The Future Of Web3 With Sandeep Nailwal

**SPEAKER_2** (0:08)
Welcome to FYI, The For Your Innovation Podcast. This show offers an intellectual discussion on technologically-enabled disruption, because investing in innovation starts with understanding it. To learn more, visit arkinvest.com.

**SPEAKER_3** (0:26)
ARK Invest is a registered investment advisor focused on investing in disruptive innovation. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. It does not constitute either explicitly or implicitly any provision of services or products by ARK. All statements made regarding companies or securities are strictly beliefs and points of view held by ARK or podcast guests, and are not endorsements or recommendations by ARK to buy, sell or hold any security. Clients of ARK Investment Management may maintain positions in the securities discussed in this podcast.

**Brett Winton** (1:00)
From ARK Invest, this is FYI, The For Your Innovation Podcast. I'm Brett Winton. I'm joined today with Lorenzo, our Director of Research for Digital Assets. Hi Lorenzo, how are you?

**Lorenzo** (1:11)
Good.

**Brett Winton** (1:11)
Okay. So today we're talking to Sandeep Nailwal, who is the co-founder of Polygon, which is, I actually don't know what it is, but I think it's a side chain that's also a level two. Lorenzo, I think it would be helpful for me if you could define for me, what is an L1 or layer one blockchain? What is an L2 blockchain? What is a side chain? Why do we have so many different names for all of these things?

**Lorenzo** (1:41)
Polygon is really one of the first teams that spearheaded Ethereum scaling roadmap, right? So the layer one is really a blockchain where you can run applications on top of it. And really what the layer one does, and the nodes, the validators, they compute the transactions, they agree on the transaction, and they broadcast them, and they store them, right? This has obviously a limit, right? If you want to keep the number of validators broad enough and decentralized enough, they can store infinite data and compute, right? Without requiring huge hardware requirements basically. And so what really Sandeep and Polygon thought about, this was like, I think their first round was like in 17, 18 So they've been building for years now, is really, hey, we need to have this dedicated blockchain where we're actually going to run the transactions, we're going to batch them, and we're going to post proof onto the Ethereum, their layer one blockchain. So we're going to be able to inherit the same security as Ethereum, but the fees are going to be much lower, and the throughput is going to be much higher because we're going to be able to batch the transactions, and we don't need as many validators.

**Brett Winton** (3:01)
You don't get actually the same security, as in you get the security intermittently, but not in between, as in I'm trusting Polygon to batch and settle the transactions along the way. If something goes wrong in that, things could get mangled there, but once it's batched into the Ethereum chain, then I get the security of the underlying settlement layer of the Ethereum chain.

**Lorenzo** (3:25)
You're right, there's more latency, and I think for the optimistic roll ups, which are a subset of L2s, you actually have a window of 10 days, the proof to be verified on Ethereum.
All of that is being worked on. Zero-knowledge proofs, which are more computationally heavy, but you post the proof directly on L1s, are different trade-offs, but you're right, Brett. They don't have exactly the same guarantees as if you were doing a transaction on their Ethereum layer 1 Right.

**Brett Winton** (4:01)
It's like if you and I were betting on things, and we just kept on a piece of paper, hey, I'm betting on this, and you're ahead, and I'm ahead, and we have it written down on a piece of paper, but then every couple of weeks, we actually exchange the money. If between those two weeks, suddenly I abscond, I'm like, all right, see, I'm not going to do it. That's the, you know, you still have the piece of paper, but the piece of paper is like on Polygon versus on underlying Ethereum. So there's some like, yeah.

**Lorenzo** (4:31)
You're trusting basically the validators on Polygon for that piece of paper, like in between periods, which obviously don't have the same security guarantees as the ETH validators, right? Which are much more decentralized, they have more at stake, and it's obviously a network that's been running for years. So yes.

**Brett Winton** (4:51)
Why do we only have layer 1 and layer 2? Why aren't there layer 3s and layer 4s and layer 6s?

**Lorenzo** (4:56)
I actually think people have built layer throughs, you really get into the needy greedy technical what is, a layer 3 that basically puts the proof onto the layer 2, which then onto the layer 1 I think people have tried that. I just think it gets really, really complicated in terms of liquidity and tokens and fragmentation.