In the early days of the internet, networks did not naturally speak to one another.
Standards had to emerge, trust had to be layered on top of open protocols and institutions had to decide how much control they were willing to relinquish in exchange for connectivity.
Blockchain technology has reached a similar inflection point.
Whether the digital asset landscape’s diverging path could lead to it becoming foundational financial infrastructure, or remain a fragmented experiment in innovation, was at the center of the latest “From the Block” podcast where PYMNTS CEO Karen Webster and Citi Global Head of Digital Assets for Treasury and Trade Solutions Ryan Rugg sat down with Bryan Pellegrino, the co-founder and CEO at LayerZero Labs.
Achieving interoperability between blockchains remains a deceptively simple problem, and one that has haunted the cryptocurrency sector for years.
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“What happens when you try to make every blockchain speak the same language?” Webster asked. “You get a headache.”
That interoperability headache is now colliding into the growing institutional demand for efficient on-chain settlement. Already, the collision has exposed a gap between what decentralized infrastructure can do and what regulated markets require.
Interoperability Meets Institutional Reality
Interoperability, or the ability for different blockchains to communicate, transact and share data securely, has been the industry’s most persistent technical challenge and one of its biggest sources of risk ever since Litecoin, the second blockchain of many to come after bitcoin, was established in 2011.
Solving blockchain’s interoperability challenge requires rethinking the technical architecture of blockchain’s layered existence altogether by separating neutral base-layer infrastructure from regulated activity at the asset and application layer, Pellegrino said.
“Historically, we’ve always been the messaging layer,” Pellegrino said of his firm, which allows data and value to move across chains without creating a central intermediary. “It’s more even of a packet on the internet than anything else. It’s just arbitrary bytes, and anybody can use them.”
The latest initiative from LayerZero Labs, announced in February, signals a broader ambition. A new high-performance Layer 1 blockchain called Zero is being developed with partners including Citadel Securities, DTCC and Google Cloud, with the stated objective to provide infrastructure capable of handling institutional throughput while preserving public-chain characteristics.
The Zero network is designed to function not merely as another blockchain but as global market infrastructure capable of handling institutional-scale workloads while maintaining what Pellegrino called a “neutral public permissionless layer.”
The ambition is to reconcile a trade-off that has long defined blockchain design: decentralization versus performance.
“Right now, there are basically two approaches,” Pellegrino said. “You can be really decentralized … and you’re going to get about 15 transactions per second. Or you can be really performance-focused … and you’re going to get speed.”
The Performance–Decentralization Trade-Off
The emerging institutional architecture of blockchain resembles the internet more than a traditional financial network. Pellegrino repeatedly invoked TCP/IP as an analogy.
“You want the base layer itself to be as neutral as humanly possible,” he said. “And then on top of that, you want the applications and the assets to be able to define their own rules.”
Webster said trust in financial systems has historically come from regulation layered throughout the stack, underscoring a central question facing blockchain financial infrastructure: Where does trust belong?
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“Building the trust layer in a permissionless environment … It’s the chicken and egg,” she said.
In decentralized systems, trust is meant to reside in code. But cross-chain environments, where assets traverse dozens or hundreds of networks, can introduce new vulnerabilities.
“Seeing asset issuers connect 168 chains, the problem is that this is 168 different sets of trust assumptions,” Pellegrino said, adding that Zero blockchain’s own approach involves pre-execution verification, including locally simulating cross-chain state changes to ensure that core invariants such as solvency are preserved before transactions finalize.
Citi’s Rugg added that institutions may adopt blockchain rails, but they will not abandon risk management frameworks built over decades.
“Safety, soundness, security are table stakes,” she said. “We view this as another set of rails that, if our clients want to use it, we want to be able to provide those services.”
Understanding Enforcement Across the Internet of Value
The metaphor of “rails” is a potentially telling one. Payment professionals are accustomed to thinking in layers of messaging networks, settlement systems and compliance frameworks. Blockchain was initially built to collapse those layers into a single programmable infrastructure for value transfer.
For institutional adoption to scale, however, the technology may be evolving toward a familiar model in which open technical standards underpin tightly governed financial applications.
“I am a huge advocate that the base layer needs to be neutral, multi-jurisdictional, broadly resilient … very similar to the internet structure,” Pellegrino said. “The enforcement layer is entirely on top.”
Stablecoins can help illustrate this point, he said. Stablecoins operate on public blockchains yet are issued by centralized entities with the authority to freeze accounts and comply with law enforcement requests. The rails may be permissionless; the assets are not.
Yet Pellegrino warned against overcorrection.
“If you take away the underlying decentralized, permissionless, global capabilities, you lose everything that makes the technology itself valuable,” he said.
The challenge is not to abandon those principles but to accommodate them within regulated market structures, Pellegrino said.
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