Scaling a $500Bn+ Ecosystem: Enterprise Use Cases for Ethereum Layer 2 Solutions
By Andreas Freund, EEA Mainnet Interest Group Member
There are new, exciting, never-before-possible enterprise use cases for L2 solutions meeting enterprise security, privacy, and compliance requirements while still leveraging Ethereum Mainnet’s security assurances, and connecting to the vibrant Ethereum ecosystem ranging from financial services to supply chain to rewards programs. While it is early in the innovation cycle, the opportunities are real, big, and have short-term realizable ROI.
Enterprise Layer 2 and Scalability Solutions Use Cases
The typical Blockchain/DLT use cases of enterprises fall into one of two categories: financial services and supply chain. Many enterprise projects have implemented solutions in those two areas. However, these have been almost exclusively on private blockchains and not Ethereum Mainnet.
The two primary concerns of enterprises in adopting the Ethereum Mainnet have been both transaction scalability and privacy. Both of these can now be addressed with Layer 2 solutions such as zk-zk Rollups or zk-Optimistic Rollups or more interoperable Sidechains as was discussed in detail in the previous blog post.
This means the following, high-volume, full privacy-preserving enterprise use cases become now viable:
- Digital Asset Exchanges
- Payments or Digital Asset Transfers
- Digital Asset Funds
- Digital Rewards Programs
- Global Supply Chain Traceability
We will discuss these in more detail below. There are, of course, more enterprise use cases such as high-volume, ultra-short-term Insurance Products Platforms, Digital Gaming Platforms enabling Play-to-Earn models and preventing online gaming fraud, or privacy-preserving federated machine learning (ML) platforms to create unbiased ML models.
Digital Asset Exchanges
Unsurprisingly, digital asset exchanges for fungible and non-fungible tokens (NFTs) and their complex composites are not only the first use case for public scalability solutions on Ethereum
Mainnet but also enterprises with a focus on:
- High-Frequency Trading, the current bread-and-butter of traditional exchanges.
- Secondary asset markets that traditionally have been very illiquid or hard to manage, such as derivative markets of debt instruments such as Credit Default Swaps or Repurchasing agreements
- Over-The-Counter trading of illiquid assets such as alternative investment vehicles, including Fund of Funds, Oil and Gas futures, andReal Estate Investment Trusts
- Real-time audit reporting for the end-to-end trade lifecycle from pre-trade to post-trade compliance, for example, while preserving privacy but not compromising the correctness of the audit
Payments or Digital Asset Transfers
Similar to Digital Asset Exchanges, payments have been a focus for both public and enterprise projects from the beginning. The big advantage of L2 and other scalability solutions compared to traditional payment rails such as VISA, SWIFT or ACH is not primarily in traditional payments but rather in:
- Micropayments for digital services such as streaming or data connectivity services and Person-to-Person transactions in emerging economies using SMS payments on mobile devices
- Machine-to-Machine payments of autonomous agents such as autonomous vehicles that have been delegated funds by their owner and can control them to make or receive payments on behalf of the delegatee to pay congestion fees, usage-based insurance, or being issued digital assets such as carbon credits for the avoidance of CO2 emissions.
In these applications, L2 can provide the additional benefits of privacy preservation while enabling full regulatory compliance with KYC or AML rules.
Digital Asset Funds
Traditional asset funds such as Mutual Funds or Money Market Funds have significant regulatory compliance requirements ranging from client investment suitability requirements, to fund allocation limits and asset class restrictions to stop-loss requirements based on the respective official investment prospectus. Large funds have, therefore, significant operational costs to provably comply with all regulatory requirements while preserving customer privacy. Layer 2 solutions, especially zk-zk Rollups with their recursive zk proofs, can help alleviate these issues by:
- Enabling full Fund audits by anyone, anytime, in real-time based on the onchain recursive zk-proofs,
- Making it impossible for the Fund to cheat since all zk-proofs need to be validated before being finalized onchain,
- Enabling investors to move back and forth between traditional and crypto assets, or crypto representations of traditional assets through representing traditional assets with their zk-proofs onchain and vice versa.
These can be achieved while maintaining complete confidentiality through the very nature of the zk-proofs.
Digital Rewards Programs
Digital consumer rewards in the form of loyalty points or rewards collectibles are steadily increasing in popularity, although they are currently cumbersome to administer for enterprises, and also more and more require interoperability between loyalty programs as enterprises partner with each other and let consumers transfer rewards between programs. The requirements for these programs are often a combination of Digital Asset Exchanges, Digital Asset Transfers, and Digital Asset funds we just discussed. Therefore, and given the large transaction volume globally within and across rewards programs together with the stringent privacy requirements arising globally such as the EU’s GDPR, L2, or other scalability solutions are eminently suited to scale and enable real-time interoperability through exchanges of Digital Rewards programs.
Synchronizing Systems of Records between Enterprises at Scale
B2B transactions have traditionally been fraught with issues around data synchronicity between two systems of record because there is no guarantee that contract terms are properly represented in an ERP system — addresses, product numbers, or payment terms come to mind — or that the history of commercial transactions (Orders, Invoices, Credit Memos, etc.) are accurately reflected in both ERP systems — incorrect tax calculations or incorrect application of volume discounts to pricing are classics. These issues lead to hundreds of billions of dollars in opportunity costs every year across the nearly three trillion B2B transactions a year globally. Larger organizations with thousands or tens of thousands of business relationships globally not only have the headache of the opportunity costs but also the challenge of maintaining one-to-one integrations between many systems of record, often with arcane technology.
Through design patterns and protocols such as Baseline, L2, and other scalability solutions that support both complex EVM-type smart contract logic aligned with the business rules around commercial documents such as Orders and Invoices and privacy preservation through zk-proofs are:
- Enabling the synchronization of systems of record by enforcing data consistency through zk-proofs that can only be generated correctly if the submitted commercial documents comply with the relevant business rules and data encoded into its zk prover systems’ program circuits,
- Enabling full B2B transaction audits by anyone, anytime, in real-time based on onchain recursive zk-proofs,
- Making it virtually impossible for counterparties to cheat since all zk-proofs need to be validated before being finalized on-chain, while
- Maintaining complete confidentiality through the very nature of the zk-proofs
Global Supply Chain Traceability
Lastly, global supply chains have always been a focus of blockchain projects, and some programs have gone into production such as Food Trust, Marco Polo, Trade Lens, or the Morpheus Network. Yet these have primarily been on private networks, despite some notable exceptions such as Morpheus. However, with the challenge of the G7 to digitize global supply chains within 18 months, the ever-increasing stream of small package imports from abroad through online retail platforms, and the need for customs organization to have visibility into supply chains even before a product is ordered, known as “Intent to Import”, are creating significant transformation pressures. On the one hand, there is a need to create transparency, while on the other hand not revealing business-sensitive information, not only for individual transactions but for all supply chains and their intersections. For example, a shipper importing goods into a harbor in containers involving not only customs but also multiple importers for each item in the containers.
Again, L2 or other scalability solutions that support both complex EVM-type smart contract logic and privacy preservation through zk-proofs are:
- Enabling full supply chain audits by anyone, anytime, in real-time based on onchain recursive zk-proofs,
- Making it very difficult for the supply chain participants to cheat since all zk-proofs need to be validated before being finalized onchain and their predicates — a.k.a. statements of facts — are public, while
Maintaining complete confidentiality through the very nature of the zk-proofs.
What does this mean for Enterprises?
Now, for the first time, enterprises have the opportunity to combine the best of both worlds — applications that meet enterprise security, privacy, and compliance requirements while also enjoying the enhanced economic security assurances and digital asset network effects of Ethereum Mainnet. Even though the technology is still rapidly evolving, and the underlying cryptography is still “young” by enterprise standards, enterprises are advised to get “into the action” now. Why? To take advantage of new DeFi opportunities to drive net-new revenue such as building enterprise appropriate and regulatory compliant products from those new asset classes, or mixing and matching new and existing asset classes into new financial products at scale, or leveraging the scalability of the new L2 solutions with the innovations of decentralized exchanges’ automated market makers to create concentrated liquidity pools along price or premium curves. And, finally, to collaborate with emerging L2 vendors to build the next iteration of L2 solutions to “enterprise spec.”