Robinhood’s L2 Hits 4M Transactions in Week 1

Robin Hood has been dedicated to creating accessible investment opportunities for the past ten years by providing retail investors with easy-to-use platforms for trading stocks and cryptocurrencies. Its next step in this journey is to support its new goal, which is to build a new blockchain infrastructure, known as Robinhood Chain, built upon an existing Ethereum Layer-2 solution. After launching the public testnet last week, CEO Vlad Tenev posted an eye-catching number to X, describing how the company processed four million transactions in just seven days.

The launch of a public testnet for Robinhood's blockchain is just one small step in the development process; however, it gives us some idea of the level of demand that exists for Robinhood's efforts. Public testnets were designed for testing purposes primarily by developers and innovators who create products, therefore any usage that occurs within these environments can provide insight into future consumer demand (not actual organic consumer activity). As a result, an extremely high number of usage events occurring in the first week of Robinhood Chain demonstrate that there is a large amount of latent developer interest in building applications on the Robinhood blockchain and that the apps being built will be meaningful enough to warrant additional attention.

What Robinhood Chain Actually Is

The Robinhood Chain is an Ethereum layer-2 blockchain that uses Arbitrum technology to function. Arbitrum is a layer 2 scaling solution on Ethereum and is one of the most established scaling solutions in the Ethereum space for scaling Ethereum by processing transactions outside of Ethereum's mainnet then batching them together before sending proofs back to Ethereum's mainnet, this allows users to process transactions faster and more cheaply while still having the same level of security provided by Ethereum.

Unlike many of the dozens of other Ethereum L2 projects launched recently, Robinhood Chain has a specific purpose. Most layer two solutions are general-purpose layers that allow you to run any application that you can run on Ethereum in a more efficient and cost-effective way; whereas Robinhood Chain is explicitly focused on providing a platform to tokenize real-world assets and blockchain-enabled financial services (i.e., Tokenized equities, tokenized ETFs, etc.), rather than supporting DeFi retail speculation or NFT marketplaces.

Robinhood has a clear connection to its existing business model in that their core product is retail access to the financial markets, and building a blockchain designed to improve the functionality and accessibility of those same markets aligns with their core business rather than moving away from their current business model.

Source: Author

Six Months of Private Testing Before Public Launch

Robinhood did not just come out with the public version of their chain for the first time. They recently released their chain (which is called "Robinhood Chain") out on a public testnet after testing it privately for approximately six months. During the private testing phase, they interacted only with a select group of developers and infrastructure partners under strict controls, so this public launch is NOT the first time this network has been used. It is just the first time it has been publicly available after being run, broken, and improved for six months in perfection.

Because of this past development history, the 4 million transaction number that was generated by Robinhood Chain during its first week of operation as a public chain has different implications than most people would assume. As such, a new public blockchain that has already achieved a large transactional volume after six weeks of being tested would be considered to be a mature product compared to how it usually appears on paper or likely would be perceived if you hadn't experienced the fact that it has been continuously and successfully operating two different versions of itself for the prior six months before being released to the public.

The network is still new and still has a long way to go, but the fundamentals, such as the design/architecture, have already been validated. Moving forward, the public will be able to interact with an established and well designed product that has had the benefits of being tested, re-tested, and continually improved upon by the Robinhood team for the last six months prior to being tested by the public.

Tenev's overall framework on X that "the next chapter of finance runs onchain" is very lofty and will likely be met with skepticism as a result of how lofty and grandiose that framing statement is from Tenev; however, there is now some empirical data that supports that framing statement (i.e., the 4 million transactions completed in the first week of public activity) and thus lends itself to being at least to some degree of validity.

The Infrastructure Stack Behind the Chain

Robinhood did not create everything within the Robinhood Chain as such; understanding who they partnered with for their infrastructure will give insight into both their technical solutions and commercial goals for the network. Alchemy (the largest or most popular node infrastructure provider) is the most commonly used infrastructure provider for Web3 - it supplies a large percentage of the Developer Tooling/API Access for Ethereum developers/developer tooling (Developer Tools). This allows Robinhood Chain to have the benefit of pre-established and tried-and-true infrastructure that many developers are already comfortable using, reducing the number of barriers to entry for developers that wish to build on the Robinhood Chain.

LayerZero supplies a cross-chain messaging framework, which will be crucial for an ecosystem that is structured to enable the movement of tokenized assets across multiple chains (tokenized equity from Robinhood Chain may need to interact with a DeFi protocol on an L2, or settle to a stablecoin residing on a different chain). LayerZero provides the messaging system that will facilitate this interaction.

Chainlink's contribution to this category of applications (tokenized equities and ETFs) will be one of the most impactful elements for Robinhood Chain. Price reference data for tokenized equities and ETFs require trustworthy and tamper-proof pricing methods from off-chain data sources. Chainlink's oracle network is the most widely adopted resolution for price reference data in the Ethereum ecosystem, so the partnership with Chainlink is further proof that Robinhood Chain is focused on deploying real financial products (not just synthetic versions).

Tokenized Equities on a Consumer Fintech's Blockchain

The two financial instruments that Robinhood Chain will offer are: 1) Tokenized equities, and 2) ETF's (Exchange Traded Funds). This is among the most active areas of institutional blockchain adoption today. Institutions like BlackRock BUIDL Fund and Franklin Templeton have already begun to explore what it would mean to create traditional financial instruments on-chain.

Robinhood is unique in this space because it has an established relationship with over millions of retail customers. Robinhood already offers brokerage accounts, facilitates the trading of equities and ETF's, and is subject to regulatory oversight as a licensed financial services company. Thus, Robinhood is in a position to provide a bridge between its regulated financial infrastructure and on-chain programmability that is difficult for pure blockchain projects to replicate.

The real question is: will retail investors using Robinhood have access to these tokenized equity on Robinhood Chain and, if so, how will these access to tokenized equity be materially different from existing access to equity securities via the Robinhood app? There is much said about the benefits of tokenized equity, including: faster settlement, programmable dividend payments, prefabricated access to decentralized finance (DeFi) applications, and availability 24/7 for trading. However, the real question, which is not answerable by test transactions on any testnet, will be whether these benefits will, in fact, produce a change in investor behaviour (i.e., actual use of tokenized equities).

What to Watch Next

The conclusion of the testnet phase will mark the start of the launch of the mainnet. The disparity between the 4 million testnetz transactions and actual usage of the Mainnet in real-world financial use cases is - and will be - the most important part in determining whether or not the Robinhood Chain represents an infrastructure that truly matters or simply provides another cool technology that does not have a marketplace.

Much of the determination of how tokenized equities will be used in the United States will ultimately boil down to the level of regulatory clarity that is present in the use of tokenized equities. Robinhood is a company based in the United States, where the issuance of on-chain assets is filled with many complex regulatory issues created by securities laws and being able to navigate this complicated maze of regulation while still building a financial blockchain with an extremely high amount of throughput is an unenviable position to be in at this time and this issue has yet to be resolved.

The US Regulatory Framework for tokenized RWAs is continuously evolving. Therefore, the Robinhood Chain mainnet will be dictated not only by what is developed through engineering but also what is mandated by regulators in order for tokenized RWAs to be issued on the blockchain.

The first week of public testnet has achieved some noteworthy results with 4 million testnetz transactions.