What Is Celo?
Celo leverages the deep market penetration of smartphones to deliver a universal financial solution. Celo is a lightweight mobile-centric Proof-of-Stake Layer 1 that allows users to transfer value using only a phone number, with plans to transition to a Layer 2 leveraging the OP Stack.
Key Takeaways
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Celo is a mobile-centric blockchain that links public and private keys to mobile numbers for ease of use and provides a universal financial solution with a low barrier to entry.
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Celo’s target audience is users underserved by the traditional financial apparatus, powering access to native stablecoins leapfrogging traditional infrastructural barriers and provides affordable and accessible financial primitives.
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Celo has a mission-driven approach and will be the first Layer 1 blockchain to transition to a Layer 2 leveraging the OP Stack.
Understanding the value provided by Celo requires diverging from the Western-centric lens that primarily views crypto speculatively as a new technology frontier. The hidden premise that supports and causes this viewpoint to become dominant is the proper functioning of payment infrastructure throughout most of the Western world.
Celo opts for a utility-driven approach, which has become more dominant in this cycle compared to the last, and primarily services areas of the world underserved by TradFi. Global crypto adoption indexes show emerging economies consistently outranking developed economies. Although outranked in capital investment, these budding nations are in the lead regarding actual use and adoption metrics.
One of the most interesting components of the Celo project is the feeling that blockchain represents a tool. At a high level, Celo focuses on regenerative finance and providing fair and accessible alternatives to traditional financial systems, which have typically underserved the developing world. Blockchain was the best vehicle for this goal, hence Celo’s implementation of open distributed ledger technology. This philosophical point will be important later when discussing Celo’s migration to the OP Stack as a Layer 2.
Source: https://celo.org/brand-kit-graphic-elements
Celo: Regenerative Finance
Regenerative finance seeks to recenter the current modus operandi of financial entities from the profit-focused and extraction-based system towards an inclusive model that puts people at the center. Blockchain technology has always revolved around financial inclusivity, and Celo’s provision of convenient, transferable, and accessible money returns to this core ethos.
Celo exists to provide users with financial infrastructure that allows them to take control of their finances and engage with the world supported by foundational building blocks. It may be somewhat hard to imagine, but to speed run Celo’s value proposition, a reader should imagine they live in a region with no access to banks, traditional financial services, and perhaps no computer, but they do have a mobile phone.
Celo employs on-chain public key infrastructure linking phone numbers to public keys, meaning any mobile number functions as a crypto wallet, and from here, a user can access core financial primitives from a smartphone.
Source: https://docs.celo.org/general/architecture
Celo’s Lightweight Infrastructure
Celo’s blockchain architecture consists of three subgroups. Validators, full nodes, and light clients. Validators maintain network state and possess a full record of transactions. Full nodes maintain a partial history and primarily service requests and transactions from light clients. Users running a Celo full node earn CEL in return for their services. Light clients do not receive or retain the full state of the blockchain; they simply make transactional requests.
Although smartphone ownership has become common, hardware capacity lags, and data remains a precious resource. That is why Celo leverages Plumo, a zk-SNARK based system allowing for verification of the blockchain state without requiring the validation of prior transactions. This means low data costs for network syncing and the ability for light clients to interact with the network with low computational/ data demands.
Features of Celo
Here are some key features of Celo and how they reflect the brand’s focus on regenerative finance and overcoming infrastructural limitations for the underserved:
Carbon-Neutral
Celo’s philosophy revolves around making the world a better place, and even though it leverages a Proof-of-Stake consensus mechanism, it still consumes computational power. Celo uses block rewards to fund its Carbon Offsetting program. By donating funds to organizations that offset carbon, Celo has become one of the first blockchains to achieve carbon neutrality.
Mobile-First
The central innovation behind Celo is the ability to use mobile numbers as public keys. Celo leverages Address-Based encryption to make mobile number to mobile number transactions a reality. Users generate their private/ public key pair, and their public key is registered in a decentralized append-only database (data can be added but the existing data is immutable). Validators send an attestation to the public key, users sign the message with their private key (a transaction), and the contract matches the signature (private key) and the public key.
Celo encrypts the numbers to avoid address harvesting, and the above is a highly simplified version of the mechanism. The result is the ability for users to transact in an identity-based ecosystem. Instead of finding a long, complicated crypto address (public key), users simply utilize a phone number. And this system even allows users to send Celo assets to users who do not yet possess a crypto wallet.
The Celo wallet app, at its core, provides a FinTech experience for users, built on blockchain rails, and abstracts away the complications inherent to crypto use. Celo supports multi-currency gas fees, and all elements have been carefully crafted to power a lightweight, functional economic infrastructure layer for smartphone users.
Celo’s DeFi Ecosystem
Source: https://defillama.com/chain/Celo
Celo, like any Layer 1, possesses a DeFi ecosystem, but the flavor of the ecosystem is distinct from the majority of alternative Layer 1s. The key dApps operating on Celo are Mento, the stablecoin issuer, Moola Market, a typical lending protocol where users can lend and earn interest on Celo stablecoins, stCELO, a liquid staking as a service provider; and slightly more intriguing protocols like ImpactMarket.
ImpactMarket focuses on UBI and microcredit allowing users to make a tangible difference in the world and is a prime example of how blockchain technology can overhaul charity initiatives and philanthropic work globally.
Celo Native Stablecoins
Celo has three native stablecoins: Celo Dollars cUSD, Celo Euros cEUR, and Celo Reals cREAL. Mento, a Celo protocol, issues these stablecoins and lets users worldwide access these relatively stable fiat currencies. Whether for remittance payments, saving, or general transfer of value, Celo light clients can access these pegged assets tracking fiat currencies to do so.
Celo stablecoins are over-collateralized and have an elastic supply dependent on market demand. The stability mechanism is referred to as DOTO (decentralized one-to-one mechanism). Assets can be minted by depositing CELO to the reserve and receiving the desired stable asset. The redemption process involves burning stable assets to receive CELO. In short, CELO is stored in a reserve smart contract and exchanged for the desired stablecoin in line with demand.
Multi-Collateral Mento
Mento is currently in the process of deploying Multi-Collateral Mento, which will allow the trading between any collateral asset and any stablecoin. This will bolster the liquidity and usability of Mento stablecoins. The upgrade also features an on-chain circuit breaker to disable trading when oracle price reports shift beyond a predefined threshold.
Oracle manipulation attacks have become increasingly common, with the most recent example being Rodeo Finance, and the on-chain circuit breaker will provide an additional layer of security from manipulation and extreme market volatility.
Mento Stablecoins: Total Supply & Reserve Assets
Source: https://reserve.mento.org/
These stable assets, as well as being collateralized by CELO, are additionally collateralized by exogenous assets. The total outstanding supply across all three stablecoins rests slightly above $64 million.
Source: https://reserve.mento.org/
Source: https://reserve.mento.org/
As seen above, the reserve ratio is 2.51 at the time of writing, and this heavy over-collateralization has spurred an interesting proposal. Roman, the Chief Research Officer from Mento, outlined a bold proposal to return 120 million CELO – gifted initially to Mento to bootstrap the cUSD reserve – to the Celo Community Fund.
The theory behind this proposal is to put the dormant CELO held in reserve to productive use elsewhere in the ecosystem and help facilitate a broader transition towards collateral to stable pairings instead of CELO to stable pairings.
The Transition to Layer 2
On July 15 CLabs announced a proposal that outlined an overall transition from a Layer 1 to an Ethereum Layer 2 via leveraging the OP Stack. Retrospectively, this will be seen as a critical juncture in the power dynamic between Ethereum and alternative Layer 1s – Ethereum has cannibalized a Layer 1.
Source: https://forum.celo.org/t/clabs-proposal-for-celo-to-transition-to-an-ethereum-l2/6109
High-Level Overview
This transition makes perfect sense for Celo, looping back to the earlier comment of Celo being mission-focused and employing blockchain technology as a means to an end. The tech stack offered by Ethereum is now viable for implementing the regenerative finance task.
Celo will derive three central benefits from this transition: alignment, network effects, and security.
Alignment
Transitioning to an OP Stack chain increases EVM compatibility and unlocks all the libraries and tools associated with Ethereum for developers building on Celo. And with it becoming increasingly clear that Ethereum dominance is inevitable, fostering deeper alignment with crypto’s central value layer will yield significant long-term dividends.
Network Effects
Ethereum has the strongest network effects of any blockchain, and momentum heavily favors the continuation of this trend. The Layer 2 ecosystem continues to grow, and by becoming a member of the OP Superchain, as well as gaining access to economic incentives from the Optimism Retroactive Public Goods Funding, Celo becomes part of the ecosystem already containing Optimism, Base, Mantle, and potentially opBNB. As the Optimism Superchain narrative strengthens, this transition will be viewed increasingly favorably.
Security
The most significant benefit for Celo will be that it gains access to Ethereum’s security guarantees, which are the most robust of any general-purpose blockchain and growing stronger thanks to the overwhelming popularity of staking. Celo no longer has to issue its native token to pay for security, inheriting it from Ethereum. Celo will also benefit from the off-chain data availability provided by EigenLayer, further reducing costs.
The upgrade will not be felt by end users – Celo will retain its Layer 1 block finality, and gas fees will remain incredibly low thanks to the off-chain solution from EigenLayer. The transition is essentially all upside for the Celo network.
The Technicals
The key takeaway from a technical perspective is that Celo will employ a decentralized sequencer varying from the predominantly centralized sequencer model in the Layer 2 space and leverage off-chain data availability via EigenLayer.
Celo validators and full node operators will become sequencers for the network. It would also naturally entail them running and maintaining an Ethereum node. There will be no discernible change for end users, and even gas fees will still be payable in CELO. That is the beauty of Celo’s unique lightweight architecture and leveraging light clients.
A Note on Sequencers
A sequencer is a core part of the Layer 2 tech stack. A node that orders and submits transactions to the parent network. It ensures that transactions are ordered and secured. The majority, if not all, Layer 2s currently employ centralized sequencers because it is the most efficient and straightforward approach to implement. However, it is the least decentralized. Celo’s approach will transform its existing validators into sequencers, meaning Celo will be the first Layer 2 with a decentralized sequencer.
Celo’s pedigree of regenerative finance makes it an ideal test for such a sequencer. One would like to believe that Celo validators are aligned with the protocol’s mission and, therefore, less inclined to participate in MEV extraction.
Celo’s Future
Celo’s transition to a Layer 2 is a watershed moment for crypto, but the mission-driven approach of Celo does not change. The OP Stack is merely another tool it can leverage to bring affordable and accessible financial primitives to users underserved by the traditional financial apparatus.
Ethereum’s Cannabilzation Era Begins?
Celo willingly made the choice to transition from a Layer 1 to a Layer 2. And in a recent interview, Andre Cronje stated that Fantom was exploring and investigating a similar move to integrate optimistic rollups to connect Fantom to Ethereum. The fallout of the Multichain hack has essentially forced this by decimating Fantom’s on-chain liquidity.
And this is where things get interesting. The last cycle was dominated by personalities, and every alternative Layer 1 has a tribe and a leader. But the bear market has ravaged the value of these protocols, and with everything hinging on the price of the native token – which, in some cases, no longer has value – it makes sense for more protocols to become Layer 2s.
The Cannibalization Thesis
Every VC who could throw together a Layer 1 and extract capital from retail was heavily incentivized to do so in the last bull run. But due to the winner takes all dynamics present in crypto, and the prevalence of network effects, winning networks become gravitational black holes, and the losers struggle to acquire scraps. Ethereum’s success is a case in point.
Token value becomes deeply enmeshed in the ecosystem. And without token value, an ecosystem falls apart. Many of the alternative Layer 1s face an existential crisis, and the most probable road to salvation will be to become a Layer 2.
Why is this attractive? Alternative Layer 1s no longer have to pay the security costs of maintaining their network via token issuance, instead benefiting from Ethereum’s security guarantees. And with off-chain data availability from Eigenlayer, this is becoming incredibly attractive judged on a cost-basis.
As well as a reduced security spend, the provided security is also improved. The network effect benefits are also large due to the increased interoperability among Layer 2s. There are lots of overvalued EVM-compatible alternative Layer 1s, and the conversation about becoming a Layer 2 is likely already taking place behind closed doors.
In summary, alternative Layer 1s that transition will benefit from Ethereum’s network effects, improved security at a lower cost basis, and greater interoperability. Celo came first, Fantom may be second, but for sure, many more are coming. Welcome to the era of Ethereum cannibalization.
This article is for educational purposes only and should not be taken as finacial advice. Always do your own research before investing in any cryptocurrency.
Kofi J has been active in DeFi since the 2020 summer explosion and has been rugged more times than he can remember. He hopes to make the decentralized economy a little bit more accessible through his prose. Follow the author on Twitter @k_pangolin
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