Kraken to launch its own zk Layer2 to expand into the Web3 ecosystem?

According to a report by CoinDesk, the exchange Kraken is in the process of building its own Layer 2 network and considering partners. Current candidates include Polygon, Matter Labs, and Nil Foundation. Is it becoming a standard for centralized exchanges to have their own L2 networks in the future?

Kraken Aims to Establish Layer2

Kraken, a well-established U.S. cryptocurrency exchange founded in 2013, is currently in the process of planning to establish Layer2. They are considering partnerships and are negotiating with teams such as Polygon, Matter Labs, and Nil Foundation.

All three entities have investments in Layer2 and zero-knowledge proof (zk) technology:

• Polygon is a developer in the Ethereum scaling space, recently launching an open-source modular blockchain package called Polygon CDK, which helps developers build Layer2 networks based on zero-knowledge proofs more efficiently. Projects that have indicated they will adopt their technology include Immutable and Aavegotchi.
• Matter Labs is the developer team behind the Layer2 network zkSync, which has recently gained significant attention. In June of this year, they also released a development toolkit called ZK Stack, enabling developers to build more secure Layer2 networks.
• Nil Foundation is a protocol developer that provides Low-Level Virtual Machine (LLVM) technology to make it easier for blockchain projects to use zero-knowledge proofs as designed. This allows developers to write blockchain architectures using mainstream programming languages such as Rust or C++, reducing development efforts.

Based on the expertise of the aforementioned developers and the fact that Kraken is currently hiring cryptography engineers, it can be inferred that Kraken's future direction is leaning towards developing Layer2 and on-chain applications based on zk technology.

Exchanges Begin to Establish L2 Scenarios

Recently, in addition to Kraken, other mainstream exchanges and large companies like ConsenSys have also begun to enter the Layer2 space.

Mainstream top-tier cryptocurrency exchanges, as the entry point of the blockchain industry, have always had the majority of users within the industry. Why are they now beginning to expand their business scope into the on-chain industry, particularly focusing on Layer2?

Previous Cases

In the past, exchanges launched their own networks mainly to capture the market gaps created by the congestion on Ethereum, such as Binance's earlier introduction of Binance Smart Chain (BSC) or Cronos.com's launch of Cronos in September 2021, most of which are Layer1 blockchains.

However, starting this year, exchanges have begun to layout Layer2:

• Binance launched the Layer2 network opBNB based on OP Stack in June of this year.
• Coinbase launched its own Layer2 blockchain Base in August of this year.
• Even Metamask's parent company ConsenSys launched the Layer2 network Linea in July of this year.

Completing the Scene

Why are major exchanges starting to launch their own networks? The author believes that the purpose of exchanges is to meet their users' needs and prevent traffic from flowing out. As the industry develops, users are not only interested in buying and selling cryptocurrencies but are also gradually becoming aware of on-chain services like Web3. Users' usage scenarios are expanding to Web3, ultimately transferring tokens from exchanges to on-chain wallets.

For exchanges, having already gained the trust of users, promoting their own networks to users has its advantages. This can effectively retain value within the ecosystem and generate profits through operational nodes.

At this stage, Layer2 technology is mature and, compared to application chains like the Cosmos ecosystem, Layer2, which inherits from the Ethereum network with the largest market value and the largest community, is more in line with the strategy of exchanges following market trends and is easier to promote to users. Therefore, most exchanges choose to establish Layer2 networks.

To perfect the usage scenarios of Web3, it's not just about networks; there are many basic tools for users, such as crypto wallets. OKX launched its own Web3 wallet as early as October last year, while the Gate exchange directly built a Web3 wallet into the exchange's application.

However, there are still many uncertainties as to whether the market will accept these developments in the end.