# Liam Horne - Full Writing Archive
> Software entrepreneur and engineer working on Ethereum scaling, stablecoins, and blockchain technology.
This file contains the full text of every essay on https://liamhorne.com.
## State Channels and Agentic Payments
- URL: https://liamhorne.com/mpp
- Published: March 2026
- Summary: Liam Horne on the Machine Payments Protocol (MPP), an open standard for machine payments co-authored with Stripe, and how AI agents became the killer app for state channels.
I've spent almost a decade obsessed with one idea: software paying software. Back in 2017, a bunch of us poured years into building state channels on Ethereum, infrastructure for machines to stream micropayments to each other. The tech worked really well, but nobody needed it yet. People used blockchains to trade tokens, not to make payments. AI agents changed that. They're exactly the software we were waiting for, so we built the [Machine Payments Protocol](https://mpp.dev) with Stripe to give them a way to pay.
## State channels on Ethereum
When I started working on Ethereum in 2016, the thing that pulled me in was payments. The idea that two pieces of software could transfer value to each other without a bank or a payment processor in between. Ethereum showed the promise of this, but the problem for years was that it was too slow and too expensive for payments to take off. A single transaction cost a few dollars in gas and took minutes to confirm.
So, in 2017, [Jeff Coleman](https://jeff.coleman.fyi) and I started working on [state channels](https://liamhorne.com/state-channels). The core insight was that you don't need to put every transaction onchain. Instead, two parties could lock funds into a multisig contract, exchange signed transactions offchain at whatever speed they want, and only settle the net result back to the blockchain.
And it worked really well. Instant transactions, zero fees, thousands of TPS between two peers, all settling as a single onchain transaction. We also came up with this idea we called counterfactual instantiation, treating contracts as deployed even though they hadn't touched the chain, which ended up motivating Vitalik to author [EIP-1014](https://eips.ethereum.org/EIPS/eip-1014), the `CREATE2` opcode now foundational to account abstraction and cross-chain deployments.
What we were really building, though, was payment infrastructure for _machines_. My favorite demo that we built was [Web3Torrent](https://liamhorne.com/web3torrent), a torrenting client where peers paid each other micropayments for each chunk of data they downloaded. A peer would open a state channel with a seeder, download pieces of a file, and send a tiny payment for each piece. It was really cool to see it work.
## A solution without a problem
The problem with state channels though was that it had no users. The applications we kept writing about, streaming payments between IoT devices and game servers and torrent peers, all required autonomous software on both sides of every transaction, software that could discover a service, negotiate a price, authorize a payment, and consume the result without a human clicking a button. The harnesses for this didn't really exist yet, so we had to show the potential by writing demos. **We were building infrastructure for a world that hadn't arrived yet.**
State channels were specifically designed for payments, but most people using Ethereum were doing DeFi and trading, not payments. There just wasn't enough demand. So [rollups](https://liamhorne.com/optimism) turned out to be the more general scaling answer, and several of us spent a few years working on that instead.
In recent years though, [stablecoins](https://liamhorne.com/stablecoins) have really taken off. Payments on blockchains went from a niche idea to the fastest growing use case in crypto, and that's a big part of what led us to build [Tempo](https://liamhorne.com/tempo), a blockchain designed from the ground up for stablecoin payments. But even with all of that progress, machines streaming micropayments to each other was still hypothetical. Nobody was actually doing it.
## Agents are the customer state channels were made for
I think that what's happening with agents right now is finally changing that. If you've used Codex, Claude Code, or Amp in the last few months, you can see how dramatic of a paradigm shift AI is going to be. An agent can write code, spin up infrastructure, pull data from a dozen sources, run tests, and ship a PR. All without you. Agents are becoming the default way that people do software engineering and many different kinds of knowledge work already.
But agents don't pay like humans. An agent might make thousands of small decisions a day, each one needing low-latency, programmatic payments. And right now there's no standard way to do that. You either hardcode an API key with a pre-paid balance or you try to find a way to get your agent to submit using a card checkout form on a headless browser.
I think that agentic payments are the killer app state channels never had. They're autonomous software that needs to transact with other software, at high frequency, for small amounts, without human intervention. An agent already reasons about goals, evaluates tradeoffs, and decides what actions to take. Giving it a spending policy and letting it act within that policy is the kind of bounded decision-making agents are built for.
## Introducing the Machine Payments Protocol
That's why we built the [Machine Payments Protocol](https://mpp.dev) with Stripe. With MPP, an agent can request a resource, a service names a price, and the agent pays from its wallet without any human in the loop, billing agreement, or credit card on file. We've even [proposed it to the IETF](https://paymentauth.org) as an open standard built on HTTP 402. And while it works exceptionally well for stablecoin payments, it's actually entirely agnostic to blockchains and even tokens. Visa has already [extended](https://mpp.dev/payment-methods/card#card) it to work with cards.
For example, [Browserbase](https://browserbase.com) lets agents spin up headless browsers and pay per session, [Parallel](https://parallel.ai) gives agents programmatic web access with per-call payments, and even physical-world services can work with MPP: agents can pay to print and send mail through [Postalform](https://postalform.com).
And at the core of MPP are the concept of sessions that let an agent authorize once with a service provider, commit some funds upfront, then stream micropayments within the session, and settle once at the end. Thousands of payments, one settlement. **Sessions _are_ state channels**, just the most basic kind. And with Tempo, we plan to enshrine these payments natively into the chain.
MPP is live today on [Tempo Mainnet](https://tempo.xyz), which is also now open for developers.
If you're building agents and want them to pay for services, I encourage you to read the [spec](https://mpp.dev) or get started with the [SDK](https://docs.tempo.xyz/mpp). If you're running a service and want agents to be able to pay you, list it in the [Payments Directory](https://tempo.xyz/directory). If you just want to try it out, check out [Tempo Wallet](https://wallet.tempo.xyz), which is a wallet designed primarily for managing your agentic payments.
Stablecoins are taking off for enterprise use cases like payroll, remittances, and embedded finance, and agentic payments are just getting started. There are so many ideas from a decade of working on Ethereum scaling that we're finally going to realize with Tempo, and MPP is just the first. We're hiring. If you want to work directly with me on bringing these ideas to life, email me at [liam@tempo.xyz](mailto:liam@tempo.xyz).
---
## Tempo
- URL: https://liamhorne.com/tempo
- Published: September 1, 2025
- Summary: Liam Horne joins Tempo, a payments-first blockchain incubated by Stripe and Paradigm, to build infrastructure purpose-built for stablecoins and fintech adoption.
I'm excited to share that I've joined the team at [Tempo](https://tempo.xyz).
Tempo is a payments-first blockchain, incubated by Stripe and Paradigm.
## Stablecoins and blockchains
When [Base](https://base.org/) launched in 2023 with the [OP Stack](https://specs.optimism.io/), it was clear that we had hit an important milestone in the history of blockchain scaling. Now, a Fortune 500 company in the US like Coinbase can just "spin up" a blockchain and begin integrating it into their business like they would any other technology. Given Coinbase's business development teams, its relationship to Circle, and its ability to leverage its user base, network of ramp integrations, and liquidity, Base was set up to be wildly successful — and it has been!
It was those dynamics between Circle, Coinbase, and Base that got me hooked on stablecoins that summer too. Alongside some friends, I did a lot of research into [Tether on Tron](https://liamhorne.com/stablecoins) and the similar dynamics those two had alongside Binance in the adoption of stablecoins outside of the US. It was the observations from that research that led me to do lots of work in understanding the business of stablecoin issuers, ramp networks, various financial services firms, exchanges, and more.
Over the past year, I've applied lots of those insights in the buildout of [World Chain](https://liamhorne.com/world-chain) where we've built an EVM-based blockchain network designed for the over 30M humans that have signed up on [World](https://world.org/).
From that work, a few things became really clear to me:
**Stablecoins were going to go mainstream, very soon.** You could see it was imminent from the data. Stablecoins were _already_ 70% of transaction volume across all blockchains, yet they didn't have anywhere near that level of notoriety within the ecosystem. Now with more dashboards out like [Visa's Onchain Analytics Dashboard](https://visaonchainanalytics.com/) and excellent coverage by podcasts like [Tokenized](https://www.tokenizedpod.com/), the industry is waking up to how big of a deal stablecoins are. Importantly, regulators have become keenly aware of how important they are too.
**Fintech adoption of stablecoins was coming.** Outside of the blockchain space, there is already a massive shift going on within fintech. More and more applications are offering bank-like services to end consumers. Things like [Starbucks's cash product](https://www.moneyness.ca/2019/08/starbucks-monetary-superpower.html), [Apple Cash](https://www.apple.com/apple-cash/), [Cash App](https://cash.app/), [DoorDash Crimson](https://dasher.doordash.com/en-us/doordashcrimson), [Wise](https://wise.com/), and more are all rebuilding exactly the kinds of infrastructure in a closed and bespoke way that the stablecoin space is creating in an open and integrated way. It seemed inevitable that fintechs would embrace stablecoins.
**Blockchains were not designed for stablecoins.** Stablecoins are an emergent phenomenon of blockchains. They were created in order to be inter-exchange financial rails and to be an alternative bank for those exchanges, but the main use case driving their adoption was crypto trading. Meanwhile, blockchains themselves have always treated them as some kind of "application," as opposed to the fundamental primitive that they should be designed _for_. As a result, stablecoin use cases were fragmented, expensive or had unpredictable costs, and had several user experience paper cuts for anything other than trading.
## Why Tempo
In the last year or so, we've definitely seen stablecoins go mainstream. However, the experience for fintechs, banks, businesses, and end consumers using them is still not so great. To me, solving this problem is the most important mission for the future of the blockchain industry. We've spent over a decade understanding how these systems work and how they can be scaled to handle so many different kinds of use cases, all the time looking for killer applications.
Stablecoins and fintech adoption of them represent the biggest opportunity this industry has ever had to meaningfully change the world using blockchain rails. So, Tempo is an attempt to build those rails from scratch. It is leveraging over a decade of research and development by the best in the industry, and is being built in partnership with the largest payment gateway and payment processor on the internet.
Instead of focusing on trading, Tempo is being designed from the ground up to support real-world crypto use cases like remittances, global payroll, embedded accounts, agentic finance, and even microtransactions. It’s a blockchain designed for payments first, not as an afterthought.
For example, here are some of what's going to be included at the chain level:
- **High throughput and sub-second finality**, designed to feel instant for payments.
- **Low, predictable fees payable in any stablecoin.**
- **Cross-stablecoin transfers** through a built-in AMM, ensuring neutrality across issuers.
- **Payments-first UX** with gasless flows, memos, access lists, and dedicated lanes.
- **Optional privacy** for real financial applications and enterprise requirements.
Importantly, Tempo is also being designed to be neutral and permissionless. It is borrowing much of the Ethereum ethos and strategy of not enshrining or embedding any particular issuer, token, or centralized entity into the network.
## Looking ahead
Tempo is an independent company, with Stripe and Paradigm as first investors, and a team of 15 led by Matt Huang.
For me, this is an exciting continuation of a journey that started with payment-based state channels on Ethereum through to working on Optimism and the OP Stack. Stablecoins are already the most important use case of blockchain technology, and now it’s time to build rails that are purpose-built for them.
If you’re working on payments, remittances, or embedded fintech and want to help shape what comes next, I’d love to connect.
Learn more at [tempo.xyz](https://tempo.xyz).
---
## World Chain
- URL: https://liamhorne.com/world-chain
- Published: October 2024
- Summary: The first blockchain that prioritizes anonymous verified human interactions over bots and AI
The reality is that bots run by trading firms dominate transactions and fee revenues on blockchains. Although being "onchain" is becoming more popular, there are still very few actual people using blockchain-based applications.
To help with this, I've been advising the World Foundation this year on the launch of [World Chain](https://worldcoin.org/world-chain). Today, I'm proud to share that the public mainnet for the network is officially open! The chain is launching with nearly 15M humans migrating from OP Mainnet.
You can actually see live grant claims happening on Index Supply [here](https://www.indexsupply.net/query?query=SELECT%0Ablock_num%2C%0ACOUNT+%28DISTINCT+%22receiver%22%29+AS+unique_receiver_count%0AFROM+grantclaimed%0AGROUP+BY+block_num%0AORDER+BY+block_num+DESC%0ALIMIT+5%3B&event_signatures=GrantClaimed+%28uint256+grantId%2C+address+receiver%29&chain=480&block_height=4925137).
**Real world adoption**
Like I [wrote about](/stablecoins) earlier this year, I think that stablecoins are the killer app of the blockchain industry. In countries all over the world, but especially in those where local currencies are failing or capital controls are strict, stablecoins have become a way for people to access a stable form of money.
In the recent report [Stablecoin: The Emerging Market Story](https://castleisland.vc/wp-content/uploads/2024/09/stablecoins_the_emerging_market_story_091224.pdf) by Castle Island Ventures and Brevin Howard Digital, they found that significant numbers of people are using them for dollar savings, currency conversion, and for yield generation. Also, they found that in emerging markets in particular, they use stablecoins for currency substitution, to pay for goods and services, and for cross-border payments.
From my vantage point, this is a really big deal! Ethereum is enabling people all around the world have better financial access and to achieve a baseline of financial security that many of us take for granted.
So, this is why I was excited by World's insane user growth since it [launched](https://worldcoin.org/blog/announcements/worldcoin-commits-optimism-superchain-vision-ahead-mainnet-launch) last year. The project has onboarded millions of people in _precisely_ those regions where stablecoin adoption was highest, and that was a major opportunity! Nearly 7M verified humans and 15M total app installs holding ~$100M of assets, and more total USDC holders than on any other blockchain. It made total sense for the project to scale onto its own blockchain to better cater to those users.
In addition to World Chain launching, World App (how most of the 15M humans interact with the project), is launching [Mini Apps](https://world-id-docs-git-world-chain-docs-main-worldcoin.vercel.app/mini-apps) too. Kind of like WeChat, it's way to distribute apps inside of an app. For Ethereum developers, you can build applications that will **go directly** to the mobile phones of millions of people in places where real world crypto adoption is actually happening.
**Prioritizing humans over bots**
World Chain is the first blockchain that prioritizes anonymous verified human interactions over bots and AI.
That sounds nebulous, so let me explain what that means precisely.
Since World Chain is built on [Optimism](https://optimism.io/), transactions are submitted to and sequenced by a server run by the World Foundation. Since every person that has a valid [World ID](https://worldcoin.org/world-id) is identifiable by their public address on the chain (i.e., they are anonymously verified humans), the World Foundation can build blocks that put those transactions above all others, regardless of all other factors.
This is an incredibly simple, but valuable feature. While the industry is trying to figure out how to _distribute_ MEV to users through different kinds of exotic mechanisms, World Chain can simply differentiate between human and other transactions and prioritize those human-originated transactions first.
Since retail traders, the ones on the major "order flow aggregators" (i.e., the websites and mobile apps) are the ones most often losing out because of sophisticated trading firms running bots, this sequencer-level prioritization is doing them a massive service. It's putting humans first over algorithms and bots. As the OP Stack develops, it might also be possible soon to enshrine this in the fault proof too.
World Chain even goes one step further. Humans will be given a gas allowance for their transactions, meaning for them gas will be **free** up to a certain point. This is better than $0.01 or even $0.001 fees, it's literally $0 for humans. The way this can be sustainable over time is that the non-verified addresses (i.e., the bots) will still pay for fees like on other blockchains, and the revenue from those fees will be put back into the free gas allowance for users.
**Built with Optimism**
This is one of the first projects I've gotten to work on since stepping back from OP Labs last Summer, and it's been great to orient some of my focus away from infrastructure and more towards real world blockchain applications. Of course, it's made even better that World Chain will be built within the Optimism Superchain and using the OP Stack that has become industry standard.
This launch means that the World project is able to reach millions of real humans _today_ with real world applications, build a blockchain that prioritizes humans over bots, and directly benefit from all of the work that has been put in to scale Ethereum over the years!
You can learn more at [world.org/world-chain](https://www.worldcoin.org/world-chain).
---
## Canada Cannot Afford to Miss Out on Stablecoins
- URL: https://liamhorne.com/canada-stablecoins
- Published: January 2024
- Summary: A memo proposing a clear regulatory framework for stablecoins in Canada to modernize digital payment infrastructure and maintain economic sovereignty.
_Cross-posted from [Build Canada](https://www.buildcanada.com/memos/stablecoins)_.
> **Proposed by:** Som Seif, Founder Purpose Unlimited
>
> **Supported by:** Lucas Matheson, Liam Horne, Jean Amiouny, Eric Richmond, Alex Tapscott, Daniel Debow, Jamie McDonald, Justin Sky, Brice Scheschuk, Josh Domingues, Daniel Eberhard, Farhan Thawar, Brian Mosoff
Stablecoins backed by the Canadian dollar will make transactions faster, cheaper, and more efficient, modernizing our digital payment infrastructure.
Canada is actively fighting against this technology. Meanwhile the EU and Singapore have already established a regulatory framework, and the US is actively pushing forward the GENIUS Act to do the same.
Without a stablecoin framework, Canada will lose economic influence to foreign stablecoin issuers, increase reliance on USD-pegged assets and forfeit economic sovereignty.
## Goals
Establish a clear framework for stablecoins in Canada under federal prudential regulation as digital payment instruments – distinct from securities. Integrate stablecoins into our financial and payment systems to increase consumer options, financial competitiveness, and economic resilience for Canada. With this, Canadians will see faster transactions, lower costs, and a Canadian dollar that can compete on global markets.
## Background and Motivation
In many ways, blockchain technology is a made-in-Canada innovation. Ethereum, the world's second-largest blockchain network, was co-founded in Canada by a Canadian. Today it is the largest Canadian business venture ever built, worth over $300 billion CAD (about 1.5 times the size of RBC, Canada's largest company).
A decade ago, facing uncertainty and skepticism from Canada's regulators and business establishment, most of Ethereum's founders left Canada and set up shop in the U.S., Singapore, Germany, Switzerland.
Despite Canada's leadership in developing blockchain infrastructure, we are falling behind in applying these innovations to our financial system. Canada should be at the forefront of blockchain-based financial solutions, leveraging its homegrown expertise rather than ceding leadership to foreign players. We can start with stablecoins.
A stablecoin is a type of digital currency designed to maintain a stable value by being backed by traditional currency, such as the Canadian dollar. Think of it as digital cash that is always worth the same amount because it is fully backed by real money in a bank. Unlike other cryptocurrencies, which can fluctuate wildly in price, stablecoins combine the security and utility of traditional money with the speed and efficiency of digital transactions.
Stablecoins offer two major advantages over Canada's current financial system: they eliminate middlemen and enable programmable financial transactions.
First, stablecoins allow Canadians to hold and transfer money directly, without relying on banks or payment processors. This simplifies transactions, offering lower fees and less delays, especially for international payment. One in five Canadians remit money abroad today, but pay hefty fees of 6-12%. Imagine if you could send money to family abroad or conduct business with foreign intermediaries instantly and cheaply, without clunky wire transfers or slow credit card payments.
Second, stablecoins introduce programmability through smart contracts. This allows you to automate financial operations currently handled by banks and intermediaries. Loans, escrow services, regulatory compliance checks, and secure asset storage can all be managed transparently and cost-effectively through programmable digital contracts. This significantly streamlines treasury operations, payroll, and cross-border business transactions, lowering complexity and cost.
Stablecoins solve several real-world financial challenges for Canadians:
- **High fees and slow transactions** – Current banking systems impose delays and fees, particularly on international transactions. Stablecoins offer low-cost, instant global payments.
- **Currency conversion costs** – Canadian businesses dealing internationally face excessive foreign exchange fees. Stablecoins simplify currency management, reducing reliance on costly foreign exchange services.
- **Limited banking access** – Canadians are often constrained by banking hours and limited service availability. Stablecoins operate 24/7, ensuring constant financial access.
- **Inefficient treasury management** – International transactions introduce liquidity challenges for businesses. Stablecoins provide real-time settlement, enhancing financial efficiency.
Beyond efficiency improvements, the relevance of the Canadian dollar is at stake. As stablecoins become more widely adopted in global finance, they are overwhelmingly USD-dominated, reinforcing U.S. economic influence in cross-border transactions. Canada's economy is built on a strong and trusted currency, and ensuring that a CAD-backed stablecoin exists and thrives is critical to maintaining our role in international trade and money flows. If Canada does not create the regulatory framework and environment that encourages the development of CAD stablecoins, consumers and businesses will default to using USD-pegged alternatives, eroding the relevance of CAD in global markets.
This shift would not only weaken CAD's influence in international finance but also subject Canada's economy to greater exposure and dependence on U.S. monetary policy. Establishing a CAD stablecoin secures our economic sovereignty, reinforcing CAD's role in global commerce while enabling Canadian firms to transact digitally in their national currency.
## Current Challenges
While other countries have established clear legal definitions and regulatory structures for stablecoins, a lack of federal leadership has led to inconsistent policies across provinces. It's not just a lack of certainty, some provinces are actively fighting against this technology. The Canadian Securities Administrators (CSA), which represents the provincial securities regulators, has deemed stablecoins to be securities (i.e. they should be treated like a stock or bond).
This is not only an inaccurate designation (other countries have deemed these to be payment infrastructure), but it places a higher regulatory burden on stablecoin operators, actively stifling growth. This also leads to a significant tax burden for users, as stablecoin transactions would be subject to capital gains or income tax. Imagine having to pay tax on the appreciation of the Canadian dollar every time you bought something in cash – it wouldn't make sense to use it.
The time to act is now. By establishing a strong legal and regulatory foundation for stablecoins, Canada can modernize its financial system, enhance competitiveness, and ensure a future where Canadian businesses and individuals benefit from the efficiency, security, and accessibility of stablecoin technology.
## International Adoption
Many countries have already raced ahead with frameworks that support the adoption of stablecoins:
- **Singapore** – The Monetary Authority of Singapore established clear licensing rules for stablecoin issuers, ensuring they maintain 1:1 fiat backing (i.e. backed to the Singapore dollar) and consumer protections. As a result, Singapore has attracted stablecoin innovation while maintaining financial stability.
- **European Union** – The EU's Markets in Crypto-Assets (MiCA) framework classifies stablecoins as digital money, creating a clear legal path for their use in daily commerce. This has provided legal certainty for businesses and consumers.
- **United Kingdom** – The U.K. integrated stablecoins into existing financial regulations under its Financial Services and Markets Act, ensuring they are regulated like traditional electronic money.
- **United States** – The US has expressed strong support for stablecoins. The GENIUS Act, which offers a pro-growth regulatory framework and ensures 1:1 US-dollar backed reserves, is actively being pushed through to becoming law.
## What Needs To Be Done
To secure Canada's leadership in digital finance, we must act quickly:
1. **Define Stablecoins in Law** – The Federal Minister of Finance must issue an immediate Order in Council to classify stablecoins as digital payment instruments, distinguishing them from securities.
2. **Amend the Retail Payment Activities Act (RPAA)** – Stablecoins must be recognized under the RPAA, ensuring they are governed by appropriate financial regulations and consumer protection standards.
3. **Establish a Single Regulator for Stablecoins** – As CAD-denominated stablecoins are an extension of the Canadian dollar, the Bank of Canada should oversee stablecoin issuers. Having a single regulator will also help streamline processes. Their mandate should be two-fold:
- Support the safety and security of consumer finances – e.g. ensuring issuers meet reserve and redemption requirements; establishing anti-money laundering rules
- Ensure Canada is a globally competitive environment for stablecoin adoption – e.g. following similar regulatory models already established in the UK and US will make it easy for existing companies to expand to Canada
4. **Enable Stablecoin Integration into New Banking Infrastructure** – Stablecoins should be incorporated into Canada's open banking and real-time rails framework, ensuring seamless interoperability with existing financial services.
## Common Questions
**Would stablecoins destabilize Canada's financial system?** No. Properly regulated stablecoins are backed 1:1 by fiat (i.e. CAD) reserves and improve financial efficiency without affecting traditional banking stability.
**Are stablecoins secure?** Yes, under this framework, issuers will be required to undergo regular audits, and comply with stringent security protocols.
**Aren't cryptocurrencies speculative assets that fluctuate wildly in price?** Stablecoins are not crypto assets. They are backed by fiat currency (i.e. the Canadian dollar). By making existing currency a digital asset, countries can benefit from the speed, security, and lower fees of blockchain technology, without the fluctuations in price.
**Will this benefit everyday Canadians?** Absolutely. Lower transaction fees, faster payments, and better financial access will help individuals and businesses alike. With regulatory clarity, innovators would feel empowered to develop new and important financial products and services to support consumers and businesses.
**How will stablecoins prevent illicit finance?** Stablecoins offer a powerful tool to combat illicit activity under strong regulations. Issuers can (and have) assisted law enforcement, using blockchain analytics to trace and freeze funds tied to crimes like scams and ransomware. Unlike cash systems, which are slow, opaque, and nearly impossible to track efficiently, stablecoins provide transparency and speed that traditional cash can't rival.
## Conclusion
Stablecoins are the next step in Canada's financial evolution. If we act now, we can position ourselves as a global leader in digital payments, attract investment, and enhance economic sovereignty. Our government must move quickly to define and regulate stablecoins, ensuring they serve Canadian businesses and consumers in a safe and efficient manner. Other countries are doing the same; Canada cannot afford to be left behind.
---
## Making Sense of Tether on Tron
- URL: https://liamhorne.com/stablecoins
- Published: November 2023
- Summary: Analysis of stablecoin adoption and Tether's growth on the Tron blockchain
My friends that work on Ethereum tend to be very surprised once they realize the most used
cryptocurrency for payments is Tether on Tron. I was too when I first found out. Recently, I started
to look more into it and here is what I learned!
### Stablecoins grew exponentially over the last five years
Global access to the US dollar has really turned out to be a killer app. They're used for all kinds
of things, like inter-exchange settlement, cross-border payments, and accessing a dollar product in
countries with strict capital controls.
They're growing *really* fast, over 100% year-over-year in the past five years, from under $3B to
over $125B[^4] of stablecoins in circulation today. Stablecoins today make up 70% of all
cryptocurrency transaction volumes despite only composing 10% of the entire cryptocurrency market
cap![^12]
Stablecoins even surpassed PayPal in total settlements in 2022: over $11T[^4] of volume settled on
blockchains! That's almost the size of the entire Visa network ($11.6T[^4]).
Even in bear markets for cryptocurrency trading, they continue to gain adoption. Since the end of
2021, stablecoin transaction volumes have dropped only 11%, compared to centralized exchange
volumes, which are down 64%.
Active addresses, dominated by USDT
Transactions sent, dominated by USDT
### Stablecoins seriously help people that need stable money
More than a third of Latin American consumers say they have made a payment for an everyday
purchase with stablecoin, at least according to a study conducted by Mastercard. They claim
from their survey data that 51%[^52] of consumers in the region have already made at least one
transaction with some cryptocurrency.
Once you look into it though, it's obvious why. People living in countries with failing monetary
policy like Argentina have experienced 100%[^47] annual inflation for over a century. They quite
simply *need* stability in their money and stablecoins provide that. They help people preserve the
wealth they've accumulated.
This is such a hair-on-fire problem for Argentinians that their new president is [planning on moving
the entire economy to the US
dollar](https://www.bnnbloomberg.ca/what-is-dollarization-and-why-is-argentina-considering-it-1.2011307)!
In Turkey, the Lira inflated by 80.5% in 2022 making not only stablecoins but cryptocurrencies in
general ways for people to preserve wealth. According to data from research by GWI, ownership of
cryptocurrencies is the highest in the world, at 27.1%[^90], well above the average of 11.9%
globally.
In Istanbul, it's common to see stores in densely populated areas where you can convert your Lira,
USD, or EUR in and out of USDT. Some friends and I [visited those
stores](https://daimo.com/blog/cash-chain) to understand more about how Turkish people are using
stablecoins last year.
Share of internet users aged 16 to 64 owning some form of cryptocurrency. The fastest growing countries in crypto ownership all share one thing in common: skyrocketing inflation.
### Businesses are building consumer finance apps with stablecoins
For instance, [Lemon](https://www.lemon.me/en) lets more than 2M[^43] customers in Latin America
store their stablecoins like they would with a traditional bank and even spend them using a credit
card on the Visa network. Funds customers lend to Lemon are custodied[^48] as USDT on Ethereum or
invested into BTC on Bitcoin. They've seen a 200x growth in active users since 2021.
Larger fintech businesses are also starting to meet this demand. For instance, the [Mercado
Pago](https://www.mercadopago.com.mx/criptomonedas) (the fintech arm of Latin America's version of
Amazon, which has 200M users) is starting to support payments made by users in USDC and USDP across
Latin America, starting in Chile[^49] and Mexico[^50].
[Yellow Card](https://yellowcard.io/send-money/) provides fiat payment and disbursement solutions in
16 African countries. They handle all accounting and settlement of the funds between countries by
using stablecoins like USDT. Effectively, they're enabling cross-border money transfers by using
stablecoins as the backend instead of existing cross-border banking infrastructure.
### And infrastructure is being built for businesses with stablecoins
With all of these products being built that lean on stablecoins, it's becoming clear that
infrastructure serving them is important to be built too. Some companies are already recognizing the
opportunity to build picks and shovels for a wave of stablecoin adoption.
[Bridge](https://www.bridge.xyz/#oi), for example, offers APIs for developers of fintech businesses
to move between any stablecoin to any other stablecoin. In a sense, they're unbundling the part of
an exchange like Coinbase that allows users to "deposit" and "withdraw" with fiat money and turning
that into a service to be integrated in other apps.
Even Visa, the largest payment processor in the world, is beginning to pilot stablecoins for
merchant settlement as an alternative to traditional banking.[^51] From a pilot Visa did with
Crypto.com, they were able to have reduced the time it took to prefund transactions by 50% and
reduce foreign exchange fees.
### Stablecoin issuers are benefiting from higher interest rates
For stablecoin issuers, the recent rise in interest rates has been incredibly profitable.
Tether, the issuer of the largest stablecoin USDT, has a market cap of ~$82.9B[^16] today. They've
stated that at least $72B[^41] of those funds are held in US treasury bonds with Cantor
Fitzgerald[^86]. Tether owns more US Treasury Bills than Australia, Spain, and the United Arab
Emirates.[^65] With federal rates at 5%[^40], Tether is able to make billions from the
interest alone.
The interest on stablecoin deposits are so large that, Coinbase, the largest crypto business in the
US is making significant double-digit percentages of its revenue via a revenue share with Circle. In
Q2 of 2023, the revenue from interest on the reserves accounted for $201.4M[^17].
After the pandemic, interest rates have continued to climb.
## How did we get here?
### Tether was the first to establish the utility of stablecoins
Today, Tether's USDT represents 69% of the entire stablecoin supply and 55% of all DEX
volume, rivaled only by US-based USDC (which, compared to Tether, only has 16% as many active
addresses).
Tether was founded in 2014 and was the first way for users of cryptocurrency exchanges to get access
to a product similar to a digital dollar — this was difficult at the time especially for exchanges
which lacked access to traditional banking infrastructure. Also, it became a way for blockchain
users to make transactions denominated in dollars without leaving a blockchain at all.
Tether's supply grew with the rise of exchange trading volume.
### Tether facilitated cryptocurrency exchange banking and arbitrage
Between the start of 2016 and the end of 2017 the market cap of USDT grew 1000x from $1M to over $1B
when excitement around cryptocurrencies surged dramatically. The rise of exchanges made USDT
critically important with users wanting to transact in dollar denominations within those exchanges. USDT
fulfilled some important useful functions in the cryptocurrency industry when it first launched:
1. **An alternative bank for exchanges**. For cryptocurrency exchanges that had their bank accounts
disconnected from traditional fiat systems, they could support Tether and allow deposits and
withdrawals into the exchange that way instead.
2. **Inter-exchange financial rails**. Tether acted as a reliable "tether" between all of the
cryptocurrency exchanges so that accounts with USDT balances could deposit between them, for
example moving funds from Binance to Bitfinex. This led to an enormous opportunity for
arbitraging price differences across exchanges.
Funds realized that arbitrage opportunities existed in moving assets from one exchange to another to
take advantage of pricing differences, or to purchase assets only available on certain exchanges.
This same trend was accelerated dramatically in recent years, exacerbated by the growth of DeFi and
maturation of crypto markets.
During the last bull market run, the largest single recipient of newly minted Tether was Sam
Bankman-Fried's market making firm.[^65] Alameda Research famously made enormous profits on
arbitraging differences in prices between the Korean and American markets.
Early on, iFinex (owner of Tether and Bitfinex) minted Tether, but over time the largest recipients of newly issued USDT primarily became market making firms like Alameda Research and Cumberland.
### Tether's supply started to move onto Tron
Tether was first issued on top of the MasterCoin protocol, an extension to Bitcoin intended to
support more kinds of currencies than BTC. Later, Ethereum would be the place where the majority of
new Tether supply was issued as the ERC-20 standard took off, enabling more pairs to be tradable
directly on the Ethereum blockchain and thus driving more demand for USDT there.
Later, however, Tron entered the arena with a fork of ethereum that promised extremely cheap and
low-latency settlement. Justin Sun, its founder, was exceptionally good at ensuring Tron became used
for inter-chain settlement in the way Omni and Ethereum were doing.
Although it's unclear exactly what deals Justin Sun brokered, he was able to position Tron in such a
way that enormous amounts of USDT began settling on it. At the time, Tron had extremely low fees and
fast block times, which was also very helpful for market makers that wanted to move between
exchanges quickly using Tron.
So, today, Tether has an outstanding supply of more than $44B worth of USDT on Tron, even more
than there is USDT on Ethereum Mainnet ($39B).
Total stablecoin (including USDC) supply split between Ethereum and Tron. Supply of USDT on the original chain Omni (previously known as MasterCoin) has mostly been retired.
### The majority of consumer stablecoin transactions use Tether on Tron
Use cases for USDT on Ethereum tends to be for higher-value holdings and transactions whereas Tron
has become more frequently used for smaller transactions. The average stablecoin transaction on
Ethereum is 13x the value of the average stablecoin transaction on Tron.
Today, ~5M weekly active stablecoin addresses transact using stablecoins and 75% of them less
than $1k per week[^4], indicating that retail users likely represent the majority of
stablecoin addresses. Most of that activity is using Tether on Tron.
While Ethereum was too expensive for small transactions and too slow for time-sensitive ones, Tron,
bolstered by its exchange integrations, was able take advantage of the moment and took off quickly
for consumer use cases like payments.
Unique active addresses on Tron and BSC. Tron, first to market, took off in 2020. Binance Smart Chain followed suit soon after, having seen its growth.
### Binance helped make Tron the default for holding USDT
Binance played a massively important role in Tron's early success. The exchange was one of the first
to ever list Tron's native token, TRX, which helped boost its credibility. In the early days of
Tron's adoption curve, Binance also facilitated transactions on the network for free!
Additionally, Tron was the *default* blockchain for depositing and withdrawing Tether on the
exchange. Why it did this, and what the business agreements were between Justin Sun and Changpeng
Zhao are unclear, but it definitely worked really well.
Since Binance has significant operations throughout Latin America, Africa, and Asia, users with
Binance accounts were mainly getting access to Tether on Tron via deposits and withdrawals on the
Binance App. Over time, this set a precedent, deeply embedding Tether on Tron as the default choice
for many retail users.
Compared to Coinbase, which has always been seen as a user-friendly platform primarily serving the
US market, Binance's approach was more global from the outset. Coinbase's regulatory-compliant
stance and focus on the US meant it moved at a more measured pace internationally.
Huobi, on the other hand, had a stronghold in the Asian markets but didn't expand as aggressively or
innovatively as Binance in terms of product offerings. Binance's agility, combined with its wide
range of services and focus on both developed and emerging markets, gave it an edge over these
competitors.
As a result, Binance is now used by over 150M people in 180 countries and is also the largest
holder of USDT, which is deposited there by its users.
Binance built inroads across the globe early on.
## How can Ethereum compete?
From the point of view of someone that has been working on Ethereum, it's easy to look at the
dominance of Tether, Tron, and Binance and feel like Ethereum has failed end users. But, I think
that's missing the point. Ethereum has been successful in many ways, but it's just that the market
for stablecoins has been dominated by companies that were willing to grow at all costs.
Ethereum hasn't compromised on decentralization, security, or sustainable approaches to scalability.
It's been a slow and steady march towards a more decentralized and secure blockchain, and it's been
a long journey to scale. But, it's been worth it. Ethereum remains the leading blockchain project
for decentralization, security, and now has a clear path to scalability.
**Ethereum scalability enables better products to compete**
Because of mature specifications for protocols to scale execution costs of transactions like the [OP
Stack](https://docs.optimism.io/stack/getting-started), and production blockchain networks to run
them like [Optimism](https://optimism.io/), it's now possible for developers to build EVM blockchain
networks secured by Ethereum with extremely low fees that will
[soon](https://www.techopedia.com/ethereum-upgrade-when-is-it-going-live) be less than $0.01 per
transaction.
Critically, these new category of blockchains have some very valuable features:
1. **They're "Secured by Ethereum"**. Instead of having to bootstrap their own security, these
networks are secured by Ethereum. This means that they're able to benefit from the security of
Ethereum without having to pay for it themselves. This is a huge advantage over having to build
their own security from scratch.
2. **They're natively bridged to Ethereum**. Other blockchain ecosystems simply don't have anywhere
near the scale and network effects of the Ethereum ecosystem. Rollups are natively bridged to
Ethereum, which means that assets like ETH, USDC, WBTC, USDT, etc can be moved between Ethereum
and these networks without any friction. This is a huge advantage over other having to use
complex and often insecure bridging products to other blockchain ecosystems.
3. **They're easy to manage.** As opposed to launching a brand new blockchain, these networks are
built on top of the EVM, are governed by a collective of Ethereum developers, and can even be
entirely hosted by external vendors (e.g., [Conduit](https://conduit.xyz/)). This is a huge
advantage over having to build tooling and infrastructure from scratch.
Last year, the total transactions per second on all L2s surpassed those on Ethereum
Mainnet, and since then has reached an average of around [5x as
many](https://l2beat.com/scaling/activity). This is a sign that the future of blockchain
applications is going to be built on top of L2 networks secured by Ethereum.
Transactions per second growing exponentially on L2s
**Crypto commerce can be built on a scalable Ethereum**
The most exciting recent example of a company benefitting from building a scalable rollup product on
Optimism is [Coinbase](https://coinbase.com). Coinbase is the largest cryptocurrency exchange in the
US, and they've built a product called [Base](https://base.org) that is a rollup built on Optimism
and thus secured by Ethereum that has extremely low fees for end users.
With Base, Coinbase can start to bring its already strong brand and product to the rest of the
world. They've already started to do this in Africa, where they recently [announced a
partnership](https://www.coinbase.com/blog/bringing-the-future-of-money-to-africa-with-yellow-card)
with Yellow Card, to distribute USDC via its Wallet app and on Base. This is a huge step forward for
Ethereum, and it demonstrates a pathway to compete directly with the deep social integration and
network effects that Tether, Tron, and Binance have built.
**Now is the perfect time to build stablecoin applications on Ethereum**
While Tether, Tron, and Binance have been the dominant players in the stablecoin space for the last
few years, I believe that's going to change. The industry is [moving towards](https://bluechip.org/)
a future where stablecoins are going to be issued by companies that are more likely to comply with
regulations and that are going to be more transparent about their operations, and that's a really
good thing.
Fees on Tron are now far higher than they were when it first launched, Binance has serious
competition emerging that can bring Ethereum to a more global audience, and Ethereum is now a viable
option for stablecoin transactions via its L2 networks.
With all of these trends happening at once, it seems like it's becoming the moment to seize
back the consumer stablecoin market, this time secured by Ethereum, and for us to provide a better
alternative to Tether on Tron!
Thanks to DC Posch, Polynya, Jesse Pollak, Josh Stark, Ansgar Dietrichs, Kenan Saleh, Faraaz
Nishtar, Vishal Mathur, Nalin Bhardwaj, Sina Habibian, Haonan Li, Smit Vachhani, Jacob Willemsma,
and others for helping read through some earlier drafts of this post, and chatting with me about
these topics in general!
And, especially thank you to Peter Johnson from Brevan Howard Digital for his excellent report on
stablecoins which many of the graphs in this post are from.
# References
[^1]: https://l2beat.com/scaling/summary
[^2]: https://l2fees.info/
[^3]: https://usa.visa.com/content/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf
[^4]: https://mirror.xyz/0x63F8A82711ECA999D5Cf588d5b7afE4DB673C7ED/ekt7LwxhuqZ4t1q5CN1oOHR3nlQGglMpaCB3ZBu2B3Y
[^5]: https://polynya.mirror.xyz/LY8-BIZQlw_NAtO-Uh9gQE2YeyhJPJf9yMV9_4N1KXs
[^6]: https://investor.starbucks.com/press-releases/financial-releases/press-release-details/2023/Starbucks-Reports-Q2-Fiscal-2023-Results/default.aspx
[^7]: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000829224/6b670226-cba4-4d9d-a5f9-72e287fddb1b.html
[^8]: https://dune.com/embeds/2863300/4789188
[^9]: https://on.emarketer.com/rs/867-SLG-901/images/Outbrain_GlobalCommerceTrends_2023_Lookbook.pdf
[^10]: https://www.oberlo.com/statistics/global-ecommerce-sales-growth
[^11]: https://www.apple.com/newsroom/2023/08/apple-cards-savings-account-by-goldman-sachs-sees-over-10-billion-usd-in-deposits/
[^12]: https://coinmarketcap.com/charts/
[^13]: https://www.usesignhouse.com/blog/cash-app-stats
[^14]: https://github.com/bnb-chain/BEPs/pull/131?ref=binance.ghost.io
[^15]: https://beaconscan.com/stat/validator
[^16]: https://bluechip.org/coins/usdt
[^17]: https://www.barrons.com/articles/coinbase-circle-stablecoin-deal-dd016298
[^18]: https://www.reuters.com/technology/crypto-exchange-coinbases-revenue-falls-trading-volumes-remain-muted-2023-08-03/
[^19]: https://www.coinbase.com/usdc
[^20]: https://app.rwa.xyz/treasuries
[^21]: https://blockworks.co/news/stablecoin-with-yield-franklin-templeton
[^22]: https://decrypt.co/119562/revolut-assessing-best-time-native-revcoin-launch
[^23]: https://decrypt.co/75988/revolut-becomes-uks-biggest-fintech-ever-with-800m-raise-report
[^24]: https://www.revolut.com/about-revolut/
[^25]: https://ethereum.org/en/staking/
[^26]: https://defillama.com/chains
[^27]: https://defillama.com/dexs/chains
[^28]: https://github.com/electric-capital/developer-reports/blob/master/dev_report_2022.pdf
[^29]: https://twitter.com/waleswoosh/status/1693945674780299469?s=20
[^30]: https://polygon.technology/blog/starbucks-taps-polygon-for-its-starbucks-r-odyssey-web3-experience-nbsp
[^31]: https://www.statista.com/statistics/647374/worldwide-blockchain-wallet-users/
[^32]: https://twitter.com/adam3us/status/1619824591580598272?
[^33]: https://www.worldbank.org/en/news/press-release/2022/05/11/remittances-to-reach-630-billion-in-2022-with-record-flows-into-ukraine
[^34]: https://twitter.com/jerallaire/status/1688672056898928640
[^35]: https://www.wsj.com/articles/crypto-firm-paxos-faces-sec-lawsuit-over-binance-usd-token-8031e7a7
[^36]: https://www.cryptofrens.info/p/understanding-crypto-in-africa
[^37]: https://base.mirror.xyz/aBwt4flT1WAKJGQTj2AXBpH_8Qd3umQ-ZECLAJoO_nE
[^38]: https://www.dlnews.com/articles/defi/lebanon-cryptocurrencies-otc-usdt-stablecoins-tether-gunmen/
[^39]: https://devonzuegel.com/post/inside-argentina-s-currency-exchange-black-markets.html
[^40]: https://www.ishares.com/us/products/239452/ishares-13-year-treasury-bond-etf
[^41]: https://decrypt.co/150678/tether-reports-850-million-q2-profit-72-billion-exposure-to-us-treasuries
[^42]: https://www.binance.com/en/feed/post/905671
[^43]: https://wiki.lemon.me/lemon-cash-app/ya-somos-2-millones-de-usuarios/
[^44]: https://blog.chainalysis.com/reports/latin-america-cryptocurrency-geography-report-2022-preview
[^45]: https://americasmi.com/insights/crypto-landscape-argentina/#:~:text=According%20to%20our%20survey%2C%2051,%2C%2027%25%20buy%20cryptocurrencies%20regularly.
[^46]: https://www.prnewswire.com/news-releases/latin-america-s-crypto-conquest-is-driven-by-consumers-needs-819718066.html
[^47]: https://english.elpais.com/usa/2021-03-05/argentinas-perpetual-crisis.html#:~:text=Since%201921%2C%20when%20it%20was,peso%20ley%20from%201970%20to
[^48]: https://dune.com/queries/2659241/4420459
[^49]: https://www.circle.com/blog/circle-teams-up-with-mercado-pago-to-introduce-usdc-to-chile-customers
[^50]: https://decrypt.co/146481/mercado-libre-gives-mexican-customers-access-to-pax-dollar-stablecoin
[^51]: https://www.businesswire.com/news/home/20230905549860/en/Visa-Expands-Stablecoin-Settlement-Capabilities-to-Merchant-Acquirers
[^52]: https://www.prnewswire.com/news-releases/latin-america-s-crypto-conquest-is-driven-by-consumers-needs-819718066.html
[^53]: https://www.fintechfutures.com/2022/07/brazilian-payments-app-picpay-to-launch-crypto-exchange-and-stablecoin/>
[^54]: https://dune.com/sixdegree/base-blockchain-overview
[^55]: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/cryptocurrency-usage-soars-in-nigeria-despite-bank-ban-70497781
[^56]: https://newsroom.paypal-corp.com/2023-08-07-PayPal-Launches-U-S-Dollar-Stablecoin
[^60]: https://twitter.com/nic__carter/status/1697667392921272780?s=20
[^61]: https://www.scmp.com/business/money/wealth/article/2157587/tron-cashed-us70-m-coin-sale-chinas-ico-ban-where-it-going
[^62]: https://twitter.com/paoloardoino/status/1698943028541419795
[^65]: https://protos.com/tether-papers-crypto-stablecoin-usdt-investigation-analysis/
[^67]: https://datafinnovation.medium.com/bnb-beacon-chain-not-a-blockchain-3230dda7172c
[^70]: https://news.crunchbase.com/web3-startups-investors/
[^85]: https://www.chainalysis.com/blog/sub-saharan-africa-cryptocurrency-geography-report-2022-preview/
[^86]: https://decrypt.co/209640/cantor-fitzgerald-ceo-tether-bullish-bitcoin-halving-etf
[^87]: https://tether.to/en/tether-releases-letters-shared-with-the-us-senate-committee-on-banking-housing-and-urban-affairs-and-the-us-house-financial-services-committee/
[^89]: https://www.politico.com/news/2023/11/21/feds-hit-crypto-giant-with-4-4b-in-fines-alleging-hamas-financing-sanctions-violations-00128278
[^90]: https://www.reuters.com/technology/cryptoverse-digital-coins-lure-inflation-weary-argentines-turks-2023-05-02/
---
## Future of OP Labs
- URL: https://liamhorne.com/oplabs-update
- Published: May 31, 2023
- Summary: Liam Horne's thoughts on the future direction of OP Labs
Today I’m proud to share that my longtime friend and Optimism co-founder, Karl Floersch, will assume the role of CEO of OP Labs. In this role, Karl will be responsible for leading the company, defining its vision, and working with our amazing team to establish and execute the strategies necessary to [decentralize Optimism](https://dev.optimism.io/decentralization-roadmap/) and build the [Superchain](https://stack.optimism.io/docs/understand/explainer/).
In our pursuit to build Optimism, we have consistently charted our own course. A core principle we have emphasized is the modularity and flexibility of the open-source OP Stack, welcoming external contributions since the very beginning. With Karl at the helm of OP Labs, we are set to renew our focus and double down on protocol development and engineering, empowering more projects to emerge and flourish within the Optimism ecosystem on top — ultimately laying the groundwork for Ethereum to scale, and towards a [rollup-centric](https://ethereum-magicians.org/t/a-rollup-centric-ethereum-roadmap/4698) future.
As for myself, I will maintain a close working relationship with Karl, concentrating on vision, strategy, and execution in an advisory capacity at OP Labs. The transition will enable me to direct more attention towards the burgeoning ecosystem of projects and businesses building _on top_ of the OP Stack or intending to join the Superchain ecosystem in the future. I'll also delve deeply into how the Ethereum developer landscape might change with the growth of Optimism and Layer Twos more broadly, for instance in helping design an expanded L2 EVM specification and further understanding the implications of modular Ethereum clients designed for Layer Two such as [reth](https://github.com/paradigmxyz/reth).
I want to express my deepest gratitude to the incredible team at OP Labs for their unwavering dedication and hard work. Although it is bittersweet, I am immensely grateful for my experiences at OP Labs and so proud of the remarkable team that we have assembled. I take pride in our collective achievements and have full confidence that the team will continue to push the boundaries of what is possible in the Ethereum ecosystem.
My heartfelt thanks also goes out to everyone else who has been a part of this journey thus far. When I joined two years ago, we were a handful of dreamers with big ambitions, working out of a house on Venice Beach on a path towards mainnet. We’ve come an extraordinarily long way since then. I am looking forward to supporting projects building on the OP Stack, towards the Superchain vision, and ultimately towards a future where the entire world goes onchain thanks to the work we’ve done here.
---
## OP Labs
- URL: https://liamhorne.com/oplabs
- Published: June 2022
- Summary: Liam Horne on becoming CEO of OP Labs
I'm proud to share today that I'm becoming CEO of OP Labs (previously known as Optimism PBC) to continue the journey of scaling Ethereum by building the Optimism protocol and driving the evolution of the Ethereum protocol and ecosystem for a [rollup-centric future](https://ethereum-magicians.org/t/a-rollup-centric-ethereum-roadmap/4698).
## Parallel Tracks
Jing, who has given me this opportunity has taught me a lot about building teams and aggressively working towards a shared vision. I deeply believe that her and Ben are going to build a remarkable organization with the Optimism Foundation, and I can't wait to see how having such relentless founders at the helm of a foundation at its inception will play out.
Optimism is meant to scale Ethereum's technology _and_ its values. By specifying and building optimistic rollups today and driving the adoption of Optimism Mainnet we're scaling the technology. By introducing [retroactive public goods funding](https://medium.com/ethereum-optimism/retroactive-public-goods-funding-33c9b7d00f0c) and [launching broader governance](https://app.optimism.io/governance) over the network, we're scaling its values. My hope is that with this split of responsibilities between OP Labs and the Optimism Foundation, we'll be able to achieve both of these goals in parallel.
## Ethereum's Product
Just over a year ago I [wrote](https://liamhorne.com/optimism) about why I joined Optimism and all of the reasons I had then remain just as true today. What has become most clear to me over the last year, however, is how crucial it is for us to scale the Ethereum *product*.
Ethereum, like Bitcoin, is a decentralized technology and protocol. Making major modifications to the protocol takes time and requires a consensus amongst a large group of people scattered all over the world. It is precisely because of its dedication to creating a decentralized ecosystem that it has been able to sustain multiple bull and bear markets, rebound from significant attacks on the network, and remain dominant despite well-funded "ethereum killers" trying to take its crown.
However, the downside of this is that it is harder for Ethereum to ship at the pace of well-run business. Things which could take only a few days in the context of a more centralized blockchain can take weeks or months in the Ethereum community. Sometimes, this is a good thing but on other occasions, it is preventing Ethereum to meet its potential.
It's clear to me that Optimism is Ethereum's opportunity to scale its product.
At OP Labs, already, we have assembled a team of some of the best engineering talent, product leaders, ecosystem builders, community leaders, and legal expertise in the industry, and we're only at the very beginning of our journey. We've shipped the [Optimism Mainnet](https://dune.com/optimismpbc/Optimism-Overview), designed and are building the most [minimal rollup abstraction](https://github.com/ethereum-optimism/optimistic-specs) in the industry, and launched the ecosystem with the creation of the [OP token and its governance mechanisms](https://community.optimism.io/docs/governance/economics/).
Together, we can execute on shipping the world-class product that Ethereum users deserve. Everything from engaging with wallet developers to improve the end-user experience, pushing forward improvements to the EVM, and getting [danksharding](https://vitalik.ca/general/2021/12/06/endgame.html) shipped are critical parts of the overall Ethereum product development. It is our mission to dial up the quality of Ethereum's product development, and we believe that Optimism is the perfect place to do that especially since we'll have the ability to run experiments in new these new L2 environments.
Building this ecosystem is going to require both the largest scale crypto migration in history and an explosion of new projects. To that end, we're going to scale our efforts across integrations, partnerships, and marketing to make Optimism the best network in the space for the Ethereum community to migrate to and for the next wave of founders and builders to make their mark.
## Moving Forward
Moving forward, we are going to be laser focused on execution. In the immediate future, this means shipping [Bedrock](https://github.com/ethereum-optimism/optimistic-specs) and [Cannon](https://github.com/ethereum-optimism/cannon), growing Optimism Mainnet (by the way, [reach out](https://optimismpbc.typeform.com/op-marketing?typeform-source=www.optimism.io) for support launching on Optimism), and stewarding [EIP-4844](http://eip4844.com/) for the entire rollup community to offer $0.01 gas fees this year.
Further along, we'll be shipping more and more products for Ethereum users to use Optimism and continuing to evolve our understanding of the ideal system to scale Ethereum; for instance, incorporating lessons learned from hybrid zero-knowledge proof rollup systems to improve the Optimism protocol.
Achieving our vision is going to take a lot of effort, but that's precisely what makes it fun. :)
If you're interested in being a part of the journey, please reach out, [we're hiring](https://boards.greenhouse.io/oplabs)!
---
## Optimism
- URL: https://liamhorne.com/optimism
- Published: February 1, 2021
- Summary: Liam Horne on joining Optimism to build optimistic rollups
I'm incredibly excited to share that I'm joining [Optimism](http://optimism.io/) to help Karl, Jing, Ben, and the world-class team they've built around them build and deploy production-ready optimistic rollups.
**Ethereum's Culture**
When I decided to begin working on Ethereum, what motivated me most was its founding [philosophies](https://ethereum.org/en/whitepaper/#philosophy) that invited anyone to build on top and to contribute to the development of the community and protocol. Instead of deterring new ideas or approaches, the Ethereum ecosystem welcomed them with eyes and ears wide open. Vitalik himself has been excellent at reinforcing this culture, making Ethereum not just a technology, but a *community*.
From my perspective, it's precisely because of this culture that ethereum has been so successful. Tens of thousands of developers around the world have experimented with building and deploying decentralized applications on top of it; hundreds of researchers have built academic careers exploring and expanding on its foundational ideas; and hundreds of companies have been built relying on it as part of their business model.
This culture is also what inspired my friends and I to start [ETHGlobal](http://ethglobal.co/). Working on Ethereum felt an awful lot like being a part of a hackathon community like the one we started in college: [Hack the North](http://hackthenorth.com/). There, thousands of ambitious students built all kinds of interesting projects without limitations; whatever they wanted. Developers didn't just build projects though, they also built tightknit relationships which flourished throughout their careers. Building relationships was just as important as building applications.
Within Ethereum, many of the best projects and ideas are created by aggressive and rapid experimentation. The annual Devcon conferences, research workshops, and hackathons all embody Ethereum's culture of open innovation and acclerate the pace at which new ideas get tested and reach maturity.
**Layer 2**
Today, Ethereum is not only the most used crypto protocol by fees, but out of the [15 most used crypto projects](https://cryptofees.info/), 13 of them are built as applications on top of Ethereum. As the market matures and more use cases and ecosystems like decentralized finance, non-fungible tokens, and decentralized internet infrastructure take shape, I expect that we'll continue to see its usage grow.
The big challenge now is scaling the technology to meet the demand **without compromising** on its commitment to decentralization, censorship resistance, and security. For myself and some others, this has meant investing heavily in the research & development of [layer 2 solutions](https://medium.com/l4-media/making-sense-of-ethereums-layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4); strategies for **securely** moving as much off-chain as possible.
Again, in the spirit of permissionless innovation, the community has approached layer 2 scaling with several different strategies. For myself, that has been primarily on developing [state channels](https://statechannels.org/): a technique for streamlining transactions amongst parties which frequently interact (e.g., [torrenting peers](https://blog.statechannels.org/introducing-web3torrent/)). Together with the Magmo team within Consensys R&D and support from the Ethereum Foundation, we have pushed state channels towards production.
Along the way however, there have been many experiments with various combinations and flavours of "[Plasma](https://ethresear.ch/t/plasma-world-map-the-hitchhiker-s-guide-to-the-plasma/4333)", new pathways to scaling with [zK-SNARKs](https://ethresear.ch/t/on-chain-scaling-to-potentially-500-tx-sec-through-mass-tx-validation/3477), and more recently, clear pathways to production with [optimistic rollups](https://research.paradigm.xyz/rollups). Unfortunately, despite all of this work, the [gas costs](https://etherscan.io/gastracker) have remained prohibitively high with a single asset swap costing over $50 on average.
It seems to me that in the long-term many of these techniques are going to complement each other. For example, in a world where we transition to having multiple rollups or even shards, enabling fast access to liquidity between them will likely require channels and hubs. Towards this, I'll continue to be giving strategic advice to the State Channels project.
**Optimism**
Having collaborated on researching these layer 2 strategies alongside Optimism's Co-Founders Ben, Karl, and Jing over the years, the thing that I've admired most about their approach has always been **staying true to Ethereum's founding philosophies**. It has been extremely clear since first meeting them that they want to see the community as a whole succeed.
And they make that a priority. Optimism was even founded as a [public benefit corporation](https://medium.com/ethereum-optimism/optimism-cd9bea61a3ee). I believe this commitment to core community values will lead Optimism to success, just as those same values have helped Ethereum thrive.
More than that though, it's Karl, Ben, and Jing's commitment to delivering a working solution *now* that has really impressed me. For example, [Synthetix](https://blog.synthetix.io/why-optimism/) began building on Optimism in October and is today on a [limited mainnet release](https://blog.synthetix.io/l2-mainnet-launch/).
Instead of building one of these scaling solutions in the abstract, the [Optimistic Virtual Machine](https://research.paradigm.xyz/optimism) is designed to work right now, with the same source code, developer tools, and user experience that developers and users of Ethereum already expect. And the team working on the protocol, infrastructure, and the community are some of best in the industry.
The road ahead for Optimism is going to be incredibly exciting. As projects begin migrating to Optimism, I can't wait to see how the community will take advantage of what's now possible. Between lowering gas fees, normalizing cross-chain swaps, experimenting with protocol modifications, and building more infrastructure around miner-extractable value, there is so much exciting work that Optimism enables.
The mainnet release is going to be a huge stress test for the team and the technology, but it's a journey that I couldn't be more excited to be a part of.
---
## Introducing Web3Torrent
- URL: https://liamhorne.com/web3torrent
- Published: June 18, 2020
- Summary: Peer-to-peer micropayments for torrenting. Built on Ethereum using state channels.
Today we're excited to share something we've been working on behind the scenes of the State Channels project: [Web3Torrent](https://web3torrent.statechannels.org).
Web3Torrent is a browser based torrenting client that supports incentivized peer-to-peer filesharing using micropayments. The micropayments are built using state channels that run on top of the Ethereum blockchain. Users can upload files and begin seeding to earn small, incremental, amounts of money from anyone that downloads from them.
Web3Torrent is running live on the Goërli testnet right now, please [try it out](https://web3torrent.statechannels.org)!
Downloading a file from several peers at once using micropayments with Web3Torrent.
## Why Web3Torrent?
_State channels are a layer 2 scaling technique for Ethereum; they enable trustless, instant, and zero-fee transactions amongst fixed groups of users. If you haven't heard of them before, I recommend reading our recent post: "[Do we still need state channels?](https://blog.statechannels.org/do-we-still-need-state-channels/)"._
We have built several layers of the technical stack for state channels. If you've read other posts in our [blog series](https://blog.statechannels.org) you'll know there is a considerable amount of complexity in designing a state channel protocol and implementing software to execute it.
Recently, we've shown that building a simple application like [Rock-Paper-Scissors](https://blog.statechannels.org/deconstructing-a-state-channel-application/) using state channels is certainly possible with the tools we've built so far. This application, wherein each state transition corresponds to a single click by the user (i.e., choosing your "weapon" in Rock-Paper-Scissors) demonstrates how state channels can get around having to wait for an on-chain transaction for simple peer-to-peer state updates.
Of course, the promise of state channels doesn't end at making decentralized Rock-Paper-Scissors slightly nicer to use.
We wanted to demonstrate something more practical that shines a light on the features that state channels offer. So, when we looked at the kinds of applications that could genuinely benefit from the application of state channels, torrenting stood out as a clear candidate for these reasons:
**Torrenting is peer-to-peer.** A torrent network is comprised of people providing chunks of a file and others requesting those chunks. The network architecture lends itself nicely as a base to overlay peer-to-peer state channel relationships.
**Torrenting requires high-frequency messaging.** As users share pieces of a file with each other, they communicate constantly. There is already a [well established](https://www.bittorrent.org/beps/bep_0003.html) peer-to-peer wire protocol that various torrenting clients use (e.g., uTorrent, BitTorrent, etc).
**Torrenting has an incentivization problem.** There is sometimes a real lack of incentive to seed a file, especially for obscure files where you may only find a single digit number of people that have it. Adding monetary incentives to the existing torrenting structure should prove to be extremely interesting.
These characteristics suggest to us that introducing a micropayment based incentivization layer would increase the quality of the peer-to-peer network and lead to greater decentralization. If a user just paid to download a file, by leaving their client running and allowing others to pay to download from them they can actually recoup the cost of the download, or even exceed that cost in uploading revenue.
## Basics of torrenting
As mentioned, torrenting networks are _specifically designed_ to solve the problem of peer-to-peer filesharing.
Two important roles are seeders and leechers. A **seeder** has an entire file available to be downloaded, and a **leecher** is looking for pieces of a file to download. Seeders broadcast to the network that they have all the pieces of a file available to be downloaded and leechers seek out other peers (seeders or other leechers) from whom they can download some pieces of the file.
Files get split into chunks (called pieces) and are exchanged between peers.
While a leecher is downloading pieces, they may upload those pieces they have already received to other peers in the swarm. Some users, as pictured below, can even upload and download from each other at the same time as they both have and require different pieces of the same file that can be shared between them.
As more users join the torrent network, they begin to leech from each other.
## Integrating micropayments
Since torrenting protocols lend themselves so well to state channels, deciding how to design the state channels application is remarkably simple. Essentially, since peers are already exchanging messages with file data encoded within them at a high rate, we can encode state updates that transfer tiny incremental amounts of a cryptocurrency within those messages.
Leechers send tiny amounts of ETH as payment per piece they download from a peer.
The functionality we needed then, was the ability to extend a torrenting protocol in such a way that peers can communicate with each other, identify who to open channels with, and then additional to each piece getting sent over the wire, include signed state channel updates constituting crypto payments.
We found a web-based torrenting library called [WebTorrent](https://webtorrent.io), built by Feross Aboukhadijeh, which implements the BitTorrent protocol over WebRTC so that web browsers can be nodes in a torrenting network. WebTorrent provides a very convenient API to extend the protocol in the way described.
The lifecycle of a single file download between a seeder and leecher then looks like this:
- A seeder broadcasts his willingness to seed a file in exchange for payment
- A leecher interested in that file establishes a WebRTC connection with the seeder
- The leecher then requests the first piece of data from the seeder for the file
- The seeder tells his wallet to create a channel and prompts the leecher to join (the channel is now _starting_)
- The leecher tells his wallet to join the channel and sends over the countersignature (the channel is now _running_)
- The leecher then dispatches a state update command to his wallet to send a small bit of ETH to the seeder
- The seeder, upon seeing this bit of payment, sends the data to the counterparty and countersigns the state update
This repeats until the leecher has finished downloading the file from the seeder. Then:
- The leecher tells his wallet to close the channel (the channel is now _closing_)
- The seeder responds and closes the channel (the channel is now _finished_)
- The leecher and seeder then close their WebRTC connection
Below you can see all of this happening in just a few seconds.
Downloading a 404 KB file resulted in 22 off-chain transactions between the two peers.
## What's Next?
We hope that this application will serve as a demonstration of what is possible with state channels today, and inspire more people to use micropayments/state channels as part of their mechanism design. Of course, this is only the tip of the iceberg of what is possible with state channels, and we've only covered the implementation details at a very high-level in this blog post.
In the near future we'll be diving into some of the important infrastructure that is "under the hood" of this demo such as virtual channels and hubs, browser-based funding policies, crash-tolerant wallet design, optimizing micropayments for performance, and much more.
In terms of Web3Torrent itself, we're looking for your feedback! Presently this application is running on an ethereum testnet to showcase the work we've done in designing this protocol and all of the underlying wallet software required to make it work. We'll be developing our server wallet and hub infrastructure software next and we're actively looking to integrate all of it with a partner on mainnet. Please reach out to us if you're interested in discussing possible integrations.
Until next time!
_Written by Liam Horne, thanks to George Knee, Tom Close, Georgios Konstantopoulos, and Josh Stark for feedback. Thanks especially to the entire State Channels team for all of the hard work that has gone into making this possible._
---
## Contribute
This work was made possible by donations from the Ethereum Foundation and Consensys to fund our team working on [State Channels](https://statechannels.org). All of our work is 100% MIT-licensed open source code, and we heartily welcome contributors! If you're interested in discussing ways you can contribute, or to explore possible projects that would benefit from working with us to integrate state channels, please reach out to us on our [discussion forum](https://research.statechannels.org).
---
## Counterfactual - Generalized State Channels on Ethereum
- URL: https://liamhorne.com/counterfactual
- Published: June 12, 2018
- Summary: Introducing the Counterfactual framework for building generalized state channels with minimal on-chain operations and maximal privacy.
At L4 we have been working on state channels and other blockchain scalability research. Today we're excited to share one of the foundational pieces of our work: [Counterfactual: Generalized State Channels (pdf)](/counterfactual.pdf).
State channels are the foundational technology for useable distributed applications. They can be used in any interaction with a defined set of participants, such as payments or games like chess or poker. "Channelizing" these applications makes them radically cheaper, and reduces the unacceptably high latency in today's blockchain applications, enabling the web-like response times expected by users.
Despite this, state channels are underutilized in today's ethereum applications. Each project that wants to use state channels must effectively build their own custom implementation, leading to redundancies and unnecessary risks. Second, existing state channel implementations still put too many operations on-chain, and compromise privacy in unnecessary ways.
We envision a better future. Earlier, we described two broad goals:
1. Design a generalized state channels implementation that preserves privacy, is built using modular components, has support for multiple parallel operations inside a single channel, and allows users to upgrade channel designs without any on-chain operations.
2. Make it easy for developers to utilize state channels by providing a framework and standard modular components for building secure, performant applications.
Our [paper (pdf)](/counterfactual.pdf) describes a state channels design that places as little on-chain as possible while still remaining secure. We believe it will become a standard reference for building secure and optimized state channels, something long-needed by the ethereum community.
We will be attending Off the Chain in Berlin where we will discuss our technique in more depth. Needless to say, we're not doing an ICO or any other fundraising event involving a token.
In this blog post, we summarize the approach described in our paper. If you're interested in a conceptual description of how state channels work, take a look at the state channels section of Josh Stark's Layer 2 scaling article. The rest of this blog post assumes the reader has some familiarity with the basic technique.
## State channels terminology
The basic technique behind state channels has been known for several years. Since then, we have found new vocabulary that lets us abstract over particular implementations and discuss components and techniques that appear in all state channels.
State channels work by "locking up" some portion of blockchain state into a multisig contract, controlled by a defined set of participants. The state that is "locked up" is called a **state deposit**. For instance, this might be an amount of ether or an ERC20 token, but could also be a cryptokitty or an ENS domain name.
After the state deposit is locked, channel participants use off-chain messaging to exchange and sign valid ethereum transactions without deploying them to chain. These are transactions that could be put on chain anytime, but are not.
Updating the state of the channel always proceeds by unanimous consent. All parties sign (and keep their own copies of) each off-chain transaction. Because these "state updates" are taking place entirely off chain, they have zero transaction fees, and their speed is limited only by their underlying communications protocol.
For this reason, state channels offer "instant" transactions — i.e., parties do not have to wait for any blockchain confirmations. An application can immediately consider an operation finalized and display that to users, without having to wait for a set number of confirmations. This is how state channels are able to offer web-like response times.
We call this property **instant finality**. In consensus research, "finality" means the extent to which a state transition is guaranteed not to be reverted. In the context of state channels, an operation is final if Alice cannot be prevented from realizing that operation on the blockchain if they choose to.
If the latest "update" in a state channel says "Alice = 5ETH, Bob = 1 ETH", then that state is "final". Remember, the update is a valid transaction signed by both Alice and Bob, which could be deployed on-chain by either party at any time. As long as we assume Alice can broadcast that transaction to the internet at some point, she can consider that transaction final.
The core property of state channels is the ability to refer back to the blockchain only when necessary. If a channel is properly constructed, then all parties can engage in fast operations that offer instant finality. If anything ever goes wrong, all parties always have the option to deploy the latest version of the state to the blockchain.
Keep in mind that state channels — and all blockchain technologies — should be considered within appropriate threat models. We examine in detail threat models appropriate for state channels in section 3 of our paper and limitations of state channels in section 7.
## Minimizing on-chain operations
Existing application-specific state channel implementations require users to open up a new channel for each application they would like to use, paying expensive transaction fees. For instance, two users would make one on-chain transaction to open a payment channel between them, and they would need to make another on-chain transaction to play a game of chess with each other.
Our state channels minimize on-chain requirements to an extreme, moving as much logic as possible to the off-chain layer. This leads to one of the most significant insights of our paper: **a sufficiently powerful multisignature wallet is the only necessary on-chain component of any individual state channel**.
Moving logic off-chain allows us to gain significant advantages over existing channels. We can install new applications into a state channel without ever going on-chain. We can even upgrade or re-design a state channel without requiring on-chain transactions or fees.
This approach also has significant privacy benefits. Properly constructed, the multisignature wallet used to secure the state deposit should be indistinguishable from any other multisignature wallet. There would be no way to tell the difference, on chain, between a common multisig and one used to create a state channel.
## Counterfactual Terminology
We are able to achieve these results using what we call "counterfactual instantiation". Explaining this technique requires first defining terminology.
**"Counterfactual" means something that could be true, but is not.** This is an extremely helpful concept when discussing state channels, where we spend a lot of time reasoning about things that could be happening on chain, but are not.
In state channels, we say "counterfactual X" to describe a case where:
- X could happen on chain, but doesn't
- Any participant can unilaterally make X happen on-chain
- Participants can therefore act as though X has happened on-chain
For instance, imagine a payment channel between Alice and Bob. Alice sends 4 ETH to Bob through the channel, which in practice means that both parties sign a transaction. This transaction could be deployed on chain at any time by either party, but it is not. So we can say "counterfactual Alice gives Bob 4 ETH". This allows them to act as though the transaction has already happened — it is final, within appropriate threat models.
## Counterfactual instantiation
In the sections above, we said that our approach lets you install new applications into a state channel with zero on chain operations or fees. How it this possible?
The key to this capability is what we call **counterfactual instantiation**. In the section above, we described counterfactual transactions between Alice and Bob. But we can also create counterfactual contracts. Counterfactual instantiation means to instantiate a contract without actually deploying it on-chain. When a contract is counterfactually instantiated, all parties in the channel act as though it has been deployed, even though it has not. This technique lets us move almost all channel logic off-chain.
Counterfactual instantiation is achieved by making users sign and share commitments to the multisig wallet. These commitments say that if the counterfactually instantiated contract were to be instantiated on-chain, the multisig wallet (which holds the state deposit) will look at the instantiated contract and transfer the appropriate state deposits based on the state of that contract.
For this to work, we need to refer to the counterfactually instantiated contract inside the commitment, before the contract is deployed. To do this, we introduce a global registry: an on-chain contract that maps unique deterministic addresses for any counterfactual contract to actual on-chain deployed addresses. The hashing function used to produce the deterministic address can be any function that takes into account the bytecode, its owner (i.e. the multisignature wallet address), and a unique identifier.
For example, we might have a contract `C` with bytecode and constructor arguments `initcode`. The result of running a function call to the registry with the argument `initcode` would be that an entry would be added to the registry; its key being the counterfactual address and its value being the actual on-chain deployed address.
This gives us a way of referencing off-chain contracts without needing to deploy them on-chain first. We simply do a lookup in the registry to see what address corresponds to the counterfactual address. In Solidity this is as simple as:
```solidity
Registry(registryAddress).resolve(counterfactualAddress)
```
## Object-oriented channel design
Our channel design lets developers take an object-oriented approach to state channels. Any individual state channel will be composed of several counterfactual objects — e.g. a payment channel object, or a chess-game channel object. Because these are counterfactually instantiated, they require no fees to be added into the channel — only signed commitments between the parties.
For instance, Alice and Bob can at any point choose to counterfactually instantiate a contract within their channel — say, a contract that defines a game of chess. They can then exchange state-updates between each other that reference that counterfactually-instantiated game, in order to actually play the game of chess, all with no on-chain fees.
We believe this object-oriented approach offers many significant benefits:
- Application developers can program against a well-defined API, plugging into the core components necessary for every channel.
- We can ensure that, as long as the core components are heavily audited and remain secure, bugs in the application developer's code can be isolated to just the state it controls.
- Application developers can reuse existing components via counterfactual addressing just as they would reuse ethereum contracts — for instance, a provably fair randomness source.
- Users can preserve privacy in a dispute, only putting on-chain the objects that are in dispute.
- We can access more points on the trade-off curve between messages passed during normal operation, and transactions that need to be posted in the case of a dispute, and in certain cases this lets us amortize responses to stale state across channels.
## Conclusion
If you're interested in learning more about generalized state channels and the counterfactual technique, we encourage you to read [the paper](/counterfactual.pdf). The paper includes significant content that we have not summarized in this post, including:
- Comparisons to other techniques like sidechains and Plasma
- Review of existing state channel designs
- In-depth examination of relevant threat models
- Meta-channels
- An example construction for generalized state channels
For updates, follow us at [@statechannels](https://twitter.com/statechannels) and keep an eye on our website.
Lastly, we'd like to thank the Ethereum Foundation for their continuing support of this important work. We are thrilled to be part of a talented community driven to scale the ethereum network, laying the groundwork for Web 3. We'd also like to thank Vitalik Buterin, Erik Bryn, Tom Close, Josh Stark, Nima Vaziri, Armani Ferrante, Lisa Eckey, Kristina Hostakova, Yoichi Hirai, and Sylvain Laurent for their discussion and feedback on earlier drafts of the paper.
---
## Making Sense of Web 3
- URL: https://liamhorne.com/web3
- Published: June 6, 2018
- Summary: A vision for a new, better internet where users have more control over their identity, data, and the platforms they use every day.
_Co-authored with Josh Stark and Panashe Mahachi_
_Cross-posted from [L4 blog](https://medium.com/l4-media/making-sense-of-web-3-c1a9e74dcae)_
The internet is changing again.
Over the last decade internet-based services have trended towards centralization. Today, a handful of companies control the platforms we use to search for information, store our personal data, manage our online identities, and communicate publicly and privately.
At the same time, a group of seemingly unrelated technologies are being developed on the fringes of the tech industry, ranging from encrypted messaging to digital money. Within that loose community, "web 3" has become a catchall term for a vision of a new, better internet. An internet where payments and money are natively digital, where "decentralized" applications compete with centralized ones, and where users have more control over their identity and data.
However, we often struggle to articulate what this all means. How might "web 3" be different from previous eras of the internet? What is "decentralization" and why does it matter? How can these new technologies actually be used? We're spending years building infrastructure to make blockchains more scalable — but who will actually use that infrastructure, for what, and why should anyone care?
This article attempts to explain the web 3 vision in clear, simple terms. We discuss the core animating idea behind the many projects that form web 3, and survey three key trends.
This article isn't a prediction about the future. The future isn't fixed: we have to make the right choices to get the world we want. The point of this article is to describe a future that might be, a future compelling enough to be worth building, and a future clear enough that we know which direction to travel first.
## The web 3 reformation
The internet has gone through major generational shifts before. These expanded the performance, features, and scale of the internet. We went from plaintext websites to streaming video. We went from static web pages to full-featured applications served remotely through the browser. We went from listservs to global social networks that drive modern politics and culture.
As the web matured, we grew to rely more and more on a handful of large companies. Google built the fastest and most convenient search engine, and have been rewarded with control over 74% of all search traffic. Facebook built the most popular social network, and was rewarded with control over the online identities of 2.2 billion people.
Web 3 is different from previous generational shifts. At its core, web 3 isn't about speed, performance, or convenience. In fact, many web 3 applications are, at least today, slower and less convenient than existing products.
Instead, web 3 is about power. It's about who has control over the technologies and applications that we use every day. It's about breaking the dynamic that has shaped the last decade of the web: the tradeoff between convenience and control. We've become so accustomed to this dynamic that it seems inevitable: of course using the internet means being surveilled, and of course having a social media account means having my personal data sold to advertisers or worse. How could it be any other way?
Web 3 rejects the premise. We can have the benefits of the internet without handing the majority of power to a minority of companies. The dynamic described above isn't an iron law of the universe, it's just a product of the technology available at the time and the choices we made along the way.
"Web 3" is a movement to build different technologies and make better choices. We aren't trying to replace the web, but rather keep what we like while changing its underlying structure — a reformation, not a revolution.
The projects within it can seem disparate, but they all share a common theme. Web 3 is a group of technologies that restructure control over the internet. These range from financial projects (cryptocurrencies), to basic communications technology (end to end encrypted messaging), to mass consumer use-cases (open social networks and p2p markets), to critical internet infrastructure (decentralized DNS).
Web 3 includes more than just cryptocurrencies, blockchains, and other products of cryptoeconomic design. It encompasses any technology that helps reform the centralized internet and lets users take back control over their digital lives. However, we believe that these technologies are the most significant contributors to the web 3 movement today, and for that reason focus on them in this article.
## Three trends for web 3
In this article we survey three trends, and discuss how they might develop over time:
1. Money will become a native feature of the internet.
2. "Decentralized" applications will offer users new capabilities.
3. Users will have more control over their digital identities and data.
It's important to keep in mind that each of these are speculative. Inevitably, web 3 will include technologies and applications we can't anticipate, and the ones we discuss below will look different than we can imagine today.
## 1. Money
In web 3, money is a native feature of the internet.
In the past, the internet was simply a portal to the offline, traditional financial system. But cryptocurrencies are fundamentally digital — sending a transaction does not require interacting with some offline system, it only requires sending a message over the internet. We will soon live in a world where "money" is just something the internet does:
- Sending or receiving payments is now something that any piece of software can do, and by extension, something that can be done by any person with an internet connection and a phone.
- Digital payments will unlock new business models that were previously impractical. They will radically lower the costs of some transactions (e.g. cross-border remittances), enable new use-cases (e.g. machine payments), and be available to massive new markets (e.g. people who could not previously access the traditional financial system).
- An ecosystem of basic financial primitives — lending, derivatives, exchanges — provide the building blocks of more complex financial applications that can be used by anyone.
- We will create new kinds of money, as technologists explore the cryptoeconomic design space. We have only started to explore these possibilities, like protocol tokens and non-fungible digital assets.
Cryptocurrency is only possible because Satoshi invented a way to support a currency and payment network without handing control to any centralized company. Bitcoin is decentralized in that it is "controlled" by a variety of actors, ranging from large mining companies, to individual node operators, to core protocol developers. All of them exert influence in different ways and to different degrees, but no individual actor has exclusive power over the network.
"Decentralization" has become a central concept for web 3. However, it's often used more as a slogan than a precise technical description. Decentralization can refer to a huge range of possibilities. Is a platform "decentralized" if it is controlled by 20 entities? 100? 10,000? What kind of decentralization are we even considering?
Decentralization isn't a binary state — it's a direction along a spectrum of possibilities. Saying a system ought to be "decentralized" is a little like telling an engineer that a bridge ought to be "big". No doubt, but it's not very useful information on its own — we also need to know what river you want to span and the load you need to bear.
The point of web 3 isn't that all systems must be decentralized as much as possible, but rather that we are newly able to explore more points along the spectrum. The degree of decentralization that is useful or necessary will depend on the application. Bitcoin is an example of this: it is decentralized to a sufficient degree that payments are very difficult to censor and it would be very difficult to change the basic parameters of the currency, i.e. a deflationary monetary policy where the total amount of bitcoin is permanently capped. Others will attempt to create similar global currencies with other features that take advantage of decentralization, e.g. stablecoins like Dai that attempt to solve the problem of volatility.
Because bitcoin was the first, it's often taken to be the only possible design for a cryptocurrency. As a result, "cryptocurrency" has become synonymous with particular political views about money, such as the virtue of deflationary currencies.
It's important to understand that there are many possible designs for a digital currency, which might serve different purposes. Bitcoin enthusiasts believe the purpose of cryptocurrency is to allow people to opt into the enthusiast's preferred monetary policy, the superiority of which is self-evident. A more humble interpretation is that the innovation of cryptocurrencies is that people can opt into whatever monetary policy they choose, whatever that happens to be. All they need is an internet connection and a phone.
## 2. Decentralized applications and services
The products and services that make up the internet today tend to be produced and controlled by individual corporations. If you use an internet-based application, there is very likely a legal entity somewhere that controls it. That company employs people to work on it, decides what features get prioritized, controls the servers that host the application's data, and ultimately determines what code gets pushed to the product.
The promise of web 3 is that there might be other options. Maybe we can build products and services that are not controlled by any single company, but still have comparable usefulness to their centralized equivalents. Just as with Bitcoin, these products would be "decentralized", though the rationale for decentralization, and the benefits it offers, may be very different.
Imagine, for instance, what a "decentralized publishing platform" might look like. This would be a social platform like Twitter or Medium that lets users share content, comment on it, and "vote" for content that they like.
The platform comes with built-in mechanisms to encourage users to contribute. Instead of just "upvoting" posts, users can send each other micropayments, or set up recurring payments for content creators whose work they want to support. The best Twitter accounts or Medium authors get paid directly in the platform, instead of having to figure out some secondary way to monetize their large followings. Even if each upvote was only a few cents, it would still be an improvement over centralized platforms like YouTube, where creators earn only a few thousand dollars per million views. On our decentralized platform, there is no central entity to take a large cut of the money that users pay each other. The platform could even use inflation funding to create a pool of rewards, which are distributed to the top posts each day.
The core rules that govern our decentralized service are defined in an open-source protocol. Users interact with that protocol using client-software of their choice. In other words, there would be a variety of apps, all made by different developers, but which all connected to the same social network. These clients may offer different features from one another, but all conform to the same shared protocol, analogous to the way that email clients all use the same standard for sending and receiving emails.
Users could use any client they choose, and clients can implement different features or offer third party services. Because we're building on a decentralized protocol, client developers don't have to ask permission from any central company, and they can build their product without fear that someday their API access could be revoked. Users don't have to wait for twitter to add new anti-spam or anti-harassment features, they just use a client that offers them. An ecosystem of services grows on top of the open protocol, letting users do everything they can do with twitter today and more.
This illustrates an under-appreciated benefit of decentralized platforms: sustainable ecosystems of third party services. App developers can build useful products on top of a decentralized protocol without fear that someday their API access will be turned off, because there is no one company who can turn it off. The platform can remain neutral, meaning that a larger network of developers will invest their time and money into building businesses on top of it. Chris Dixon's "Why Decentralization Matters" explores this argument in depth.
Of course, we will still use products and services created by centralized companies. But it will be possible for these companies to restrict the type of control they have over their products, placing more of that control in the hands of users.
This already exists in encrypted messaging apps, with products like Signal (made by Open Whisper Systems) that never see or hold any customer communications. By designing their application with end-to-end encryption, they have intentionally limited the control they have over their users.
Where early internet startups committed to an ideal of "don't be evil", web 3 companies aim higher to try and ensure that they can't be evil — at least with respect to specific kinds of evil. Web 3 includes technologies that let developers limit their control over customers, by refusing to have certain kinds of power in the first place. That doesn't mean we won't have to trust centralized companies to some degree, but it does mean we can trust them less.
## 3. User control over identity and data
In web 3, users will have more control over their identity and their data.
Today, most of our online identities belong to someone else, like a Gmail address or Facebook account. Web 3 is laying the groundwork for personal control of online identities.
In part, this is a result of the infrastructure being built out for cryptocurrencies. Holding cryptocurrency requires holding private keys, and millions of people use apps that let them do just this. But the same technology can let people manage any kind of blockchain-based data, including a personal identity. The fact that we call these apps "wallets" is no coincidence — in the future they will hold not just your money, but also your ID.
At the same time, web 3 will make it possible for users to retain control of their data. First, because users will have the option of using their own identity, instead of one provided by a third party, limiting the opportunities for identity providers like Facebook to capture user data. Second, because the emergence of decentralized services will mean that in some cases, there won't be a central company that is in a position to collect, store, and sell your personal data when you are using social media, renting an apartment, or catching a ride home. In general, a greater share of our use of the internet will be through platforms and systems that collect no data about us.
Finally, the new capabilities offered by web 3 technologies — control over our identities and data, and the availability of a worldwide payment network — will make it easier for individual users to capture the value that have turned social media companies into billion dollar businesses.
These companies collect your data because it's valuable. In web 3, users capture that value instead. If you want to sell data about your personal browsing habits, you will be able to do so directly — but you get paid, not Facebook. And as we experiment with novel mechanisms for ownership over digital assets, individual users will have new ways to actually own a piece of the technology that they use every day — an opportunity currently available only to entrepreneurs, venture capitalists, and accredited investors.
## Conclusion
Web 3 is not inevitable. The descriptions above of a potential future face many barriers, some of which may never be overcome. Some of the "open problems" in web 3 include:
- Are entrepreneurs actually incentivized to build decentralized applications? Who will fund them? Today, the route to profitability and venture-scale returns for these applications is unclear, whereas the traditional "centralized" business model is more reliable.
- Will decentralized applications be worse than centralized ones? A product controlled by a single company might have a more coherent product vision, and is able to rapidly iterate on new features. Centralized products may always have better UX and ease of setup.
- Will the cryptographic components of decentralized applications be too challenging for most users? How can users manage private keys in a way that can be safely recoverable? Is that even possible without returning to some form of centralized service?
- Will decentralized applications be more expensive to use? Low level decentralized systems (e.g. file storage, computation, oracles) have many redundancies built in to make them function. Will these layers make decentralized applications too costly?
- Will decentralized applications built with "smart contracts" ever make sense? Is it possible to write "immutable" code that fulfills an application's requirements forever? If we need to upgrade smart contracts, then who gets to decide those upgrades, and is it any different from a centralized application?
- How will decentralized systems be "governed"? Decision making by centralized companies with total control is easier than building consensus among a group of actors with different interests and priorities. How will governance of the base layers work across different political ideologies and cultures?
- Do enough users actually care about privacy, controlling their own identity, or access to open financial services? Or will the goals of web 3 always be a niche concern?
- How will governments and regulators respond to web 3? There is inevitable tension created by technologies that give people new capabilities. Web 3 includes technologies that avoid censorship and surveillance, and could be used to sidestep financial regulation and law enforcement.
- Can the base-layer blockchains used by web 3 apps ever scale to serve millions or billions of users?
Even with this uncertainty, web 3 is a worthwhile vision for the future. Cryptocurrency and blockchain enthusiasts are rightly criticized for focusing myopically on technology, rather than the problems that technology is supposed to solve. Cryptocurrencies and blockchains aren't ends in themselves: they are only valuable in so far as they solve a problem. The web 3 vision is helpful because it reorients us towards that problem: the internet has grown too centralized, and it needs to be opened up.
Focusing on the web 3 vision instead of any specific technology also helps us step outside the partisan politics that defines much of the cryptocurrency space. Web 3 is agnostic about whose platform ends up being used — the focus is on what the technology can actually do and what problems it solves for people.
Ethereum or Bitcoin could fail, but if they did the web 3 vision would not die. We would just build new, better versions of those systems using the same applied body of knowledge that we've developed over the last 8 years — cryptoeconomics — and keep on building.
Web 3 won't be a utopia, and we shouldn't delude ourselves into thinking it will be. If anything, the last 20 years should teach us that technology is not a magic bullet, and that the same human problems that exist everywhere exist on the internet, too. Politics, power, and control didn't disappear with the invention of the web, they just took different forms. The promise of web 3 is that at least this time, constraints on power and control are design requirements, not afterthoughts. We have a second chance to build the internet as it was supposed to be, and we might not get a third — let's make the most of it.
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## Generalized State Channels on Ethereum
- URL: https://liamhorne.com/state-channels
- Published: October 31, 2017
- Summary: Announcing work on generalized state channels for Ethereum to improve scalability, privacy, and usability of blockchain applications.
_Co-authored with Jeff Coleman_
A fundamental limitation of blockchain applications is that blockchains are expensive. Sending transactions requires fees, and using ethereum to run smart-contract code is comparatively costly to other kinds of computation.
The idea behind state channels is that we can make blockchains more efficient by moving many processes off-chain, while still retaining a blockchain's characteristic trustworthiness. Despite their conceptual simplicity as a natural extension of the "payment channel" concept, this technique today remains heavily under-utilized and underdeveloped.
This is why we are excited to share that we have started working on a generalized state channels implementation with a focus on privacy, speed, trust minimization, security, and modularity. We think this is one of the most important layers of infrastructure that needs to be built today.
We will not be doing an ICO, token sale, or other kind of fundraising event involving a token. As has been pointed out by Fred Ehrsam, Elad Gil, Vitalik Buterin, and many others, the economic incentives for core protocol innovation and second-layer infrastructure are much too low, and so the token model of funding a project in these domains has unfortunately become overused. Instead, we will initially be funded by a donation from Vitalik Buterin.
In our view, state channels are the basic foundation for usability in distributed applications. They reduce latency from the unacceptably high levels of today's blockchain applications to the weblike response times that users expect.
Even with other scalability methods like sharding, many applications that rely on large numbers of individual operations (such as streaming payments, IoT devices, games, etc) cannot hope to achieve the cost reductions they require without the added savings that state channels are able to introduce.
Rather than receiving the benefit of these savings across a wide number of different applications, today's blockchain application users will be lucky to find a one-off single-purpose state channel design that runs on its own network, isolated from other applications.
These different applications may use the same types of assets, yet deploy separate and highly bespoke contracts that cannot interoperate. They must be audited for security concerns on an individual and ongoing basis; significantly increasing costs. They are rarely optimized to the theoretical limits, often consuming orders of magnitude more gas than is necessary, and frequently going to chain when doing so is not even strictly required.
The state of the art advances slowly, and developers are often left struggling to solve the same problems over and over, where one mistake threatens the entire security model of the application. Even when secure, these custom implementations have significant privacy drawbacks; leaking detailed information about the network graph, participant assets and activity.
## We envision a different future
- We want to see clearly designed general purpose state channels that do not reduce, and in fact in many cases greatly increase, privacy.
- We don't want to put anything on the chain that doesn't need to be.
- We want channels that can be easily incorporated into new applications without the requirement for those developers to also be state channel experts.
- We want to achieve a level of privacy where state channel operations are indistinguishable from other common types of on-chain activities.
- We want to see support for multiple parallel operations inside of a single channel that do not interfere with each other.
- We want to provide expertly optimized, formally verified, and highly audited components that developers of decentralized applications can rely on without repeatedly re-inventing the wheel.
- We want to support deploying or upgrading channel designs without requiring the user to make a single on-chain operation.
- And we want to establish clear standards for how all of these generalized state channels will fit together into a global, multi-blockchain network where any user can easily connect to any other.
Together, we are working towards building this future.
We will be making further announcements around our plans for this project soon. For now, we are entirely focused on building a working prototype using our approach and speaking to developers and founders of decentralized application projects. We intend on building the best possible interface for decentralized application developers to work with so they can deliver the web-like experience their users expect without compromising on any component of the decentralized internet.
If you're interested in working with us or want to support the project, please send us an email.