Vitalik Buterin, co-founder of Ethereum, praised the Ethereum Layer 2-based approach to decentralization, depending on recent concerns about Base’s sequencers and whether it should be treated as an exchange.
“The base is doing things the right way. The L2 above Ethereum is tied to Ethereum’s distributed base layer for security while using centralized features to provide stronger UX capabilities,” Vitac Baterin said Tuesday.
He added that Coinbase Layer-2 is not custody of your funds.
True Layer-2 is non-obligatory, he continued. “These are extensions of Ethereum, and submitting hashes just happens to be glorious servers.”
Buterin’s comments came in the recent irony about the definition and centralization of layer 2 networks. L2 entered the spotlight following comments by Securities and Exchange Committee Hester Perth on his podcast on September 7th.
Is the L2 the same as the exchange?
Many Layer-2 uses centralized transaction sequences to provide better rates and prevent frontrunning by bots. Perth hinted at potential regulatory implications when these “matching engines” behave like central exchange.
“If there is a matching engine that is essentially controlled by one entity that controls all of its parts, it looks like an exchange and you have to think about it.”
But she also said that if the “matching” assets are not securities, “we don’t say much about it.”
Layer 2 is an infrastructure provider like AWS
Coinbase Chief Legal Officer Paul Grewal argued that calling a Layer-2 sequencer like the “exchange” of the base fundamentally misunderstands its role and function.
The SEC defines “exchange” as providing a market for connecting buyers and sellers of securities, he said, adding that Layer-2 is a “general-purpose blockchain that acts as an infrastructure.”
They process messages as code, invoke smart contracts, and handle all transactions in batches.
Related: Vitalik Buterin proposes minimalism as the key to success in the Layer-2 blockchain
He compared Layer 2, such as Base, to Amazon Web Services. Both run executable code provided by developers, including Exchange applications, but it doesn’t make the infrastructure provider itself into Exchange.
“If the exchange is being performed on AWS, is AWS a replacement? Obviously not.”
The sequencer does not match the engine
Jesse Pollak, the base co-founder, followed up with details on how the sequencer works.
Users can trade through Base’s sequencers or directly through Ethereum to maintain full decentralization and censorship resistance, he said.
“It’s like a traffic controller that ensures that the vehicle flows smoothly through more prioritized traffic lanes, allowing it to reach where it travels faster.”
He also cleared the misconceptions of matching engines, saying that the sequencer does not function as an engine like “matching services” or traditional replacements.
“The matching engine pairs a purchase and a sale at a specific price to perform a transaction. The sequencer does not do that. It simply determines the order in which transactions are processed.”
If Layer 2 is classified as an exchange, it must be registered with the SEC as a stock exchange, complying with broad regulatory requirements, and potentially facing operational restrictions.
magazine: What is Native Rollup? A complete guide to the latest innovations in Ethereum