High-profile new blockchains signal a shift in power over payments | PaymentsSource

The past few days delivered some big-name announcements that have triggered a renewed focus on blockchain architecture.

One came from stablecoin issuer Circle, which used the occasion of its Q2 results to reveal plans to launch a blockchain called Arc, powered by Circle’s stablecoin USDC. According to Circle’s statement, Arc will be “designed from the ground up to serve the next era of stablecoin-native applications,” such as tokenization, foreign exchange swaps and derivatives, to name just a few.

Another was more inadvertent — payments giant Stripe posted an open role for a product marketer for its Tempo blockchain, still in stealth. A journalist noticed, wrote about it and although the ad was swiftly taken down, Stripe has not denied the report. The posting described Tempo as a “high-performance, payments-focused blockchain” being developed in conjunction with VC firm Paradigm. Its head will reportedly be Paradigm co-founder and managing partner Matt Huang.

Both announcements raise an obvious question: Why build a new blockchain from scratch when there are already many to choose from in the market? Assuming that customization is the answer, why not at least work within an existing ecosystem?

For instance, ethereum is the largest smart contract ecosystem in the market, with thousands of live applications and a vast, global developer network. Large market participants such as Robinhood, Coinbase and Kraken have opted to build their own customized blockchains as “layer-2s,” separate from ethereum but drawing on its security and benefiting from its community.

Stripe and Circle are taking a different direction: They’re building what are known as “layer-1s” or base blockchains, not tied to existing networks. Ethereum itself is a layer-1. So is bitcoin.

This ignited debate over the trade-offs in each approach.

One is the additional cost: Blockchain development is complex and expensive, especially when building new transaction engines. Another is the limited history: Even the most rigorous testing will likely miss some troublesome issues. A third is the lack of decentralization, a key feature underpinning the security of most layer-1s: The better distributed the nodes that validate transactions and execute state changes, the harder it is to hack or corrupt the network.

So, why are Stripe and Circle taking the hard option, when they could follow the example of others and build a layer-2, benefiting from an existing pool of developers, greater potential connectivity within the ecosystem, and trusted security from the connected layer-1?

The answer is about priorities, as well as their vision of where finance is heading.

Neither Circle nor Stripe need full decentralization — they are both trusted names, and their users are unlikely to care much about the number of independent validators on their networks. If they do, they have other alternatives. Decentralization is crucial when trust is low; that is not the case here.

Users will care about fees, which can be unpredictable on public networks. Layer-2s are known for their low cost, but they periodically connect to layer-1 security, paying the requisite fees to do so.

What’s more, layer-2s have little flexibility in the token used to pay fees. On ethereum and many layer-2s, it’s ETH, which is volatile in price. For Circle’s Arc, fees will be paid in its stablecoin USDC, which further removes potential fee volatility.

Another design priority is to isolate the transaction queue from traffic surges due to unrelated activities. For instance, a memecoin craze could clog the shared network or at the very least push fees up to unpopular levels. 

And layer-2s have limited flexibility when it comes to settlement finality, after which a transaction is irrevocable. Unlike in finance and trade where settlement finality is determined by rules, in the blockchain world technology plays more of a deciding factor. In the ethereum ecosystem, for instance, technical settlement finality can take anywhere from minutes to days. When it comes to tokenized markets, which Circle hopes to build on its network, that won’t fly, hence the promise that Arc will offer near-instantaneous finality for authorized transactions.

Also, most public blockchains lack native privacy features, relying on additional layers and/or partnerships. Building from scratch will enable the tailored privacy Circle’s and Stripe’s clients expect.

So, building a layer-1 from scratch gives Stripe and Circle complete control over the features for their payments and tokenization networks, something they wouldn’t have were they to opt for a customized layer-2.

But surely it would be simpler to build the desired features on top of a traditional database? Put differently, if decentralization, censorship resistance, cryptographic security and access to an existing innovation ecosystem are not the drivers for building a new blockchain, why incur the additional expense and complexity?

Because the strategy is not just about features. It’s about a reshaping of payments architecture.

In today’s payments landscape, service providers don’t own the rails on which payments move. In the new stablecoin-based landscape, they can. Both Stripe and Circle envision a vertical integration of all layers of payments plumbing, capturing the value while controlling and iterating on the customer experience. What’s more, in building their own blockchain, they can ensure future flexibility and support innovative add-ons as more entities contribute to blockchain development, while complying with global regulations.

In the case of Circle’s platform, this also includes the creation of the payment token, something not possible in the traditional system. For Stripe, watch this space.

And in both cases, the technology is not the draw. The utility is. For Circle’s and Stripe’s platforms, the end user won’t care much about what moves the transfers. It wants the result. Both companies are aiming to abstract away the blockchain to focus on simplicity and convenience.

So, the moves to build proprietary layer-1s are not, as some argue, about brandishing fashionable terms for public image purposes. They’re about rearchitecting payments.

The moves from Circle and Stripe point to more than a better service; they outline a payments landscape with shifting power centers, in which new technologies redistribute control over the movement of value, while changing our expectations of how that is represented.