similar through line, I think, to the conversation we're going to have today, where that's the story of one single app. But the through line is a story of prioritizing. decentralization above all else. Absolutely. We also had a really hot podcast that's coming out on Monday. We recorded that last week with SEC Commissioner Hester Purse. She's known as Crypto Mom, as a moniker that the crypto industry has given her, wondering if she is now going to become defy mom as an advocate for crypto of some sorts in the SEC. So that conversation is dropping on

Starting point is 00:05:02 Monday. David, we've got some great stuff going on with the bankless badge as well. So the The bankless badge is something you get when you become a full member of bankless, right? So that's the newsletter. Can you talk about what we're doing with that badge now? Yeah, we are going to do a big push for the badge, rewarding members of the bankless who hold the bankless badge. So we are going to be doing some giveaways. And so we're going to give away a BAP for those that aren't familiar, though the BAP is

Starting point is 00:05:31 the crazy, awesome, vibrant T-shirt that you see Ryan and I wearing, usually on the Friday weekly roll-up videos. and then we're also going to give a raffle away. This is a raffle, so not every bankless badge holder will be able to get one. There's only 50 baths out there and we're giving away one of them. Maybe we'll give away more in the future. We're also going to air drop an eath to the raffle winner in the future. And then perhaps some NFTs down the line.

Starting point is 00:05:55 I have a relationship with a guy who does a coffee startup and perhaps a year-long coffee subscription. The bankless badge is something you want to own. Yeah, absolutely. So this is an NFT that you get. We mint them on a monthly basis. You get when you become a member of the bankless community. And we want you to get these badges in April. Lots of benefit to doing so.

Starting point is 00:06:19 These raffles are just one. So make sure if you're an existing bankless member, you haven't gotten your badge yet. Make sure you do that. We will include a link in the show notes with some instructions where you can do that. Well, David, we should. Well, actually, before we get to,

Starting point is 00:06:35 Before we get to our guests, I got to ask you the question we always start these episodes with, which is what is the state of the nation this week, my friend? Yeah, this one's an easy one. The state of the nation is scaling. We are scaling out the network. We are scaling out the nation. We are growing in how much throughput that we can put through the Ethereum blockchain with data. But then also what that means is that because we can host more data throughput through technologies like Starkware,

Starting point is 00:07:04 we can also scale out the social society on this, on this Ethereum blockchain. It's always been one of my crazier ideas that I've had that like if we can put more transactional data through Ethereum, we can host more people. Actually, maybe that's not that crazy of an idea. That's perhaps the main reason to why we scale Ethereum in the first place. So not only are we scaling the data throughput, but we're scaling the size of the bankless nation. Scaling the social layer, also scaling the network layer with transatlantic.

Starting point is 00:07:34 actions per second, that is going to be the conversation we will have with Antonio, who's the co-founder of D-YDX, and Uri, who is the co-founder of Starkware in just a minute. But before we do, we want to tell you about the fantastic sponsors who made this State of the Nation episode possible. Metamask is your go-to wallet for the bankless journey. If you're going bankless, you need Metamask, period. Browser and mobile, get them both. This is your tool to unlock the world of D-Fi.

Starting point is 00:08:02 Here's my favorite part. Now you can swap tokens directly in Metamask with a single swipe. This has got to be the easiest way to trade Ethereum tokens. Choose a token you own, a token to exchange it with, get your quotes. If you like what you see, you hit swap. That's it. What makes swaps so useful is what happens behind the scenes. It compares Dexas, aggregators, and market makers to find you the best price with the lowest network fees and the least slippage. This means, you can swap a wider range of tokens, and swaps can even automatically split up your trade to give you access to better liquidity. You don't even have to think about it.

Starting point is 00:08:42 Try it out. Download Metamask for desktop or mobile now at metamask.io and start swapping. Bankless is proud to be supported by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum, which is what Ryan and I call a money robot. No human counterparties or centralized intermediaries, just autonomous code on Ethereum.

Starting point is 00:09:13 Input the token you want to sell and receive the token you want to buy. Something brand new in the Uniswop ecosystem is the Uniswap Grants program is now accepting applications for grants. We have been saying this for a while and will say it again. Dow's have money and they are in need of labor. If you think that you have something to contribute to the Uniswop Dow, apply for a grant to Uniswap. Just look at the size of the Uniswap treasury. It's almost $3 billion. This mountain of capital is looking for labor.

Starting point is 00:09:44 Do you have something of value to contribute to the Uniswap Dow? No matter how big or small your idea is, you can apply for a UniGrant at Unigrants.org and help steer Uniswap in the direction that you think it should go. That's exactly what we did to get Uniswap to be a sponsor for bankless. and you can do the same for your project. Thank you, Uniswap, for sponsoring Bankless. We are super excited to introduce our next guest. We have Antonio Giuliana, who is the co-founder of D-DX,

Starting point is 00:10:13 and Yuri Koddney, who's the co-founder of Starkware. Guys, this is the team-up. DYDX has a non-custodial derivatives exchange. Starkware has some amazing Ethereum Layer 2 tech, and together they just delivered something amazing to main. net that we will get into. We are going to let them tell us more. Gentlemen, it's great to have you on bankless. Happy launch day. How are you feeling? Thank you. Yeah, feeling great. Yeah, we're super excited to finally have this product live and now to everyone. And I think you guys gave a

Starting point is 00:10:49 great introduction where the point is like we've been talking about, I mean, both us and a bunch of other DAPs and scalability solutions. It's coming. It's coming. And it's finally here. And it's just good to finally have everyone be able to use it. Well, Anthony, let's kind of start on that theme. So tell us what did you just release to Mainnet right now? Yeah, we released our brand new layer two product, obviously in partnership with Starkware. And this product is for perpetual contracts, which are basically a type of derivative contract, the most popular trading product in crypto period. It's kind of a more sophisticated type of trading product, which gives users really great access to leverage amongst a bunch of other features. But perpetuals, as I mentioned,

Starting point is 00:11:36 are quite literally the most popular trading product by volume in all of crypto combined. They're bigger than even all of small trading combined. DYDX were kind of one of already the leading decentralized exchanges for perpetual contracts. And the thing we just launched on layer two is not only just basically putting what we had already on layer two, we built an entirely new product from the ground up, new user interface, new backend, new orderbook, new everything, and kind of paired that with StarCore's awesome scalability solution to create something that I think is really awesome. So decentralized exchange focused on more advanced financial products

Starting point is 00:12:13 and specifically perpetuals. Can we talk about just like a quick explain it like I'm five on perpetuals, Antonio, before we go any further. I know we have a detailed, ask me anything where you explain this thoroughly. Yeah. For someone who's just bought generally spot on something like Coinbase or Uniswap, what is a perpetual? How is it different? How is it similar? Yeah, absolutely. So perpetuals are a type of synthetic contract, which sounds fancy, but all synthetic really means is that when you're trading these contracts, the actual asset that you're

Starting point is 00:12:46 trading, so say you're trading a Bitcoin perpetual doesn't exist in the contract. A derivative basically just means that you can put a lot of different like financial mechanisms to create a different asset, which actually trades at the price of another asset. So a Bitcoin perpetual, for example, is a synthetic asset, which trades at the price of Bitcoin. And you might ask yourself, well, why do I want this? Like, why would I not just trade regular old Bitcoin? And the answer to that, for the most part, is the concept of leverage. And the concept of leverage, what that basically means is you can multiply the capital that you're trading with. And this is a really powerful concept. So basically you can come to D-YDX and you can put down a deposit of $1,000,

Starting point is 00:13:31 and you can immediately start trading as if you had $5,000, $10,000, potentially up to, you know, $25,000, depending on how much risk you're willing to take on. So just that concept where you can come to DYDX, you can immediately buy, say, like 10X, the Bitcoin or whatever leverage you want to use, then you could have otherwise on-spot trading is a really powerful concept and something that's uniquely enabled. by perpetuals. Antonio, I want to go into that a little bit more because I think the user story of people who are compelled by this kind of product might illustrate why an L2 is so valuable here.

Starting point is 00:14:06 So when it comes to the full range of spectrum of people who invest in crypto, there's people who buy on exchange and then they put it in the cold stores and then they never touch it. And then on the other side of things, there's like high frequency like traders that are doing like 10,000 transactions a day. And in my mind, DOIDX is obviously in the middle of that. but closer to the end of there's multiple transactions going on in a short time frame, which means that we really need scale. Maybe you can illustrate for our listeners like, who are the, what is the disposition

Starting point is 00:14:37 or types of traders that would come to use DYDX and how frequently are they trading? How frequently are they making transactions? And hopefully that goes into the story of why we need scale. Yeah, absolutely. I mean, that's a great intro. I'd say there's kind of two classes of customers that we support right now on DYDX. And the first is kind of the right most end of the spectrum that you were alluding to in terms of the more advanced kind of sophisticated, more like crypto funds, basically. And these types of traders, as you say, do need really high performance.

Starting point is 00:15:09 They need to execute a lot of trades. They need to be able to put and cancel a lot of bids and ask on the order books. They require access to more sophisticated order types, things like limit orders, things like stop orders, stuff like that. And then the second kind of archetype of users that we have on the platform is more individual traders. And not so much the like I just bought my first Bitcoin on Coinbase type of users or kind of like in the middle where, you know, they're more active traders. Perhaps they're more actively trading Bitcoin or Ether or other cryptocurrencies all the time kind of trying to profit on shorter term moves up and down or sideways. And that's kind of what we're targeting like these two classes of users. And even kind of those individual traders, they also require like pretty high performance.

Starting point is 00:15:56 They require access to just like, you know, new order types, different types of derivative contracts like perpetuals. And that's what we're really focused on building for them. So, Antonio, we want to start to shift this to the conversation of kind of what's new in layer two and with this new main net deployment and get area into the conversation as well as we talk about that. but maybe you could kind of tee this up for us. So my understanding of DYDX on Mainnet was that basically there was this throttle in terms of how much you could scale on MayNet, right? So gas was high.

Starting point is 00:16:36 I think that you guys, DYDX were paying some of those gas fees. So you were feeling the pain as a business. And you knew it wasn't sustainable to continue providing the rich experience of DYDX and expanding to the future. you're on mainnet. So you decided you needed like a layer two. Can you talk about kind of the pain points that you were feeling and then why a layer two and then why in particular Starkware? And then we'll get to Yuri in his description of what Starkware provides. But first, tee this up for us, Antonio. Yeah, absolutely. So I guess the main reason that we needed a layer two is pretty obvious for anybody that's been using defy, it's that the gas fees are insanely high. And previously,

Starting point is 00:17:21 D-Y-D-X on layer one worked pretty similarly to how most other decentralized exchanges work in terms of for every one trade that was on the platform that mapped to, like, we had to send one transaction to layer one, Ethereum. And this has been getting just ridiculously expensive, especially in the past few months. I believe on average it's costing users about $150 in gas fees per trade to execute a trade on layer one on DYDX. And oftentimes we'll see the spike up to hundreds of dollars. I've literally even seen it be over $1,000 in gas fees to execute a single trade on DYDX on layer one at peak times, like when the price is moving a lot, which also is when people most want to trade. So it's like double whammy there. So it's just like who's going to

Starting point is 00:18:09 use an exchange where you have to pay $100 in fees to make a trade like nobody. Well, like maybe like really big whales, but like that's basically it. So that was just kind of the first and overarching problem that we needed to solve. It didn't really stop there. There were a bunch of other limitations actually that are a little bit more behind the scenes, but that are actually really impactful to kind of the quality of the product that we were able to build on layer one Ethereum. I'll just touch on them briefly. The first is this thing called isolated versus cross margining, which sounds fancy, but it's actually a pretty simple concept.

Starting point is 00:18:43 What isolated margining is on layer one is you have to put down collateral separately for every different market you want to trade on. So say on layer one on YDX, you come and you're like, I want to trade both Bitcoin and Ethereum. There's like a pretty reasonable thing, right? You'd have to put down collateral for the Bitcoin market and then separately put down collateral for the Ethereum market. Whereas on layer two, because of the increased scalability and what Starker is able to offer with kind of their fully featured platform, we're able to build this thing called cross-margining, which basically just means you can have one account, you can deposit to collateral to D-Y-D-X one time, and then you can just start trading every different market that D-Y-D-X has. And this is going to allow us to launch a ton of new markets.

Starting point is 00:19:26 One of the really big handicaps we had on layer one, D-YD-X was because of the scalability, we were only able to ever have three markets on the platform, which is not optimal, right, especially with all of this, like, exciting stuff that's going on. with all these new D5 coins and things like that. Like again, like how are you going to be successful as an exchange if you can only support like three or four markets because of this isolated margining? Now with cross margining, we're setting a target for ourselves was launching 50 markets by the end of the year. And we're going to start executing on this.

Starting point is 00:19:57 We just announced this actually with launching AVE and Uni tokens, hopefully later this week or early next week. And then just continuing to roll out with like two or so markets per week after that, which I think is pretty exciting. And then the last thing I'll close with before answering the second part of your question, which I think is a really big advantage of layer two, is we're now able to offer much higher leverage on the platform, higher maximum leverage, that is.

Starting point is 00:20:22 On layer one, because of kind of the limitations and performance of price oracles, we are only able to offer 10x maximum leverage on DYDX. And kind of given a finance recently put out some data on their users' usage of leverage, where they basically said the average leverage that people usually use on Binance is roughly in the 20x range. So we weren't able to support that. Wow. Which is not recommended.

Starting point is 00:20:47 Yeah. And yeah, absolutely. Disclaimer, like think critically about whether that's the type of leverage that you want to be using. But regardless, like we're in exchange, right? And we need to support like the leverage that users want to use. We weren't able to do that on layer one. And now with kind of the improvement in performance in price oracles that we're

Starting point is 00:21:06 able to have through Starkware on layer two, we are able to support that. And the really cool thing, maybe just as an aside, because I think it's cool that we're able to do with the price oracles is we use the exact same price oracles, actually, the exact same decentralization and same security that we had on layer one in terms of the chain link price oracles and then the MakerDal price oracles as well. But we put them on layer two instead. So same decentralization, same security, way better performance. And I think that's kind of the overall narrative of the story, is that the product is vastly improved in a lot of different ways. So just really kind of quickly touching on the second question you had there in terms of,

Starting point is 00:21:43 okay, we knew we needed to scale, like which scalability solution do we actually use and kind of what led to the decision to use Starkware? There were three main things that we considered. First of all, obviously Starkware and more probably zero knowledge or Stark rollups. And obviously Starkware is the leader in that. So if we wanted to go with that technology, Starkware was a pretty easy choice for us. Second of all, we considered optimistic roll-ups, potentially something like an optimism. And then third of all, we considered other layer one blockchains.

Starting point is 00:22:14 So I'm just going to take them in turn. But in terms of why not other layer one blockchains, I mean, first of all, kind of the scalability is still like bounded. And especially like the amount of state you're able to put on chain is still bounded. And that's something that Stark proofs and Stark roll-ups handle very well. Second of all, just the state of the world in terms of like the quality of wallets, the quality of cross-chain solutions, the quality of developer experiences on layer one is not there yet. Like, I don't know, suppose we were to move to like near or Salon or something like that. You know, what wallet are our users going to use? Like, they wouldn't be able to use Metamask.

Starting point is 00:22:51 And that would be like a really big detraction and kind of the user experience we're able to offer. And also like, how are they going to get their coins over there? like what cross-chain solutions are available. It's just not, we wouldn't be able to offer the same product experience on those axes if we move to a different layer one. Then kind of optimism and optimistic roll-ups, that rolls up to Ethereum in a similar way to how our product with Starfur rolls up to Ethereum as well. So we can, you know, we could still potentially use like the same wallets, same everything like that with optimism.

Starting point is 00:23:22 But with optimism, there's a couple of big, I would say, you know, I think there are tradeoffs. but for us, like I think the main tradeoffs with optimism that weren't optimal for our product, or first of all, the withdrawal period is really, really long. This is something that I think has been talked about by a lot of other people in this space, but really high-level overview. Because of the way optimistic roll-ups work, you can't actually take your money out for, you know, roughly a week or so, which is a really big problem. Like, who's going to use an exchange, again, where you can't withdraw your funds for a week?

Starting point is 00:23:55 there are ways to get around this. You can potentially use like a central kind of liquidity provider to front withdraws, but then the central liquidity provider has to have capital proportional to a whole week's worth of withdraws on the entire system, which is like even for us of our scale like a ton. And imagine if you're trying to scale to like a Bynance level, like all of the withdrawals for Bynance for a week is just like more money that probably exists in like all of crypto. So that, you know, we couldn't use for that reason. And also like one big kind of downside or, no, yeah, I would potentially, I would say like a downside for an hour,

Starting point is 00:24:29 at least something that's very unproven with optimistic roll-ups is, first of all, they're not, you know, publicly available on production yet. And that was something that's really important to us. Like StarCware has a really solid and long history of already being live in production for a while now, actually, with Diversify, which is another decentralized exchange, which offers spot trading. And that gave us a lot of confidence that, you know, we need to scale. now, like our users don't want to wait for like months on end to be able to scale. So which which scalability solution is the most production ready? I think that was obviously Starkware.

Starting point is 00:25:03 And that was a big factor in our decision to use them as well. Great answer, Antonio. And I'm wondering, Yuri, if you could kind of continue the story here. So Antonio's story, he's got sort of this defy app. It's getting tremendous product market fit, but gas fees are becoming too much, you know, on-chain, main chain, congestion is too much. And so he needs some sort of a layer-to solution. I'm wondering if this is a similar story you're hearing from other defy apps. And also, could you tell us a bit about what Antonio was talking about? So in the, in sort of the press release

Starting point is 00:25:40 and announcement, there is a solution called StarkX, I believe. What is that? Is that the solution that DYDX is built on. Tell us about that. So please continue the story. Sure. So DYDX's story is really the quintessential experience for a lot of defy applications. And they're basically, the worst thing that could happen to you if you launch a DAP is that, you know, no one shows up. The second worst thing is that if, you know, everyone shows up. And that was sort of DYDX's experience. And I mean, when we first started talking to Antonio and the DOIDX team, their spending in terms of monthly expenditure on gas compared to revenues was fast rising. And shockingly enough, in no way bound by their monthly revenue, right?

Starting point is 00:26:32 So gas spending was crazy. And you have this odd situation where, you know, you've spent on customer acquisition, they show up, they knock at your door, and you have this minimum trade size. and this minimum trade size is in fact rising. So I traded for a 2K, you know, I made a 2K trade today, which was fine with the YDX. Gas prices keep moving up and they just pushed up the limit to whatever, three or four. I think it went all the way to 7K or even beyond that at some point. Now, what I could think about this from a user experience perspective,

Starting point is 00:27:03 I could conduct this trade two weeks ago or a month ago and now I can no longer do that. You know, how difficult is that in terms of a customer experience? So in that regard, I think the DYDX story is very, very much sort of the standard DFI story, a situation where transaction costs are really killing the business and killing the narrative for permission of this blockchains and DFI, this democratization of access to these tools. There's nothing democratic about a transaction that, you know, hundreds of dollars. Everything becomes a whale chain.

Starting point is 00:27:39 Everything becomes a whale chain and you're saying, so hold on a second, the whole exercise was, you know, to end up with this kind of story. No, that's not what we're here for. So, so in that regard, it's, it was a very, I think, I think it's a very typical story. And then we've heard it from, from other teams as well. In terms of your question about Starkex, so Starkex is our scalability app. And currently, it can support a whole bunch of different functionality. So it can support transfers and spa trading. And this is what we've been doing with Diversify since June of last year.

Starting point is 00:28:14 It can support derivative trading. And this is live on MayNet with DYDX as of this morning. And it can support NFTs, both minting and trading. And for that, you won't have to wait more than actually a day to see on immutable X. So it can support a whole slew of different functionalities. This is all powered by Kod. Cairo. Cairo is a train-complete language that we've developed in-house at Starkware, and it can support

Starting point is 00:28:45 the scaling of any DAP, any business logic using Starks. And it's a very efficient language, and the proof is in the pudding here. We are able to support DYDX's transactions today at below 5,000 gas per transaction. That's pretty incredible. I'm wondering if maybe we could go into that in a little bit more detail, because sort of in the crypto community and anyone who's familiar with engineering always recognizes that there are some tradeoffs with a solution. Have we made any decentralization tradeoffs here in implementing something like StarkX? So, DYDX on Mainnet versus a DYDX in StarkX on a ZK roll up chain. Have we lost anything? Are there tradeoffs that have been made? Obviously, we got the gains of scalability and many of the gains that Antonio was just talking about. But what have we lost? So I think that we actually haven't lost anything. DYDX had an off-chain operator beforehand and still

Starting point is 00:29:59 has one now. They had the intuition and tremendous wisdom. This is going back to what Antonio mentioned to actually redesign their system. Okay, so in a lot of, a lot of cases, and a lot of the layer two teams are saying, you know, we're gonna have this big red button that says compile my solidity code into whatever it is to the optimistic roll up of choice or to the ZK roll up of choice, et cetera.

Starting point is 00:30:25 Just take my business logic that I wrote for layer one, just move it to layer two. And DYDX had the good sense, actually not to even aim for that, but to actually take a step back and say, hold on a second, we have this off-chain operator, Right now it is central. I have D-YDX, Antonio can talk about this in great detail. They have a decentralization vision that they're aiming for.

Starting point is 00:30:46 But as a first step to say, let's see if we can make this system better by having this off-chain entity function in a much more trustless fashion. And what can be done using Starks in that regard and cross-margining and much higher frequency, price oracles and the benefits of this. in terms of leverage in the system and the ability to introduce so many more assets, the removal of minimum trade size, all these features are result of the fact that they actually redesigned the system from scratch using the tooling that we've developed. I'd like to go into this off-chain operator a little bit more. What does the off-chain operator do and how is it when D-YDX is on the main chain and how is it different when D-YDX is on the Starkware? where. Yeah, I can take this one. So it's basically exactly the same. So do IDX is right now what's known as a hybrid exchange by some people, which basically means that we have some kind of off-chain

Starting point is 00:31:51 operators and then we have some things that are on-chain as well, which are, of course, the smart contracts. Basically, we run our order books and we run our order matching in an off-chain way. And we have been doing that for, I don't know, like two years or something now. And this model just allows us to get kind of the really big increase in performance that I was touching on before that's basically required for kind of the level of traders that we're trying to attract and kind of the crypto funds and advanced individual traders. So we've had that for a while. And I think the point that that Yuri was making, which I would wholeheartedly echo, is that we haven't changed that at all to kind of move from Ethereum to StarCWhere's layer two. And basically what we have

Starting point is 00:32:33 this we just kind of store these like off chains like cryptographically signed messages, which are kind of similar to zero X orders if people are familiar with that. And we store these on kind of our off chain matching system. And then whenever we execute a trade, we just send it on over to Starkware. They do all of kind of the Stark proving and the batching and things like that, which is where all the scalability comes from. We can probably dive into that more later. And then it gets all just put on chain in a really quick way.

Starting point is 00:33:01 And then once it's on chain, it's 100% as decentralized because of the stark proofs and kind of the validity checking that goes on in the smart contract. So there's anything else on Layer 1 Ethereum. So how would you describe that dichotomy between what you guys do on chain and what you do off chain, right? So assets obviously stay on chain. You can't actually remove them off chain. But then just the order, the logic and order matching is off chain. what does that mean for the trust of the user with in regards to DYDX?

Starting point is 00:33:36 What are they trusting you to do? And if perhaps if you guys were malicious, what could you do? Yeah, absolutely. Good question. So they're basically trusting us to just like allow them to to trade on the order book, right? And there are ways basically where you can trade on the exchange. They're not normally used, but they're basically used. If a user, you know, even so much as thought we were being malicious for like whatever reason, you could go directly to the smart contracts.

Starting point is 00:34:05 You could trade out of your positions. You could close your positions. You could always withdraw. So that's kind of where all the non-custodial trading comes from. So like normally you go through the front door and you just talk to our matching engine. But then for whatever reason, if you want to, you can always just go directly to smart contracts as well. So they're really not trusting us for anything, really. I mean, we could potentially give them like a degraded product experience like if we want to.

Starting point is 00:34:31 But, you know, they could always just go to the smart contracts and withdraw their funds and trade that way as well. So there's nothing and there's nothing about the DYDX protocol that can't be accessed by the user. You guys just kind of have like a monopoly on the front end. Is that a good way to put it? Yeah, I think that's a good way to put it basically on kind of like the product that, you know, the website that we've built basically. I like using that has to go through our matching engine. So, Antonio, I wanted to just get this question out of the way because, you know, some folks that are listening are obviously based in the U.S.

Starting point is 00:35:07 And when they try to access the new D-Y-D-X, they're geo-blocked. I'm just curious if you could get into the reasons why. And of course, they are geo-blocked on the front end. Anything that is on-chain as a smart contract cannot be geo-blocked. But can you talk about the reasons for that and where sort of that's coming from? Yeah, absolutely. So it's a very complicated issue. And I won't touch on like every like specific like legal issue here.

Starting point is 00:35:34 But the place that's coming from is just kind of a legal and regulatory obligation that we have. It's very similar to basically like any other crypto exchange that supports derivative products right now. Again, it's quite complicated and this is like a very high level like overview of it. but it's basically like derivatives are very highly regulated like in the U.S. So we can't offer the products to U.S. customers for that reason. And that's something that's pretty standard across the crypto industry. And again, just echoing kind of what you're saying to where it's like, you know, you can't use our website basically.

Starting point is 00:36:09 But again, like the protocol and the smart contracts are still available to everyone and they can't be censored. Can you underline and emphasize what's different about DYDX versus a centralized competitors. So when I think of a centralized derivatives exchange, I always think of like the go-to bitmex, right? For instance, what is the difference between D-Y-D-X and Bitmex from a trust perspective? What do you, you know, trusting in a bitmax that you don't have to trust with D-Y-D-X? Yeah, absolutely. So this is a good question. So the first and probably most obvious thing to anybody that knows what's going on in D-FI is that on a centralized exchange, you're trusting them to custody, your funds that are on the exchange. It's very similar to like the Coinbase or Binance or anything

Starting point is 00:36:56 else that's out there. But the reason why this is especially impactful in derivatives contracts is because on spot trading, you can normally just say like go to a Coinbase, make your trade, and withdraw immediately back to your harbor wallet or whatever you're using, right? You can't do that on a derivative contract. You have to leave collateral on the exchange for the entire time you have your position open. So you may have to say leave your all of your crypto on a bitmax or something like that for months on ends, like as long as you want to like hold your levered long position on Bitcoin or whatever you're trading. On DUIDX, you know, because it's non-custodial, you don't have to trust us with your coins. They're always withdrawable directly

Starting point is 00:37:38 through the smart contracts and the security is basically the same as you would get on any other decentralized exchange. The other thing that you really trust, that's also very important to a bit max or any, call it like centralized derivatives exchange, is not only the custody of your coins, but also the execution of the contract that you're entering into. So, you know, like I said and kind of alluded to, these contracts are fairly complex under the hood. There are a lot of different financial mechanisms that are used. There are things like liquidations that happen. There are times when insurance funds are used.

Starting point is 00:38:12 There are in times when you're deleveraged onto all of the, And on a centralized exchange, you're really just trusting that the exchange itself will honor or what kind of like execute these contracts that you've entered into as per what they said they're going to. But there's no way for you to tell. And it's a black box. Right. There's no way for anybody to really like go in and like audit the system and really understands like are the rules being executed. Like how are these contracts working? Whereas what we're able to build on our products through Star Wars layer two is something that's really transparent. So like the rules of these contracts are quite literally coded into encode the smart contracts and basically StarCore system that Yuri was talking about with with Pyro and everything like that. Like the funding rates, the liquidations, the de-leveraging, everything is coded into the smart contract. So again, it's like you don't have to trust us to execute your contracts. Just trust the smart contracts or trust like these like third-party audits that we have in all of this.

Starting point is 00:39:12 And that's just a much more secure and transparent way to trade. And so that was the compare and contrast of what is basically a defy app versus a centralized competitor. But with this new StarQuare announcement, there's actually a lot that's actually now the same with Bitmex and the same in a good way, which is the performance that is matching of what you would expect in using a centralized exchange. but you still retain all of the power and trustlessness and non-consodial nature of smart contracts and auditability of smart contracts. And this is, I think, the through line that a lot of people miss about roll-ups and other L2 scaling solutions is that ultimately at the end of the day, we keep all of the power of code is law and we gain the usability and just good experience of what.

Starting point is 00:40:08 what a centralized exchange can offer. Is that a good way to describe this? Yeah, I think that's a great way to describe it. And that's something we've been pushing for for a long time now with D-YDX in general, just like trying to build an app that from a UX perspective is every bit on par or even ideally surpassing what is available on centralized exchanges.

Starting point is 00:40:27 I think we've really been able to build it on kind of this new product on layer two. As you mentioned, still retaining all of these great security and transparency advantages, but now, We have instant trading. Now we have just a really simple onboarding experience. Just like come with your Ethereum wallet like any other decentralized exchange immediately start trading. You know, that's way better than a centralized exchange, right?

Starting point is 00:40:49 Where you have to like do K.C, you have to like do all the stuff, like set up your two FAA. So now I think we have a product that's every bit on par, you know, if not superior in some ways to centralized exchanges. We're excited about that. Guys, the user experience of this, if you've ever used, obviously MetaMask, everyone who's listening to Bankless has, has used Metamask, you just connect Metamask literally to this new DYDX exchange on layer two. And it's gasless. There are zero gas costs. And the experience is just phenomenal, right?

Starting point is 00:41:20 Like transactions going in instantly, zero gas costs. It is so cool to see the possibilities, all of the user experience enhancements that Layer 2 can bring. I just want to end this question where we're talking about tradeoffs and sort of security versus Bitmex with maybe a question to Yuri here. So Antonio was describing all of the trust assumptions in a centralized derivatives exchange, like a bitmax, right? We didn't quite get to sort of the base layer trust assumptions.

Starting point is 00:41:52 So let's say Antonio and DYDX just decided to deploy this on Binance chain or create your own proof of authority, X-Dai type network, deploy it there instead. My understanding, and hopefully those who tune into the bankless program is they are now trusting a different protocol, essentially. They're no longer trusting Ethereum. They're trusting the validators that validate transactions in that new kind of side chain network. With DYDX on layer two in Starkware, are there any additional trust assumptions that we've added here? Or is this the equivalent of deploying something on Mainnet?

Starting point is 00:42:38 In other words, what I'm trying to ask here is, are we trusting anything other than the security of the Ethereum base chain with this layer 2 deployment? So as you point out with us, something like Binance chain, we know for a fact. There are, I think, a handful, seven computers that if, you know, those are compromised. your assets are essentially, you know, at the whim of whomever it is. Whereas on Ethereum, it's a very different story. Now, the beautiful thing about validity-proof systems and Starkex in particular in this regard and everything that we're building is that we are, our hands are completely tied

Starting point is 00:43:19 in terms of our ability to act as malicious players. Meaning, even if our systems are compromised, both software and hardware, hardware. Think of this sort of thought experiment. If we hand over the keys to a malicious party and say, these are our servers, go and operate them. The worst thing they could do, in fact, the only thing they could do is deny service to users. And as Antonio pointed out, in that situation, users can go directly to the smart contract with their transaction, say, my transaction here has been denied. I haven't been served this past batch or the last couple of batches. The smart contract basically raises a flag for the off-chain parties for Starkware and D-YDX and says,

Starting point is 00:44:03 here's a user complaining, serve their request. And if you don't, within a reasonable time frame, I'm freezing the system, okay, meaning any user who's denied service has the power to completely halt the exchanges operation. Wow. Way back in, you know, the Cold War, this was called, you know, mutually assured destruction, right? Next, next best thing to, you know, the Americans, the Russians, each having no nuclear was weapons, was to, you know, have an awful lot of them. Here there's this mutually assured censorship, right? Meaning if D-YDX, if StarCware, censor users, any user who's censored has the ability

Starting point is 00:44:43 to single-handedly censor the exchange and return. Now, that's an awful lot of power given to individual users in terms of ensuring their rights and their self-custody of their assets. And that's essentially that's as good as one could get here, as Antonio points out, while maintaining a lot of the benefits of a centralized operation. Yuri, what about the possibility of a user using this power when they shouldn't? Can they try and get this thing shut down in false pretenses? No, no. So this is not like writing the subway and some prank pulling of the emergency break.

Starting point is 00:45:17 Because you come to the smart contract and say my transaction has been denied. if that transaction has been included in the last batch, there's nothing you can do about it. Crying welfare won't help. If you've been served, you can see. Guys, this is why we are so excited about this because we get these scalability benefits, but we preserve banklessness. We do not have to trust a third-party custodian. You don't have to trust a bank with your funds when you're using the DYDX exchange on Starkware. We're going to talk more about that. We're also going to get into how Starkware solutions and how ZK rollups in layer two scale Ethereum and scale defy.

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Starting point is 00:48:38 at Gemini.com slash go bankless, and if you trade more than $100 within the first 30 days after sign up, you'll be gifted a free $15 Bitcoin bonus. Check them out at gemini.com slash go bankless. Guys, we are back with Antonio and Yuri. We're talking about the subject of Ethereum scalability. And this is sort of the question that's in everyone's mind right now, especially as gas fees continue to go up and block space demand on Ethereum continues to increase, is how soon will Ethereum scale? I want to contextualize this before we talk about where Starkware is adding value in helping to solve this problem with a question. Do you think, Yuri, there is ever a point at which we say, we're done, okay, Ethereum has scaled, it's over, we've met the threshold.

Starting point is 00:49:32 Mission accomplished. Yeah, exactly. So, you know, I think when considering that question, one good analogy is to look at what happened with bandwidth, say, over the past. 20 or 30 years. Okay. And there in a very clear way, the answer has been a resounding no at any given point in time, right? Are we done, you know, our optical fibers can do this. Are we good enough no? What about the routers? You know, what about cell phones? What about streaming video? What about live broadcasts? You know, thousands of people and so on and so forth. The thing about scaling solutions is that as they mature as they become stronger and more powerful, new applications suddenly

Starting point is 00:50:17 become available and those present every increasing demands in that dimension. And we're only starting to scratch the surface here. You know, saying we are no longer dealing with hundreds of dollars in transaction fees. We're going down to whatever, to fractions of a dollar. That sounds to me like sort of an entry condition for the discussion right now. The question is, can we make this 100 times, 1,000 times cheaper? And what will that mean for applications? So we're far from that point. So maybe we are even now still up the 56K modem days of that bandwidth.

Starting point is 00:50:56 Well, so how does it happen then, Yuri? So recently Ethereum has almost, I want to say almost pivoted in a way. We had Vitalik on not too long ago to help explain what rollups are. And he talked about the difference between optimistic roll-ups and ZK roll-ups. And he seemed to, you know, his take was like optimistic roll-ups. They're kind of ready here. Z-K roll-ups, they are, too, for specific applications. He also said he thought in the future, Z-K roll-ups because of these cryptographic guarantees

Starting point is 00:51:28 might be even more important to the Ethereum scalability journey in the future. I'm wondering how you see it. And take us through the, like, what's happening now? And then how's it going to play out in the next year two, year three from now? So the interesting thing about this narrative, and of course we've heard of Italic and read his post about roll-ups and all that. But in rough lines, the story was, you know, optimistic rolloops are here. They're going to dominate the near and midterm ZK. Rolups are going to take care of the long term because eventually the tooling will be advanced enough

Starting point is 00:52:00 and they'll be able to handle general computation. Now, Cairo is a general computation, a turning complete language that's been on MayNet since June. And as we see today with DYDX, a ZK roll-up is live, you know, from a massively scalable application on Maynep, well ahead of any optimistic roll-ups. And there are no proverbial sort of custodial crutches here, right there. And there's no sort of emergency button that we can hit that says, hold on, hold on a second. You know, we were we were only kidding. We're just testing the system.

Starting point is 00:52:33 This is it. This is a live system and it's handling very complex arbitrary computation defined by DYDX. So ZK rowups in spite of this notion that they're only going to happen later on in the future are ready for prime time ahead of optimistic robs. And that's a message that we want to send across to the ecosystem and say whatever your needs are, whatever your computational needs are. and no matter how you want a scaling application, we're ready for you. We're ready for you today. So that's on the topic of ZK. Roll-ups versus optimistic roll-ups.

Starting point is 00:53:10 Yeah, I think that's a great point. The fact that ZK. Roll-ups have beat some of these optimistic roll-up solutions to market is definitely of note, at least to me. And I think, David, and many people on the Bankless Journey, I want to ask you about the ability to have a turning complete programming language inside of a ZK roll-up because when we talked to Vitalik,

Starting point is 00:53:34 he was kind of like, well, this is the hard part. And it sounds like you have started to solve that. Can you talk about this? What I think people really want is something that's EVM compatible. I can just take my existing defy app with a few minor tweaks. I can put it in a ZK roll-up

Starting point is 00:53:52 and it just kind of works out of the box. How close are we to that? And can you talk about the strides that Starkware is making on that front. Sure. So it's not that we've started on our journey to altering complete language. We have it. It's done.

Starting point is 00:54:06 It's in production, right? DYDX, Diversify, the Reddit scaling dayoff last time. We're all using Cairo. So that's just a comment on that note. Now, the question with these things, and I think we're sort of, you know, this is sort of a lot of people think about this, you know, this is California in the early 19th century.

Starting point is 00:54:26 It's only just begun. So all sorts of real-life considerations like efficiency, capital efficiency, cost, et cetera, people are saying, don't worry about all that stuff. Now, efficiency of a ZK. Roll-up is a huge deal. Okay. So building something that compiles EVM byte code or solidity to, you know, to say, to Kara or other language is certainly a doable task. The question is how efficient is the resulting system? Okay, and it is considerably less efficient than something that is built natively, say in Cairo. How much less efficient? Think something on the order between 10x and 100x less efficient.

Starting point is 00:55:11 Okay, now these are costs that would someone have to bear in the context of the system. But going back to, I think, a much more fundamental point, the notion of saying, let's just take my solidity in, you know, I got to tell you, Solidity isn't the kind of language where programmers say, you know, just my, you know, just let me have my solidity. No one's in love with solidity. No one is in love. You have met to meet the guy who says, okay, I'll do anything you want. Just, but no, the thing is that even if they did love solidity, okay, as Antonio pointed out with their system, the question is not so much the use of solidity per se, but the fact that solidity was designed to run on layer one, okay, with the massive constraints.

Starting point is 00:55:53 of running on layer one. Now, if all you did was take that logic and ported it to layer two, you've missed out on a lot, meaning the DYDX could have done that. Let's assume that we had that capability before launching the system. DYDX would have ended up on layer two with a system with a price oracle feed every 50 minutes, three assets or two assets only, no cross-margining, no instant trading. None of all the cool stuff that right now is sort of what's making this system a huge system. So they would have gained nothing other than scale.

Starting point is 00:56:27 It sounds like you're ordering, like it sounds like you're making the argument, you're eight, that rather than just port the stuff that we have from main net to layer two, we should take a more first principles approach. And figure out what would be best in a layer two environment. Is that the argument you're making?

Starting point is 00:56:47 100%. Yeah, I think that's a great point too. I would wholeheartedly echo this. And that's kind of what I was saying before. where like, yeah, the scalability is great. And like, that's like, we have to solve that. But you get like so many second order benefits where if you're like, okay, well, like now with this new like more scalable system, what other features could I add?

Starting point is 00:57:05 Like, could I make my price circles more performant? Could I make my, you know, could I have cross margining? Did I like, you know, whatever? And I think there are a lot of things for any given application where that's the case. And I think for good developers, it's really not a big deal to like rewrite things or write things like from first principles again in a new language or on a new system. So I really think this narrative where like we need everything to be in solidity is, it's a bit overhyped. And I also strongly like echo like Yuri's points about like, you know, just we need to move away from this

Starting point is 00:57:36 kind of notion that like optimistic rollups are like the beginning and then like we'll go to ZK rollups later. Like look what's in production right now. Like they've been live with like diversify for like, you know, a year now. DYDX, one of the most like computationally complete. Like computationally things on all of Layer 1 Ethereum, like straight up, like already live on StarCware now, too. So it's like, we're not talking anymore like it's here. Like, go use the product. And I think that's a powerful thing. This is why we love this, by the way.

Starting point is 00:58:05 We love kind of the rush to ship in Layer 2 because it's kind of a survival of the fittest, right? All of these Layer 2 solutions are competing to be the dominant one. And it's awesome because as a Defi user, we get the benefits of that. We get to start using DYDX maybe a little bit quicker. But I'm curious, this whole approach, Yuri, that you're talking about, sort of this first principles approach. I almost want to hear the Starkware vision for Layer 2 and what you guys have pled, because we've heard sort of the optimistic roll-ups vision.

Starting point is 00:58:37 We've heard high-level, you know, the scalability vision for Ethereum from Vitalik and others. How does Starkware see it? I know you've got StarkX that we were talking about. And you also have Starknet. I'm not sure really what that is. Maybe you could talk about that in the context of your vision. Sure.

Starting point is 00:58:57 So StarcX is our scalability app. And as I mentioned, it can support a certain set of functionality, transfers, trading of certain types of assets, minting of NFTs. That's it right now. What we really want to have is something like StartNet, which is our vision for a decentralized permission to see K bro-up. And there we're thinking of something, which is really very much in the theory,

Starting point is 00:59:18 like experience. So anyone can, in a permissionless fashion, deploy whatever arbitrary logic they want in the form of a smart contract onto this layer to network. The users would be sending transactions into the network, much like they do on Ethereum today. And the system would be properly decentralized at every single layer. Now, our intent is to take the Stark X installations, deployments that we will have deployed by then and offer them the ability to port in a very seamless fashion onto Starknet if they so choose along with their user base and all that. So that's the the Starknet vision of course from our perspective from a business perspective. This is a must because as wonderful as the DYDX team is, there was very close contact since when was it, Antonio August, or so of last year building the system together.

Starting point is 01:00:16 Now, for us, it was hugely important to understand, you know, real customer needs, develop our software stack, help it, you know, sort of mature, solidify. You know, this is sort of real-life testing of whether the toolbox that we're building is powerful enough. But to scale out the business, we need to get to the point where any developer, any team of one or two,

Starting point is 01:00:41 or whatnot can deploy whatever idea they have onto the network without anyone's permission without talking to us regardless of whether Starkware exists or not and they're off to the races and that's what Starkness is all about and this is sort of the vision that we just raised series B a couple of weeks ago once again led by paradigm with three arrows and al meta research and a bunch of our early uh backwards like sequoia and founders fund and wing pantera and DCBC and this is exactly the vision that that they're supporting this permissionist decentralized ZK. Rowe.

Starting point is 01:01:19 I've got a question for you because you seem to be a big thinker. So I want to see, I want to see if you have any, how far your imagination goes. DYDX is a tried and true financial product that came before Ethereum. And what DGX is doing is taking this tried and true financial product and building it on this new financial platform.

Starting point is 01:01:38 But that's doing an old thing in a new way. And that's really cool. But what about new things? in new ways, specifically enabled by what you guys are building out at Starkware. What are the perhaps new financial products that could be built using this new platform? If you let your imagination go, have you thought of any crazy ideas like this? Well, I think that there are a ton of very beautiful ideas. Thinking back, you know, a few years back, the first time, this was like three years ago,

Starting point is 01:02:07 and there was this, I'm old and bald, but new to the blockchain space. But the first idea that sort of clicked in my mind where I heard it and I said, my God, this thing can open up new ideas. This was a company called Ensent, which I think like incentivized, which I don't think operates any longer. But their idea was to take NFTs as a means of tracking all sorts of sort of brokering dynamics. So if you help someone fill a position, you know, like staff, staff a position in their company, if you help someone sell their house. So let's say, you know, I want to sell my house. I have an NFT that represents this sale.

Starting point is 01:02:50 I give it to Ryan. He gives it to David because he knows David is interested in buying a house in my neighborhood. Now here, the path of, you know, of attribution, who was it who participated in introducing information into this market is tracked permissionlessly without any sort of. ability to dispute this in a very immutable fashion by the NFT on the blockchain. So and now let's say the brokerage, the one and a half percent, whatever it is, is now split between David and Ryan. Okay.

Starting point is 01:03:20 Now Ryan, if he knows that David is interested in this, he wants to get this NFT to the buyer, ASAP because if it goes through Antonio, this reward needs to be split three ways. Okay. Now think about this thing in the context of, say, real estate or something like that. Okay. So now you have this network. No contracts need to be signed. Anyone can participate.

Starting point is 01:03:40 Anyone can introduce information into the market and get compensated for it. You know, staffing, you know, hiring, Silicon Valley hiring, Israeli hiring for that matter is as vicious. Anyone can introduce information into the marketplace and be compensated for it. Now, this is a massively new idea. And if the economics are supportive of this and the scaling is supportive of this, you can build some amazing stuff. off this way.

Starting point is 01:04:07 Yuri, can we talk about some of the problems maybe that layer two faces or outstanding issues? I would say our challenges, maybe is another word for it. One is this idea of kind of silos, right? The concept that we lose composability of all of the defy apps that are working together. So maybe we have silos of liquidity. Maybe we also have silos of defy apps. That's the first problem.

Starting point is 01:04:33 The second problem, which might be related in your mind, but it's a lot. how do we bridge all of these various layer twos together? Do you have any thoughts or answers on these? Sure. So first of all, we're of the camp that says that the idea, I think that's been circulating in certain parts with the ecosystem that says, you know, no, don't worry everyone. Everyone's just going to migrate to the same layer two

Starting point is 01:04:54 where you're just all going to meet there and it's all going to be down to. That sort of, you know, I think that's an absurd notion in a very trivial way, meaning if that environment can sustain all that activity automatically, why can't Ethereum do that? And of course, no single environment can do that. And as we see with DYDX and other teams, the design space is rather multidimensional and different teams will pick different solutions. So from our perspective, it's going to be a slew of different layer two solutions. And from our perspective, layer one is going to remain fundamentally central to all these things. And so, for example, a design like defy pooling that we put out is an example of how we believe that layer two will continue to interact very intimately with layer one, years to come.

Starting point is 01:05:43 Is layer one like the settlement layer for all of this? Well, I'll describe later one. The concept of defy pooling layer one is where a defy is going to happen. Okay. And the pooling of demand for layer one defy services is going to happen on layer two. So instead of, you know, David and Ryan and Ori, all of us, you know, even, initiating a transaction going to compound or avae or whatever it is we go to layer two we create a pool think of this like you know pooling our car pool we pull our resources and only a single layer one

Starting point is 01:06:12 transaction is initiated but layer two here continues to interact in a very intelligent fashion a very cost-effective fashion with layer one now the other thing i think which is very important and this is sort of a responsibility of the different layer two solutions is to ensure that those the bridges between those are built in an efficient manner meaning the worst thing that could have happen to users is that if they want to go from one layer two to another layer two, they have to go out to layer one and cross over. And that would be very, very much sort of constraining from their perspective. We today, for example, for Star Trek's deployment, so you're going between D-Y-D-X and diversify pseudomutable X, other other partnerships to be a badger and other announcements

Starting point is 01:06:55 to be to follow in the coming weeks, you would be able to move funds using a crypto-privile Crypto primitive we call, I apologize. The fast withdrawals is powered. Sorry, apologies, conditional transfers is the blockchain primitive. This allows for trustlessly moving funds across Star-X deployments without going out to layer one, so from one Starkeyx to another,

Starting point is 01:07:26 from one layer two to another. This can be done across ZK roll-ups. And fundamentally, there's no reason why this cannot be done between ZK roll-ups and another layer two solutions like optimistic roleups. And I think we'll see these things maturing and coming online in the coming months and years. The other question that I have about the nature of L2 is the question of an on-ramp for Fiat, right? And so right now, the way that this works, if you want to get USDC into DYDX,

Starting point is 01:07:57 you got to go from, or you want your money into DYDX. You go from bank account to centralized exchange to Ethereum L1, and now into DYDX on Ethereum L2. So my first question is, whose responsibility is it for making that system easier? Is it DYDX's responsibility for getting USDC onto the L2 to play with DYDX? Or is it Starkware's responsibility to get USDC onto the L2?

Starting point is 01:08:24 Who goes out and talks to Coinbase in Gemini and says, come and deposit, is it come and deposit USD user funds into DYDX? or is it come and deposit U.S. user funds onto Starkware? Who's got to do this job? I think both of us. Yeah, I mean, obviously we both have a lot of incentives to be able to do this. I think you're exactly right.

Starting point is 01:08:49 I mean, I think the ideal system that we'd want to build here is just have centralized exchanges and more broadly just like any crypto products that people support, even other layer two is just have really seamless interoperability with Starkware and kind of the system that we're building. So yeah, I think it's definitely something that we're both working together towards in terms of getting a lot of those integrations for the future. And I want to say that the fiat to crypto on-ramp services, you know, like wire and MoonPay and all those guys, they're not terribly happy with layer one transaction fees because of their user experience, right? So if I, you know, charge 100 bucks to my visa and end up with 20 bucks worth of eth on layer one, you know, I'm not terribly excited. by that user experience.

Starting point is 01:09:36 So if I can move fund directly to layer two without going to layer one and a tiny fraction of that cost, that's a big win for those services as well. You know, I've been kind of waiting for like the crypto banks answer to something like Binance chain. And what I mean is like other crypto banks, like maybe Crackin or a Gemini or a Coinbase, right? Because Binance approaches, we're going to create this whole side chain thing. and we're going to push all of our liquidity into the side chain that they, as we talked about earlier, have some pretty strong control over.

Starting point is 01:10:12 I've been waiting for like a Coinbase or a Gemini to say, hey, we want to provide liquidity to this layer two, Ethereum secured chain and really kind of like push, push that. I'm not sure if there are any closer to doing that. Do you think that's how this competition will shape up between the binances and the other crypto exchanges? I get that that gets into some speculation, but I'm curious about how you think this competitive industry shakes out. I can only speculate about that, but having sort of seen the Coinbase S1 and the material coming from that direction, these are operations that are profitable to a degree where it's difficult for them to sort of entertain. things outside their sort of main focus right now.

Starting point is 01:11:03 And defy as exciting as it is for us and has been for a good while, I think it's going to take time for the centralized exchanges to sort of step back and say this, we need to seriously rethink our business in a fundamental way. Not as sort of some side, you know, a small team, you know, over on the third floor that looks at this, but you know, this is going to affect the whole business here. And I think there's a reason, you know, why D-YD-X is a startup that sort of started afresh and built this thing from the ground up.

Starting point is 01:11:37 I think you need to have a fresh team and a fresh approach to do these things. And I think that's not easy for established companies. So, guys, as we come to a close here, and again, thank you for coming on and sharing us your time and answering some of our questions. And Antonio, I know we asked this when you came on to our AMA forever ago, but the YouTube chat box will absolutely kill me if I don't ask this question. When, DYDX token? Oh, man. Yeah, I knew it was coming. Everybody asked me this.

Starting point is 01:12:10 I mean, I'm just going to give you the same answer. I've been saying for a while now, it's probably what I said before. Like, we believe that the best way to build DYDX and make DYDX huge in the future is, first of all, to build a great product. I mean, our goal at DYDX is to become one of the biggest crypto exchanges, period, like on a three to five year time horizon from now. And we think the way to do, well, you know, I would argue the way we know how to do that is first building a great product. And that's what we've been focused on for like three and a half years now. I mean, that's why I'm so excited about this newest product built on top of StarCware. Obviously, we've been talking about it, but think it's a huge leg up.

Starting point is 01:12:49 And now we feel like we have that product, which can play like in the big. leagues is every bit as good as like centralized exchanges and of course it's you know it's still something that's early will continue to improve it over time so we're not done yet but we think we're on much better footing now um so i think we're thinking about it we're obviously paying a lot of attention to what's going on in the space really big champions still of kind of decentralized governance really excited about that's community involvement um so no specifics but it's something we're definitely tracking but we're still laser focused Like we have been for the past three and a half years,

Starting point is 01:13:25 and we've gone through two cycles of this now, right? With the like 2017 ICOs, we were there for that. And then this most recent kind of like liquidity mining craze, we're here for this as well. But now I think the differences we really feel like we do have a product that's just launched today, which can be successful. And then kind of thinking about what comes next after that. Guys, this has been a phenomenal conversation.

Starting point is 01:13:48 I think we married sort of the defy app perspective and the scalability solution perspective. really well. I want to end with this question. I'll first direct this to Antonio and then Yuri can comment on it. But the question in my mind is there are all these shortcuts you could take to scalability. And many chains have arguably taken these shortcuts. Many defy applications, scalability solutions have taken these shortcuts. The path you guys have chosen has been harder, it seems like, right? It's taken longer to get to this point. And I want to ask the question that we sort of ask many teams and many projects, which is this,

Starting point is 01:14:30 why go to all this trouble? Is the decentralization that you're getting on the other side of this worth it? Maybe Antonio, you could comment first. Yeah, I mean, obviously I think the answer is yes and wholeheartedly. I think just what I was alluding to before and kind of talking about with a lot of the limitations of centralized exchanges. And remember, when we talk about centralized exchanges, it's not just centralized cryptocurrency exchanges. It's literally the entire global financial system that we're talking about there, right? So it's like these things where there's no auditability in the systems, there's no

Starting point is 01:15:06 transparency in the systems, they're very permissioned, you know, you have to trust your funds to various third parties when you're trading on them. That's the way all of finance works. And now we have a chance kind of for the first time. And I'm not the first to say this, right, but just like jumping on the bandwagon where we can reinvent that and rebuild that for things that are really core to the financial system. Obviously, the thing that we're focused on at YDX is specifically applying all of that to derivatives contracts.

Starting point is 01:15:33 But I think that's actually a really great and kind of prime use case for a lot of these advantages based on kind of what I was saying before. Currently very permission. They're currently a very black box. They're very, very trusted, not only with your funds, but with the execution of your contracts. And if you can take a lot of these advantages of decentralization and apply, them to this literally the biggest market in the world in derivative contracts, we think that that's just a complete game changer for the whole global financial industry potentially, right?

Starting point is 01:16:03 And that's the biggest market in the world and we're excited to tackle it. So I would say emphatically, yes. You're the same question to you. Why go to all this trouble? So the reason we go out into all this trouble is because we sort of try and think a few steps the head. And the basic question is, okay, what if everything we're doing succeeds, you know, in a phenomenal way? And this becomes a thousand or a million times bigger. Okay. So we're not dealing with, let me pick on NFTs. We're not picking with NFT, we're not looking at

Starting point is 01:16:33 NFT cards that trade for 10 bucks, what about 10 million bucks? Or 100 million bucks, okay? Now, if that asset is sitting on some side chain and suddenly this thing is worth $100 million, I wouldn't be sleeping well at night. Okay. If your application scales massively all of a sudden and then you need to handle, you know, many more transactions, et cetera, and certainly capital efficiency is just a huge factor, you know, how do you consider these things? And the way we see it building layer two on top of Ethereum, building a validity proof

Starting point is 01:17:08 system where the only thing that's allowed is a valid state transition in the system without any reliance on the integrity of the operators, et cetera. That is a path forward where we can see this thing massively growing and it doesn't fall apart. And that means there is a business to be built for us and for the likes of DYDX and any application developer out there. That's why we're doing it the way we're doing. Well, very exciting, guys.

Starting point is 01:17:37 We certainly appreciate your efforts, and it's been a pleasure to have you on bankless. Thanks so much. Thank you very much for having us. Guys, action items, I think the best thing you can do with Layer 2 today and with DYDX today is try it yourself. So you should go to the DYDX exchange is now deployed on Layer 2 and try it out. If you do so, we have a special code that we can share with you. It's in the show notes.

Starting point is 01:18:05 It's trade.d.dX. Exchange slash R slash Bankless, that will give you 10% off your trading fees. So get your MetaMass wallet connected and try out layer two, try out DYDX. Of course, guys, we end every episode with this. Risk and Disclaimers, ETH is risky, Bitcoin is risky, crypto is risky. So is D-Fi. You could lose what you put in. Watch out for that margin, guys.

Starting point is 01:18:31 But we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - SotN #41: Scaling DeFi with dYdX and StarkWare

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