Scaling Ethereum: Our investment in Offchain Labs

Redpoint Ventures
Aug 31 · 4 min read

By: Urvashi Barooah and Tomasz Tunguz

Blockchain activity has taken off in the past year. Average trading volumes on some of the largest crypto exchanges have grown exponentially and are approaching the volumes of traditional currency markets. Opensea, an NFT marketplace, did more volume in August than Etsy did in all of Q2.

As crypto becomes more mainstream, activity on Ethereum, its most popular chain, has soared. Gross value locked into Ethereum has already grown >5x to $75B. At the same time, developer activity on Ethereum — a leading indicator of future innovation on the platform — has far outpaced any other chain. If NFTs and DeFi represent a new digital economy, then Ethereum is the preeminent infrastructure powering this economy.

Source: The Block
Source: Electric Capital

However, Ethereum was never built to handle this type of scale. As usage has grown, the network has become more and more congested resulting in unsustainably high gas fees. How can crypto realize it’s full potential across decentralized finance/art/gaming/social networks when a $100 trade costs $15 and 3 minutes to execute, or an NFT worth <1 ETH costs $60 to buy? In fact, the most successful gaming company in crypto, Axie Infinity, had to build its own chain due to Etheruem’s lack of scalability. If the pace of development continues on its current trajectory, the network will soon be unusable.

That’s why we are so excited to announce our investment in Arbitrum, a Layer 2 solution created by Offchain Labs.

Layer 2 refers to a group of solutions that sit on top of Layer 1 (e.g. Ethereum or Bitcoin) to make them more scalable. They do this by offloading computations from Layer 1 onto a second chain which reports data back to the main chain at batched intervals, thus increasing throughput and lowering transaction fees. L2s are different from side chains like Polygon or Binance Smart Chain because they retain the security and decentralization of Ethereum while side chains do not. We believe L2s will be a crucial part of transacting on Ethereum going forward. If Ethereum without L2 is like broadband, then L2 elevates that experience to fiber optic internet.

What makes Arbitrum compelling among L2 solutions is its compatibility with Ethereum Virtual Machine (EVM), the native language of Ethereum. Arbitrum runs all code currently on Ethereum, but faster and cheaper, without any code changes. It’s the only L2 solution to do this. While most optimistic rollups claim EVM-compatibility, they achieve this through a custom compiler at the language level, which leads to incompatibilities (e.g. an EVM language like Vyper would be incompatible with a compiler). Arbitrum is the only rollup that directly accepts EVM bytecode. This leads to a superior developer experience and is a big reason why Arbitrum is able to attract a large developer community and convince the most popular DApps to build on their platform.

At Redpoint, we have been fortunate to partner with some of the most successful developer-facing companies including Stripe, Twilio, and Hashicorp, and the incredible developer interest around Arbitrum really resonated with us. Our bet on Arbitrum is a bet on the endurance of the Ethereum ecosystem and the thousands of developers who are building new and exciting applications still to come. It’s also a bet on their exceptional team: Steven, Ed, and Harry have been working on the technology behind Arbitrum since 2018 when they published their research paper “Arbitrum: Scalable, private smart contracts,” and started to execute on their mission to scale Ethereum for mass adoption. The team met at Princeton University where Ed is a professor and Steven and Harry were PhD students in computer science.

Left to right: Ed, Steven and Harry from Offchain Labs

After a much-anticipated beta, today Arbitrum announces the public launch of its mainnet solution, along with support from some of the most recognizable DApps including Uniswap, Sushiswap, Curve, Metamask, among others. And this is just the beginning for Steven, Ed, Harry, and the whole team. We couldn’t be more excited to join on this journey!

If you’d like to join Offchain Labs on a mission to make Ethereum more scalable while supporting some of the most exciting innovations in crypto, check out their job board here!