Paper 18: Scaling
How blockchains can deal with more transactions
Just over a week ago Yuga Labs apologised for “turning the lights on Ethereum for a while”. Their Otherdeeds sale created so much demand that Ethereum became so expensive that it was essentially unusable.
Because of the wild demand, Yuga Labs suggested that the ApeCoin DAO should consider migrating to “its own chain” - with the strong hint being that Ethereum (at least at Layer 1) cannot cope with the type of demand that Yuga Labs saw that night.
In this Paper I will explain at a high level what happened that night, why it happened, and what the options are for the future.
This all falls into the broad discussion on scaling - which seeks to solve the problem of blockchain capacity limitations as the number of people who use Ethereum grows.
A quick point on my own scaling: I’ve moved flat, ordered the fastest internet known to mankind, and should be producing one Paper and two podcasts per week as planned by next week. (I never knew how long it took to upload an hour long podcast with bad internet - if you don’t know, you don’t want to know!)
In the meantime, my latest BCheque Chat with OSF was classic if you missed it.
Why was it so expensive to mint Otherdeeds?
If you haven’t already, I would recommend reading my Paper 4: Blockchain Basics and Paper 5: How to win gas wars for a fundamental understanding of how the blockchain works and how it copes with excessive demand.
In a nutshell:
Everyone has to pay a transaction fee to store their transaction data in a block when they buy something on Ethereum (translated: you pay a transaction fee to submit your transaction to the network).
When many people want to buy something on Ethereum at the same time, they have to compete for space in the blocks, because blockspace is finite and the desired product may be sold out by the time they get space in a block.
This causes the price it costs to be included in a block (the transaction fee) to increase.
When Otherdeeds were being sold, demand was vastly greater than Ethereum’s block capacity to include the transactions at a reasonable cost, so everyone felt compelled to set a higher and higher transaction fee to ensure they would be included in the block (which would ensure their transaction would go through.)
As such, transaction fees soared into the thousands of dollars.
Would a separate chain reduce the costs?
The short answer is almost certainly ‘yes’. But we really need to understand why blockchains exist and the issues with which they grapple to understand if that would be ‘good’ or ‘bad’.
What is the point of a blockchain?
A blockchain is simply a public database that is updated and shared across many computers in a network.
There are three things for which blockchains would optimise in an ideal world: decentralisation, security. and scalability.
(i) Decentralisation
This represents the idea that there should be no central point of control, and so the computing power which runs the blockchain is distributed across many computers around the world.
(ii) Security
This represents a blockchain’s ability to defend itself from attacks and malicious actors.
(iii) Scalability
This represents the desire to serve as many people as possible, by being able to handle as many transactions as possible.
So what is the issue?
The reason why this is called a trilemma is because it is not possible to optimise for all three things at the same time.
In essence: the more data a blockchain is able to fit into a block and the quicker it is able to produce blocks, the fewer node operators there will be. This means that things can only get faster with increased centralisation, which in turn reduces security and censorship resistant properties.
This is a helpful video on this topic:
Justin Bram: Scaling the blockchain
This is the fundamental problem with scaling on Layer 1 (the standard consensus layer where most transactions are settled).
For this reason, people have begun to consider Layer 2 scaling options.
Layer 2 Scaling Options
Layer 2 is a term used for another “layer” which is built on top of Layer 1 so that Layer 1 can handle more transactions by moving transactions off chain.
In doing this, however, security is not sacrificed because a Layer 2 still utilises the security of Ethereum Layer 1.
This is how the Ethereum website explains how Layer 2 works:
Most layer 2 solutions are centered around a server or cluster of servers, each of which may be referred to as a node, validator, operator, sequencer, block producer, or similar term. Depending on the implementation, these layer 2 nodes may be run by the individuals, businesses or entities that use them, or by a 3rd party operator, or by a large group of individuals (similar to Mainnet).
Generally speaking, transactions are submitted to these layer 2 nodes instead of being submitted directly to layer 1 (Mainnet). For some solutions the layer 2 instance then batches them into groups before anchoring them to layer 1, after which they are secured by layer 1 and cannot be altered. The details of how this is done vary significantly between different layer 2 technologies and implementations.
Ethereum website, Layer 2 Scaling
In essence, Layer 2s allow for (i) faster transactions; (ii) more transactions; and (iii) cheaper transactions. (To consider all of the different types of Layer 2 scaling options would require another Paper. I will do that if there is interest.)
Final thoughts
In the end, we have a choice between Layer 1 Ethereum, Layer 2 Ethereum (which utilises security of Layer 1 Ethereum), and alternative Layer 1s (like Avalanche, Solana, Terra, or a future ApeChain).
It is very clear that Layer 1 Ethereum struggles when demand for blockspace is very high, but that doesn’t mean Ethereum doesn’t work. It simply means that Ethereum in its current Layer 1 form is not scalable (it works as intended, because the price for blockspace rises sharply as demand rises sharply).
So how do I think we will move forward?
Ethereum appears to be the top-tier Layer 1, and so if Layer 2s can function properly they would be a good scaling solution. (Stay tuned for some more important content on Layer 2s - would highly recommend following @32dreams_ for updates there).
Having said that, I can see very successful projects seek to opt out of already-existing chains so that they can capture more value for themselves. I have no idea how successful they will be - it’s no small task.
Hope that was a helpful look at scaling.
Have a great day,
B
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Disclaimer: The content covered in this newsletter is not to be considered as investment advice. It is for informational and educational purposes only.
I hold some of the NFTs mentioned in these newsletters.