This episode unpacks Converge, the new Layer 2 blockchain from Ethena and Securitize designed to fuse institutional finance with DeFi capabilities through tokenized assets and innovative yield products.
Converge Architecture: An Ethereum Layer 2, Not Layer 1
- The discussion begins by clarifying a key point: Converge is being built as an Ethereum Layer 2 (L2) solution using the Arbitrum tech stack and Celestia for data availability, not a standalone Layer 1 (L1) blockchain.
- Layer 2 (L2): A secondary protocol built on top of a primary blockchain (like Ethereum) to improve scalability and reduce transaction costs, while still relying on the main chain for security and final settlement.
- Carlos Domingo (Securitize CEO) notes that from a user perspective, the distinction might seem minor, but the architecture leverages Ethereum's security.
- Guy Young (Ethena Labs Founder & CEO) explains the strategic decision, stating that launching as an L2 offers significant cost savings (avoiding the need to fund L1 security) and performance benefits crucial for their applications, even if current market sentiment sometimes favors new L1s.
- Guy emphasizes a business-driven approach: "if you're going to try build a business and have like product-led tech decisions to support that business uh this this made the most sense for for the path we're going down."
The Converge Vision: Merging Permissionless DeFi with Institutional Guardrails
- Converge is envisioned as a public, permissionless blockchain, but with integrated capabilities to handle permissioned assets like Real-World Assets (RWAs) and cater to institutional compliance needs.
- Real-World Assets (RWAs): Tokens representing traditional assets (like securities, real estate, or commodities) on a blockchain.
- Carlos clarifies this isn't a closed, private institutional chain like earlier enterprise blockchain projects (e.g., R3). It aims to combine the openness of crypto with the necessary controls for regulated finance.
- The core problem being addressed: Purely permissionless DeFi protocols create barriers for institutional adoption due to KYC/AML (Know Your Customer/Anti-Money Laundering) requirements. Institutions cannot risk interacting with unknown or sanctioned entities.
- Guy Young highlights a stagnation in DeFi growth (measured by Total Value Locked as a percentage) despite institutional interest, suggesting crypto hasn't adequately catered to these potential inflows. He contrasts the two primary blockchain use cases:
- Settlement for speculation (e.g., meme coins, derivatives).
- Settlement for stablecoins, digital dollars, and tokenization.
- Guy argues the second use case (tokenization/stablecoins) has far greater potential: "if you really believe the thesis of crypto... which is we're going to start to bring all of these financial assets on chain... you have to think that that second bucket... is going to be an order of magnitude bigger..."
- Converge aims to capture this larger market by bringing together Ethena's strength in stablecoins/DeFi yields and Securitize's leadership in institutional tokenization.
What Institutions Want: Accessing Yield and Enhancing Asset Utility
- Carlos Domingo outlines two key areas of institutional interest observed by Securitize:
- Accessing crypto-native yields (like Ethena's USDe) but within a regulated structure (e.g., wrapped in a compliant format with intermediaries).
- Leveraging tokenized assets in novel ways enabled by DeFi mechanics.
- He provides a compelling example: using a tokenized private credit fund (yielding ~10%) as collateral to borrow stablecoins, buy more of the fund, and repeat (looping) to amplify yield – a process impractical in traditional finance infrastructure.
- Carlos stresses that tokenization's value proposition is evolving beyond just being a "better ledger." It makes the underlying asset more functional and composable within the DeFi ecosystem.
- Guy Young adds another use case: creating fixed-rate yield products derived from variable-rate assets like USDe (similar to what Pendle Finance enables). This requires a permissioned environment so institutions know their counterparties, making it a prime candidate for Converge.
Choosing the Tech Stack: Arbitrum and Celestia for Performance and Customization
- The selection of Arbitrum was driven by several factors:
- EVM Compatibility: Crucial for easily migrating existing assets and applications from Ethena and Securitize, which are predominantly Ethereum-based.
- EVM (Ethereum Virtual Machine): The runtime environment for smart contracts on Ethereum, which many other blockchains have adopted for compatibility.
- Performance: Arbitrum offers the speed needed for demanding financial applications.
- Customization: The stack allows for future modifications tailored to Converge's specific needs.
- Celestia was chosen as the Data Availability (DA) layer, handling the storage and verification of transaction data off the main execution chain to enhance scalability.
- Data Availability (DA) Layer: A specialized blockchain component focused on ensuring transaction data has been published and is accessible, allowing L2s to operate more efficiently.
- A key innovation planned for Converge is a dedicated validator network operating on top of the standard L2 sequencer. This network aims to provide an additional layer of security and oversight, particularly for assets bridging in and out of Converge, offering institutions more assurance.
- Carlos highlights the importance of transaction finality for institutions. Securing the L2 itself, before final settlement on Ethereum, provides quicker, reliable finality crucial for financial record-keeping.
Navigating Permissioning: Balancing Access and Compliance
- The discussion addresses how Converge will manage interactions between permissionless and permissioned applications and assets.
- Carlos explains Securitize's approach, which will likely inform Converge:
- KYC/AML is performed off-chain by regulated entities like Securitize.
- Wallets are "whitelisted" on-chain, embedding non-personally identifiable information (non-PII) about the investor's characteristics (e.g., accredited, institutional, geographic location).
- PII (Personally Identifiable Information): Data that can be used to identify a specific individual (e.g., name, address). This is not stored on-chain.
- Smart contracts governing assets and applications can then read these on-chain characteristics to enforce compliance rules automatically (e.g., preventing a retail user from accessing an institutional-only product).
- Restrictions are often inherent to the RWA itself (due to securities regulations) rather than the DeFi application. The apps inherit these restrictions.
- The user experience aims to minimize friction by filtering visibility: users would only see and be able to interact with the assets and protocols they are eligible for based on their verified on-chain profile.
- Carlos counters the idea that KYC inherently kills adoption, citing the mandatory KYC implementation across major centralized exchanges, which didn't stop volume growth.
The Converge Validator Network: Focused Security for Institutional Assets
- This network is designed as an additional safeguard, particularly relevant for institutional participants.
- It will be relatively small (initially 10-20 validators), comprised mainly of the large institutions holding significant capital on Converge.
- Its primary role is oversight and potential intervention in extreme scenarios (e.g., major hacks) specifically concerning assets being bridged out of Converge, acting as a backstop before funds are irrevocably moved elsewhere.
- This is distinct from the large-scale consensus mechanisms of L1s like Ethereum; it's a focused security layer for the Converge environment. Guy compares it conceptually to the "Security Councils" some L2s have, which act as social/governance layers for emergency actions.
- Carlos adds context by distinguishing bearer assets (like ETH, where possession is ownership) from non-bearer assets (like RWAs or regulated stablecoins), which often have built-in smart contract mechanisms for freezing or recovery, reducing certain types of risk inherently.
Ethereal DEX: An App Chain for Optimized Performance
- Converge will feature a native perpetuals Decentralized Exchange (DEX) called Ethereal.
- Perpetuals DEX: A decentralized platform for trading futures contracts that don't expire.
- Ethereal will be built as an "app chain" – it will operate on its own dedicated blockspace but post proofs back down to the main Converge L2.
- App Chain: A blockchain dedicated to a single application, allowing for customized performance and avoiding congestion from other apps.
- Guy Young explains the rationale: Perpetual exchanges have high computational demands and benefit significantly from isolated performance, especially during market volatility when transaction speed is critical. They also have lower composability requirements compared to other DeFi apps, making them suitable for the app chain model.
Future Roadmap: Incorporating Transaction Privacy
- While not part of the initial launch due to complexity, transaction privacy is recognized as a crucial feature for the future growth of institutional participation on Converge.
- Carlos notes that currently, the lack of privacy isn't a major barrier, evidenced by the rapid growth of tokenized treasuries (like BlackRock's BUIDL fund).
- However, as the ecosystem matures, institutions will require privacy to prevent their trading strategies from being publicly visible on the blockchain. This is firmly on the Converge roadmap.
Launch and Coexistence: Strategy for Existing Assets
- Converge's testnet is expected soon, with a mainnet launch planned for the coming months (Q2 target mentioned).
- Crucially, neither Ethena nor Securitize plan to force migration of their existing assets or activities from Ethereum or other chains they support (Polygon, Avalanche, Solana, etc.).
- Guy Young states the goal is to "expand the pie," targeting institutional use cases and users who may not be participating in DeFi today, rather than just shifting existing users.
- Carlos emphasizes that Securitize acts as an issuer for its clients (asset managers), and the assets belong to the investors. Migration won't be mandated.
- Asset flow to Converge is expected to be driven organically by the unique value propositions offered there, such as specific DeFi integrations or yield opportunities not available elsewhere. Certain centrally controlled assets (like potentially the reserves backing Ethena's synthetic dollar products) might be strategically housed on Converge.
Conclusion
Converge represents a significant strategic effort to build institutional-grade financial infrastructure on a Layer 2, blending DeFi's composability with regulatory compliance for RWAs and yield. Investors and researchers should monitor its ability to attract genuine institutional capital and how its hybrid permissioning model evolves, potentially setting a key precedent for future TradFi/DeFi integration.
