Podcast Summary
Modular blockchains: Compartmentalizing and optimizing aspects of a blockchain: Modular blockchains, including Ethereum's rollups and sharding, offer potential advantages in scalability, decentralization, and create ultra sound assets and ultra scalable networks.
Modular blockchains represent a new and exciting development in the blockchain space. By compartmentalizing and optimizing different aspects of a blockchain, modular designs offer potential advantages in scalability, decentralization, and other areas. Ethereum, with its sustainable scalability strategy, is seen as a leader in this space, although the concept is still in its infancy. Modular blockchains, which include technologies like rollups and sharding, offer a politically neutral design philosophy that allows for the creation of ultra sound assets and ultra scalable networks. The relationship between these concepts is interconnected, and as Ethereum continues to pioneer this technology, it's an exciting time for the industry. In a recent Bankless episode, the hosts discussed this topic with Eric Peters from One River Capital Management, highlighting the potential of this approach and the potential benefits for the future of blockchain technology.
ETH vs Bitcoin Debate: Learning and Growth in Crypto: David and Ryan engage in a debate about ETH and Bitcoin, covering topics like asset value, untinkerability, Lindy effect, and proof of work vs proof of stake. PoolTogether releases new features for its no loss lottery system, including support for Polygon and anti-whale mechanisms.
The crypto community is continuing to learn and engage in important debates, such as the ETH versus Bitcoin debate, to better understand the merits of different blockchain networks. David and Ryan will be participating in a debate on this topic, with Justin Drake representing ETH and Muneeb representing Bitcoin. This debate will cover topics like which asset holds its value over time, untinkerability, the relationship between Lindy and money, and the differences between proof of work and proof of stake. Additionally, PoolTogether has released version 4 of its no loss lottery system, which includes innovations like the ability to use Polygon and a condensed pool across all chains, as well as anti-whale mechanisms to boost chances for smaller users. Overall, the state of the nation in crypto is one of learning and growth, with opportunities for meaningful debates and the development of new tools and technologies.
Migrating DeFi to Layer Twos and Ledger's Convenient Solution: DeFi apps are moving to layer twos for better efficiency and some skip L1 entirely. Ledger offers a convenient solution for managing crypto assets and accessing DeFi apps with its hardware wallet and app.
The Ethereum L1 is seeing many DeFi applications migrate to layer twos like Arbitrum, and some even skipping L1 entirely. Meanwhile, for securely managing crypto assets and accessing DeFi apps, Ledger hardware wallets and the Ledger Live app offer a convenient solution. Ledger combines a hardware wallet with the Ledger Live app, allowing users to buy crypto, stake ETH, swap on DEXs, display NFTs, and connect to other DeFi apps. With Ledger, users can have all their crypto services and favorite DeFi apps in one place. Meanwhile, the current era is the monolithic blockchain era, where every blockchain, including Bitcoin, Ethereum, and sidechains, tries to do everything at once in the same spot. Monolithic blockchains have nodes handling consensus, data availability, and execution all at once. However, the future may bring modular blockchains, where these roles are separated and handled by different ecosystem participants. This modularization aims to improve efficiency and scalability.
Understanding the Scalability Trilemma of Trust Machines: Trust machines, like Bitcoin and Ethereum, face a scalability challenge due to the trilemma, which forces a choice between decentralization, security, and scalability.
The crypto era has introduced a new type of computer, known as "trust machines" or "trust computers," which are specialized in providing censorship-resistant, reliable state through the consensus layer. These computers, which include Bitcoin, Ethereum, Solana, and others, have three main layers: consensus, execution, and data. Monolithic chains, like Bitcoin and Ethereum, handle all three functions within the same chain, leading to the scalability trilemma. This trilemma presents a challenge as these chains must prioritize two out of three properties: decentralization, security, and scalability. Historically, monolithic chains have focused on decentralization and security at the expense of scalability. Understanding this trilemma is crucial as we explore the potential solutions to increase transaction throughput and make these trust computers more suitable for global economies and payment systems.
Blockchains prioritizing scalability over decentralization: Trade-off between scalability and decentralization in blockchains leads to fewer nodes and higher hardware requirements, decreasing decentralization and increasing potential for corruption.
Blockchains like Binance Smart Chain, Polygon, and Solana have prioritized scalability over decentralization, resulting in fewer nodes that can run the blockchain and higher hardware requirements for participation. This trade-off can lead to more efficient networks but also decreases decentralization, as there are fewer centers of power and more potential for corruption. Measuring decentralization can be challenging, as it can refer to the number of nodes or the distribution of power among them. Bitcoin is often considered the most decentralized blockchain due to its large number of nodes, but even decentralized networks can have centralized elements if certain applications or admin keys concentrate power. Ultimately, the blockchain trilemma presents a challenge, as networks can only optimize for two of the three goals - scalability, security, and decentralization - at a given time.
From monolithic to modular blockchains: Ethereum is transitioning from monolithic to modular design, inspired by the CPU manufacturing industry's shift towards modularization, leading to increased scalability and efficiency.
The blockchain industry, specifically Ethereum, is undergoing a shift towards modularization, similar to the revolution in CPU manufacturing. Traditional monolithic blockchains are limited in scalability, and Ethereum's future roadmap involves optimizing various aspects of the network. Intel, a chip manufacturing giant, once focused on making larger, monolithic chips, but AMD disrupted the industry by modularizing the CPU, leading to significant improvements in processing power at a lower cost. Ethereum researchers and developers have been working independently on various aspects of the network, such as proof of stake consensus, sharding, and roll-ups, resulting in a modularized design. Polynaya, a pseudonymous writer, was one of the first to introduce the term "modular blockchains" and has written extensively on the topic. By applying the lessons from CPU manufacturing, the blockchain industry can continue to innovate and overcome limitations, leading to more efficient and scalable networks.
Modularization in Blockchain: Inspired by Nature and Economics: Modularization in blockchain, inspired by nature and economics, leads to increased efficiency through specialization and division of labor, as seen in AMD's CPU design and Ethereum's separation of consensus, data, and execution layers with roll ups.
The concept of modularization, which has proven successful in chip design with AMD's CPU, is now being applied to blockchain technology. AMD's CPU design features multiple chiplets and a medium-sized die as a traffic controller, which can be compared to the beacon chain and shards in Ethereum 2 development. This design philosophy, inspired by nature and economics, allows for specialization and division of labor, leading to increased efficiency. In the context of blockchain, this modularization is manifested in the separation of consensus, data, and execution layers. Previously, all nodes executed and verified transactions on the same chain, but with roll ups, a new execution layer has been introduced, allowing for off-chain computation with on-chain commitments, ensuring trust and reducing the computational load on the main chain. This modular design is not only beneficial for Ethereum but can be adopted by any blockchain, following the pattern of progress and optimization seen throughout history.
Ethereum's shift towards roll ups: More efficient transaction execution: Ethereum's new design allows for efficient transaction execution through roll ups, which focus on execution and use advanced cryptography to compress data, enabling a larger volume of transactions and data processing.
Ethereum's shift towards roll ups, which are essentially separate chains secured by Ethereum, allows for a more efficient transaction execution environment while maintaining decentralization. This is achieved by concentrating the majority of execution on these roll ups, which focus solely on execution and do not have to deal with security, data availability, or consensus. Roll ups also compress data through advanced cryptography, enabling the processing of a larger volume of transactions and data. This new modular blockchain design, enabled by zkSNARK technology, is a significant unlock for the space and the reason behind Ethereum's rapid transition towards this design.
Essential Components of Ethereum's Scalability Solution: zk Rollups and Sharding: Zk Rollups bundle and securely process transactions for scalability, while Sharding distributes validation workload for increased data capacity and decentralization, significantly enhancing Ethereum's efficiency and scalability.
Zk rollups and sharding are two essential components of Ethereum's scalability solution. zk rollups compress and securely bundle multiple transactions for efficient and scalable processing, while sharding distributes the validation workload across multiple chains, increasing block space and preserving decentralization. Together, they enable Ethereum to become significantly more scalable, with the first iteration of shards adding roughly 18 times more data and scalability to the Ethereum L1. However, rollups are still dependent on the data availability of the L1, and adding more data to the L1 allows rollups to consume and compress much larger amounts of data. In essence, zk rollups handle the compute layer, while sharding manages the data layer, enhancing Ethereum's overall efficiency and scalability.
Ethereum's Scalability Solutions: Roll Ups, Data Sharding, and Consensus: Ethereum's scalability is being addressed through roll ups, data sharding, and consensus, allowing for more transactions and increased data availability while transitioning from proof of work to proof of stake.
Ethereum's scalability is being addressed through various layers and components, including roll ups, data sharding, and consensus. Roll ups allow for more transactions to be processed, making Ethereum more scalable as it linearly scales out the number of shards. Data sharding, expected to be implemented around 2023, will split the data into 64 different pieces, increasing data availability. The consensus layer, which provides security and trustlessness, is being transitioned from proof of work to proof of stake, allowing individuals to validate the Ethereum blockchain with their staked ether. These components are being developed in parallel, forming a modular Ethereum roadmap. This modular design, which turns limiting factors into growth factors, is crucial for understanding the space and making informed investments, as there's a common narrative that Ethereum is not scalable.
Ethereum's shift to proof of stake lowers barriers to entry and enhances decentralization: Proof of stake in Ethereum reduces capital requirements for validators, leading to a more accessible and decentralized network. The consensus layer, or beacon chain, has been live for a year and will replace the proof of work consensus layer, contributing to scalability and improved accessibility.
Ethereum's transition from proof of work to proof of stake collapses the barriers to entry for validators, making the network more accessible and decentralized. Capital is the key component in proof of stake, and the return on investment is the same regardless of the amount of capital. The consensus layer, or beacon chain, has been live for approximately a year and will replace the proof of work consensus layer. Ethereum's modular design separates the execution, data, and consensus layers, allowing for scalability and improved accessibility. Decentralization is crucial for blockchains, and optimizing for it is the only way to effectively address the scalability trilemma. Ethereum, like Bitcoin, prioritizes decentralization, and the development of modular solutions like the Lightning Network in Bitcoin's execution environment is a strategy to maintain this decentralization. The synergies and compounding effects of these changes will lead to increased validators, more shards, and ultimately, cheaper and faster transactions.
Interconnected benefits of modular blockchains: decentralization, scale, and security: Modular blockchains optimize for decentralization, increasing participation and faster block propagation, leading to improved security and scale through sharding and proof of stake.
Decentralization, scale, and security are interconnected benefits of moving towards modular blockchains. Modular blockchains optimize for decentralization, allowing for more participation and faster propagation of blocks. This leads to increased security and scale through sharding, which compartmentalizes validators and reduces competition. Proof of stake further collapses the costs of validating the chain, making it accessible to regular computers and individuals with capital. Using platforms like Matcha for crypto trading and exchanges like Gemini for buying and selling crypto assets can help individuals maximize their returns and access various crypto markets.
Ethereum's transition to proof of stake leads to increased decentralization, more validators, and more scale and security: Ethereum's shift to proof of stake enables more individuals to stake and validate, increasing network decentralization, security, and transaction throughput via shards and roll ups, ultimately benefiting all participants
Ethereum's transition to proof of stake and the implementation of shards and roll ups will lead to increased decentralization, more validators, and ultimately, more scale and security for the network. As more individuals can participate in staking and becoming validators, the number of shards can increase, resulting in exponential transaction throughput. This increased number of shards will also lead to more security as they contribute to the roll ups, making transactions cheaper and faster, and unlocking new economic opportunities. These roll ups will still pay Ethereum fees, which will be used to fund security for the network, ultimately benefiting all participants.
Rollups create a self-reinforcing cycle of growth in Ethereum and other scalable blockchains: Rollups reduce fees and increase economic activity, fees fund validator participation and security, and this cycle repeats, leading to growth. Monolithic chains may face economic unsustainability due to high fees, but scalability solutions like rollups can help maintain value and competitiveness.
The rollup mechanism in Ethereum and other scalable blockchains creates a virtuous cycle of decentralization, security, and economic sustainability. Rollups compress multiple transactions into one, reducing fees and allowing more economic activity. These fees go to validators, incentivizing more staking and validator participation, leading to increased security and decentralization. This process repeats, creating a self-reinforcing cycle of growth. Conversely, monolithic chains, like Ethereum, may face economic unsustainability due to their high fee markets. The fees collected on these chains ultimately fund security, and if fees exceed new ether issuance, the chain becomes deflationary, making ether more valuable and scarce. This relationship between fee collection and new supply is essential for the long-term success of a blockchain. However, optimizing for execution speed can limit fee collection, making it essential for these chains to explore scalability solutions like rollups to maintain their value and competitiveness.
Monolithic blockchains face economic sustainability challenges: Monolithic blockchains need to balance execution optimization with economic sustainability to attract users and maintain their value proposition. Increasing block space supply could lead to a fee market and competition against roll-up solutions.
Monolithic blockchains optimized for execution, like Solana, face economic sustainability challenges if they don't collect fees. However, collecting fees could compromise their value proposition. Instead, they may need to increase block space supply to instigate a fee market, which could lead them to compete against roll-up solutions. This transition from execution optimization to decentralization might be difficult for these chains, especially if they have established power structures and economies built around low fees. The economic numbers, such as Solana's $36 billion annualized revenue with a net loss of 99.2%, underscore the need for economic sustainability. Chains that can sustain themselves economically will attract users, governments, exchanges, and other desirable entities. Ultimately, all layer 1 chains are competing as money, and those with a strong monetary premium will have the highest economic security.
Monolithic blockchains can't produce non-sovereign money due to fee market limitations and centralization risks: Monolithic blockchains issuing more money than transaction fees limit economic sustainability and centralize control, while decentralization ensures equal access to the network
Monolithic blockchain designs, which issue more money than their transaction fees, cannot produce a non-sovereign money like Bitcoin or Ethereum. This is a limitation because economic sustainability in a blockchain system comes from the fee market, which is generated by limiting the block space. Compromising on decentralization, which determines who can validate the chain, can also lead to a centralized system where a select few validators control the issuance of new money, creating a division between insiders and outsiders. The importance of decentralization in blockchain systems is to prevent such a division and ensure that everyone has equal access to the network. The ultra scalable Ethereum narrative and the modular blockchain narrative are interconnected, as the former relies on the latter to achieve the goal of creating a decentralized, non-sovereign money.
Ethereum's modular design for ultra scalability and ultrasound money: Ethereum's modular design, including L1 constraints, sharding, rollups, and Ether burning, leads to scalability and a valuable Ether market. Monolithic chains may not be sustainable and could become rollups or pivot to a modular design.
The Ethereum network's modular design, which includes a constrained L1, sharding, rollups, and the burning of Ether, leads to both ultra scalability and ultrasound money. This design creates an expensive fee market, driving demand for Ether and increasing economic activity on the network. Monolithic chains may not be sustainable in the long term and could either become a rollup on Ethereum or pivot to a modular design. The current market valuations of some competing layer-1 chains assume they will become reserve assets, but if the modular blockchain thesis holds true, they will likely become execution environments at best.
The future of monolithic blockchains lies in modular designs through roll-ups: Monolithic blockchains face excessive inflation due to consensus and security costs. Roll-ups offer economically sustainable environments by optimizing execution and removing the need to issue currency. Modular designs and roll-ups are crucial for the future of the blockchain industry, with major upgrades already underway.
The future of monolithic blockchains, like Ethereum, lies in their ability to adapt and compete by embracing a modular design, specifically through the implementation of roll-ups. The main investment issue with these execution-optimized monolithic chains is their excessive inflation due to the need to pay for consensus and security. Roll-ups, on the other hand, can optimize for execution orders of magnitude more than monolithic chains, while removing the need to issue and inflate currency. This makes roll-ups the economically sustainable environments for blockchains on top of Layer 1 or Layer 2 solutions. By outsourcing decentralization and security to a different Layer 1, these modular blockchains can focus on the Layer 2, creating a bull case not only for specific chains but for decentralization and the entire industry. The economic and scalability upgrades, such as the merge and issuance reduction, are already happening, with the first roll-ups going mainstream in 2021. The next milestones include general-purpose zk-EVMs in 2022 and data shards in 2023, which will supercharge all roll-ups, adding massive scalability to every developing roll-up. This shift towards modular designs and roll-ups is a crucial development for the future of the blockchain industry.
Ethereum's Future Upgrades: Scalability and Beyond: Ethereum aims to handle up to 15 million transactions per second by 2030 through optimization, compression, ZK proofs, and data scalability upgrades. Long-term sustainability is key, but investing in Ethereum and crypto involves risks.
Ethereum is working on major upgrades beyond The Merge, including optimization, compression technologies, ZK proofs, and data scalability, which could potentially enable the network to handle up to 15 million transactions per second by 2030. This scalability strategy is important for the long-term sustainability of crypto without sacrificing decentralization. However, it's important to note that these upgrades are complex and still in development, and there are risks involved with investing in Ethereum and crypto in general. Despite the challenges, David and I remain bullish on the future of Ethereum and the broader crypto frontier. Stay tuned for more in-depth discussions on this topic as we continue to unpack the complexities of the Ethereum ecosystem.
