The era of monolithic blockchains is coming to an end, and the era of modular blockchains is coming.
Original title: ” Bankless 丨Why modular blockchain is the best expansion solution for the encryption industry “
Written by: David Hoffman, co-founder of Bankless Compiler: Yangz
The development of Ethereum is reaching a new level of maturity. Currently, the gap between where Ethereum is located and its defined roadmap is rapidly closing.
Now that we are at this stage, it is clear that Ethereum is developing a modular design architecture. The attributes that make the blockchain a “blockchain” are being distinguished and divided so that each blockchain becomes independent and maximized.
In this article, we will explore how Proof of Stake, Sharding and Rollup implement modular blockchain design to realize the long-term vision of Ethereum and set standards for the future development of blockchain.
The impossible triangle of blockchain
The impossible triangle of the blockchain determines that you can only optimize two of the three properties of the blockchain. Due to technical limitations, one must be sacrificed. The three attributes of blockchain are:
- Scalability-What is the data throughput of the system? How many TPS are there?
- Decentralization-how many nodes are there? Where is the power center?
- Security-how well is it anti-attack?
So why does this happen? Why can’t the blockchain achieve sufficient decentralization, security and scalability at one time?
Because the blockchain is monolithic. They try to achieve all three goals on the main chain. However, when you modularize these components, the limitations of the blockchain impossible triangle disappear.
For example, think about the division of labor. This economic principle divides a complex task into smaller components, and individuals can specialize in these tasks, so that the output of the entire system far exceeds the same number of workers working alone.
So, what does a modular blockchain look like and how does it work? Before that, we need to understand the three components of the blockchain, which constitute the three attributes mentioned above.
The components of the blockchain
Decentralization, scalability, and security are all attributes of blockchain. They are the characteristics that can be embodied by the blockchain, but there are some underlying components that can realize these properties. The modular blockchain divides these components into independent parts and maximizes them. So what are these components?
- Consensus-provides security and defines the canonical truth of the data stored on the blockchain. Which block number are we on? What is the content of block N?
- Execution-The calculation required to update the blockchain from N to N+1. In the old state, add a bunch of transactions, and then transition to the new state.
- Data availability-The data guaranteed by L1 can be quoted. All the data that make up N.
Before delving into it, let us use an analogy to familiarize ourselves with these terms. It is a Wednesday morning, and you are heading to your local Wells Fargo branch office to deposit a check for $100.
- Your account status is your bank balance, which is currently $69,420.
- All previous account transactions are included in the data availability layer from the beginning to the present, which is a centralized database hosted and protected by Wells Fargo.
- When the bank teller processed your check, Wells Fargo performed a state transition to the data availability layer, updating your balance to $69,520.
- Now, the N+1 status (US$69,520) is reflected in your Wells Fargo mobile app, web app, and other branch locations. There is consensus, because all updates happen in a centralized database, and only people with the correct credentials can access it.
In blockchain terms, it is:
consensus
Consensus defines the normative truth of the data stored on the blockchain.
In these categories, we found proof of work and proof of stake. These are the systems that define how the block is added to the chain and how participants agree that the block is the correct one.
With these, the blockchain can move forward in time without splitting into a million different chains, each of which has its own true version.
implement
The execution attribute of the blockchain means that the state of the blockchain is brought to the next block.
Block N has some specific states, which represent the data changes from block N-1 (account balance, contract code, etc.). Then the verifier grabs a bunch of transactions from mempool and creates a state update of block N by generating block N+1. The state of block N has changed according to the transactions extracted from mempool (mempool is like queuing Number of people waiting for bank teller).
When the validator uses the selected mempool transaction as input and the consensus mechanism to calculate the new state of the next block, the transaction is executed.
Data availability
Data availability refers to the data hosted on each blockchain node. If there is data on the node, it is available to anyone and everyone who uses the blockchain; there is no dependency on these data. It is available and complete.
This also makes these data very precious. The amount of this data available is extremely limited (we call it block space!). When you add some data to the blockchain, you add this data to the computers of all nodes running the chain (now and forever). The purpose of blockchain is immutable; this means that the data in these systems is the most precious data in human history.
Everyone wants their data (transactions) to be immutable, so people pay high prices to get these attributes, which is why we see very high gas prices on Ethereum L1.
Monolithic blockchain
A monolithic blockchain is a blockchain that tries to accomplish all three things in the same place, namely consensus, execution, and data availability: that is, on L1. Basically, most of the blockchains to date, including the current Ethereum, are monolithic blockchains.
The problem with monolithic blockchains is that they will be affected by the impossible triangle of blockchains. Because the same layer is responsible for making the blockchain become all three components of the “blockchain”, optimizing one attribute of the blockchain will restrict other attributes.
- Want to get more block space through faster block time and larger blocks? Then reduce the number of nodes that can keep up with the progress of the chain. In this way, slow computers in the world will not slow down the speed of the chain.
- Want to trade quickly? Reduce the number of nodes, so that the total number of computers that actually need to perform calculations will be reduced. In this way, we won’t have a bunch of redundant computers doing the same calculations; we just need to believe that the computers that do the calculations will not lie to the network.
- Want to optimize security and decentralization? Reduce the supply of block space and reduce the hardware requirements of nodes, so that everyone can become a participant of the network, but your transactions will take longer to settle.
Monolithic blockchains have brought us to this point, but they are now encountering scale limitations.
The era of monolithic blockchains is coming to an end.
The era of modular blockchain is coming.
Modular blockchain
The modular blockchain uses the three components of the monolithic blockchain currently on L1 and separates them. Just like the division of labor, after splitting each component, we can optimize each component and produce a better product, making the whole larger than the sum of the parts.
Modular execution with Rollup
Rollups can process transactions much faster than the main chain.
By creating a transaction execution environment independent of Ethereum and processing transactions before updating the state of L1, Rollups can exempt the responsibility for consensus and data availability.
Rollups do not have to focus on consensus or data availability like the highly decentralized L1; they are free to make any and all sacrifices on these attributes, because Rollups has an encrypted connection with Ethereum. In other words, Rollup is created by trading on Ethereum, and the Rollup promises to abide by a set of rules.
When Rollup was initialized, it made a cryptographic promise to Ethereum that it would follow these rules.
This kind of “initial commitment” Rollup sets its own restrictions on transaction management methods (that is, Rollup promises to show that all transactions are legal mathematical proofs). This is also the way in which the L1 security of Ethereum and Rollup are connected, and there is no porting at the same time. The baggage of slow consensus and limited data availability.
Included in this Rollup initialization transaction is the ability of any user to withdraw all of their funds from Rollup. This is called the “escape pod”, which means that when a Rollup “breaks” or becomes malicious, you can jump out of the escape pod through a transaction on L1. A broken Rollup is like a broken escalator; it just becomes a staircase.
Regardless of whether Rollup is online and operating, the bridge between it and Ethereum exists and allows Ethereum’s settlement guarantee to extend to it.
This bridge connects the security and decentralization of Ethereum with Rollup’s transaction execution environment.
With this bridge, each module of Ethereum is complementary; the security module (proof of rights and interests) is added to the scalability module (Rollup). The attributes of one module are injected into the attributes of another module. This is how we can achieve scale and decentralization without damaging any one module.
Rollups hardly require any maintenance costs, and only a few nodes are needed at any time, and they do not have the burden of expensive consensus mechanisms required for security. Ethereum’s L1 pays for security fees and remains decentralized, so Rollup does not need to do this.
Certain types of Rollup can even be as high-performance as a centralized server. Further innovations to Rollup can actually make them more performant than centralized databases.
Implement modular security with PoS validator
The equity consensus mechanism creates an intangible object that is responsible for providing security for the system. This object is the virtual currency pledged on the PoS network. The act of using local currency to verify the chain untie the link between physical hardware and network security.
No longer will a specific computer be responsible for network security. Now, all computers can be responsible for network security. Because ETH can be pledged on any computer connected to the Internet, this formally reflects the value of providing security for the asset itself.
The capital requirements for maintaining the physical PoW network can be used to purchase “virtual ASICs” (PoS tokens) to improve the capital efficiency of assets. Unlike physical hardware, PoS assets will not degrade over time, so there are almost no operating expenses that need to be sold.
Reducing the economic cost of running a validator node to the cost of capital (32 ETH) and the cost of a computer (the one you are on!) increases the total feasible number of possible validators for the blockchain. Although 32 ETH is expensive (currently ~$128,000), it is an order of magnitude lower than the smallest feasible proof-of-work mining operation (tens of millions of dollars). In addition, decentralized pledge protocols like Lido or Rocketpool allow any amount of ETH to be pooled and pledged, making the limit of 32 an arbitrary number. The return on your 3.2 ETH and 320 ETH is basically the same, and will approach parity over time.
The proof-of-stake network strips off the hardware requirements of the verification chain, so that general consumer devices are sufficient to verify the function of the chain. This optimizes the connection between the network and the hardware.
By minimizing the role of hardware, you maximize the accessibility of the chain and provide the possibility for the largest number of people to verify the chain. Proof of equity reduces the requirements for network verification to an absolute minimum: that is, capital.
As a result of the proof of stake, Ethereum now has two homogeneous pools, which when combined, become a modular network security pool. This is called the “authenticator pool” and it is the source of security for Ethereum.
The developers of Ethereum stated that they would like to see 10M ETH being pledged to Ethereum to be considered “safe”. 10M / 32ETH = 312,500 validators.
Refine the security of Ethereum into a single validator instance, allowing these instances to be guided by the beacon chain to where these resources need to go, so that Ethereum has the greatest choice in how to allocate its security resources.
Having a modular secure resource pool allows Ethereum to modularize its data storage capabilities through sharding.
Maximize data availability with sharding
Sharding maximizes the available block space in L1!
All blockchains have a certain security supply. The security of Bitcoin is the supply of SHA256 hash values that can be produced in the world. The security of PoS Ethereum is the supply of Ethereum validators that exist in the validator pool.
Ethereum has a “validator pool” composed of all Ethereum validators, which can be randomly selected to verify an Ethereum block. When more validators go online and provide their security (32ETH, promise to abide by the rules) to Ethereum, it can make Ethereum more secure.
When you join sharding, it will also make Ethereum more scalable. Sharding allows “re-distribution of security” on more chains instead of directing all the security of the system to a single chain.
Letting 300,000 validators (300,000 32ETH instances) protect a single chain is an excess of security and an inefficient resource allocation. By decentralizing validators to multiple chains, Ethereum’s L1 can create a scale of 64 Ethereum by having approximately 4,500 validators on each chain.
This makes Ethereum’s scalability and its security have a positive correlation. When the monolithic block chain is close to the limit determined by the impossible triangle of the block chain, the shard block chain reverses the relationship between scale and security; it turns its limiting factor into its growth factor.
Fragmented Ethereum plans to have 64 shards at the beginning, but the goal is to increase it to 1024 shards. In addition, with the development of Moore’s Law, all our home computers have become more powerful, and the number and capacity of shards can be increased.
Having 64 shards at the origin stage of sharding does not mean that we have increased the capacity of Ethereum by a factor of 64. On the contrary, the number of’Ethereum Chains’ we have will increase by 64 times, but the size of each chain will be ~1/3 larger, so it is approximately increased by ~18 times in size instead of 64 times.
However, as mentioned above, as the physical hardware improves and the Ethereum validator pool increases, we can increase the size and supply of shards, thus linking the scalability of Ethereum to Moore’s Law.
Optimize the synergy between modules
The charm of modular design is that the optimization of each module can amplify the optimization of other modules.
There are three synergies here:
- Modular PoS security can redistribute validators on more shards, because more validators are online and can safely support more data. More decentralization➡️More scale.
- The additional shards on L1 have a magnifying impact on Rollup’s execution capabilities. Before adding data to the L1 shard, Rollup can compress a large amount of data, so any extra space in the shard will have a huge impact on the available space of Rollup. Larger scale ➡️ faster execution.
- The more net transaction activity that occurs on Rollup, the more total fees paid for purchasing L1 block space. The more total fees paid for the block space, the more income paid to L1 validators. The more fees paid to verifiers, the greater the incentive to increase verifiers. Add more validators in L1, increase computing resources, and create more shards. And more shards? See step 2.
Larger scale, faster execution
By decentralizing Ethereum to 64 different data availability layers, we have created more space for Rollups to deploy its thousands of transaction bundles. Sharding L1 has a great impact on the scalability of Rollups on L2. Because Rollups compresses transactions into compact packets, any increase in data on L1 will create an order of magnitude space on L2.
This is where Ethereum gains microtransaction capabilities. Fragmented Ethereum is where the floodgates of all Rollup are opened. Increase the block space available for consumption and reduce a lot of Rollup fees on top of sharding.
Compressed Rollup transactions (think: compressed files!) now have more available block space available. Rollup amortizes the cost of its L1 transactions among all its users. If it spends 1 ETH to deploy a large transaction bundle to Ethereum, it will amortize the cost of this 1 ETH to the thousands of traders in the transaction bundle. When we have 64 times the number of shards to deploy transactions, the cost of each transaction should drop by multiple orders of magnitude. Increase the number of amortized users
Once this happens, Rollup is free to stop limiting the amount of available block space on their own, just as they currently do, and let the engine really spin.
The combination of sharding and Rollup allows computing resources to become assets of the network, rather than liabilities. More computers, any computing power, can always contribute their resources to the network and make these resources effectively used, no matter how many resources the computer has for dedication. A computer can become a Rollup validator to help compress the data sent to L1, or it can contribute its resources to the L1 validator pool to help run more shards.
Adding your node to the monolithic blockchain will add another bottleneck that the network must pass through. A monolithic blockchain cannot handle more transactions than a single node. Since all monolithic chain nodes handle all transactions, adding your computer to the monolithic network just adds another computer that needs to be able to keep up with the network.
Economic sustainability
Modular Ethereum is an economically sustainable Ethereum. This is the industry of cryptoeconomics. In addition to cryptography, we also need to do a good job in economics.
In economics, Gresham’s law is a monetary principle that states that “bad money drives out good money.” When someone encounters two different currencies, they will save the one that maintains its value and spend the one that has lost its value.
In fiat currencies, we see people fleeing to the currency with the least depreciation, which is the U.S. dollar. But now, in the world of “sci-fi economics,” we can dream bigger than just “not losing value.” On the contrary, in the cryptocurrency world, we ask “What currency has the most value growth?”
Bitcoin holders are very excited about BTC because it is the first type of hard currency that promises to maintain its purchasing power by avoiding further issuance. Bitcoin promises that as the economy develops, it will become more scarce.
The same BTC supply, but in a larger economy, is equivalent to relatively scarce BTC.
Ethereum people are excited about ETH and its ability to be burned as a demand for the Ethereum network, as well as the possibility of deflation due to burning more ETH than issued through EIP1559.
A larger economy equals a higher ETH burn rate, which makes ETH more and more scarce.
Transaction fee = currency premium
Translate the Gellert’s Law into cryptoeconomic terms: the network needs to collect more transaction fees than is issued to verifiers.
The encrypted economy network pays its security suppliers through issuance and fees. Using fee income to pay for security will replace the required issuance. The more fees the blockchain collects, the less it needs to be issued to increase its supply.
Collect more and issue less.
This is the problem of scaling a monolithic blockchain. Many blockchains promise low fees and high throughput. By promising this, they also promised that they would never create a meaningful fee market. If you want to make block space cheap, you must not rely on transaction fees to pay for security fees.
Therefore, you have to rely on issuance, which is called “bad money” in Gresham’s terminology.
Here is an excerpt from Polynya:
Let us consider Polygon PoS and Solana.
Polygon PoS charges a transaction fee of approximately US$50,000 per day, or an annual fee of US$18 million. At the same time, it has issued inflationary rewards far more than 400 million U.S. dollars. This is an incredible 95% net loss.
As for Solana, for a long time, it only charged ~$10,000/day, but with the speculative mania, it has seen a substantial increase to ~$100,000/day, or $36.5 million per year. Solana issued an even more alarming $4 billion in rewards under inflation, resulting in a net loss of 99.2%.
As a thought experiment, Solana needs to do 154,000 TPS under the current transaction fee to achieve a breakeven-considering the current hardware and bandwidth, this is completely impossible.
But the bigger problem is that these additional transactions are not free-they add greater bandwidth requirements, more state inflation, and generally, higher system requirements.
The key feature of economic sustainability is that it is compound in both directions.
A constrained Level 1 establishes a strong fee market. By limiting the amount of available block space, you both increase decentralization (by reducing the hardware requirements of participating nodes) and increase the acquisition of fee income (by limiting the supply of available block space).
The scarce block space creates a high fee income, which generates a high ETH burning rate, making ETH more scarce and more valuable.
The more valuable a currency is, the less currency needs to be issued to achieve the same effect. Therefore, when the value of the currency is high, the lower the cost actually needs to be paid for security. Under the cheap securities paradigm, you will further reduce the new net issuance, because you just issue fewer things, which further aggravates the scarcity and value of assets.
Seen from the other direction, all this will be solved.
Those blockchains that promote a low-cost charging environment cannot collect any meaningful fee income (otherwise it will have fees). If you can’t charge fees, you must pay for security through issuance, and then the currency will inflate and leak value over time.
Over time, as an inflationary currency, it is increasing the supply of money and reducing its value. Lower value means you have to issue more currency to pay for security. Further issuance inflates supply and depreciates currency, which represents the beginning of an inflationary spiral.
Although speculation in the bull market can temporarily cover up this effect, economic laws cannot be evaded. The issued currency will not preserve its value like the burning currency, and these two paths will lead to a hugely different future.
There is a direct correlation between the throughput of L1 and the soundness of the currency that powers it.
If you increase the throughput of your chain, you increase asset inflation. Sadly, when you also increase the throughput of your chain, you reduce the ability of ordinary people to become a validator.
This divides the community surrounding this blockchain into two types of citizens; one is those who have the ability to verify the blockchain and have the right to earn income, and the other is those who are incapable and can only buy validators and sell them to them. s things.
Connect everything
Ethereum has a restricted L1, which optimizes strong decentralization and efficient security. This L1 with limited block space creates an expensive fee market and adds a currency premium to ETH.
Fragmentation increases the available L1 block space as a function of the safe scale of Ethereum. As Ethereum’s validator pool grows larger, the number of feasible shards will also increase, making Ethereum more scalable in the process of decentralization.
Rollups creates an unconstrained execution environment, bundling transactions and compressing them into the smallest data packets. This frees up new types of economic activity and allows a vibrant cheap economy to flourish, increasing the net economic activity settled on L1. As more economic activities develop on Rollup, its costs will fall because they are amortized among more participants. As more shards are added to Ethereum, and shards become larger, as a function of Moore’s Law, Rollup fees continue to decrease.
The feasibility of lifting microtransactions increases the total amount of viable economic activities that can be supported, allowing net economic activities to have more orders of magnitude operating space. All of this is delivered to L1 Ethereum through a series of compressions and commitments at various levels. And all of it is allocated to the competitive expense market on L1, which burns ETH as a function of total economic activity.
The advantage of modular design is that the optimization of each module will amplify the optimization of other modules.
- Increase decentralization through PoS and increase the number of shards on Ethereum
- More shards on Ethereum L1 will increase the scale of L2 Rollup by orders of magnitude
- The greater scale of L2 Rollup releases new viable economic activities and ultimately increases the collective expenses paid by L1 Rollup.
- More collective fees paid to L1 increase the incentive to run validators, making the validator pool larger and allowing more shards to be created.
- Do this back and forth.
Optimized monolithic blockchain
In every bull market, a batch of new blockchains will appear, and they choose to sacrifice decentralization in order to optimize the execution properties of the blockchain. They increase the block size and limit the nodes so that the boom of the bull market can find a home with cheap fees.
In a bull market, Ethereum and Bitcoin have become extremely crowded because they have been optimized for decentralization, making the chain optimized for the opposite property reasonable: executing transactions.
As mentioned above, a monolithic blockchain optimized for execution has promised some shortcomings. They cannot charge fees meaningfully and sacrifice decentralization.
If such an optimized monolithic blockchain turns itself into L2 on a different L1 chain, then it can actually be more optimized for execution without having to deal with security and decentralization constraints. L1 assets no longer need to be issued to pay for security, because security comes from L1.
Eliminate inflation in the supply plan, allowing a smaller gas market to have a huge impact on the long-term supply of local assets.
Chains like Solana, Binance Smart Chain, Avalanche, and Polygon may all need “Rollup” themselves to promote the long-term sustainability of their tokens. In fact, the sooner they Rollup, the scarcer their native assets will be.
Polyna stated:
I used to think this was the most pragmatic approach, but I now think that with too much capital and arrogance invested in monolithic projects, they will soon adopt this Rollup-only approach. However, those who do this will become pioneers and gain huge network effects.
Reasonable conclusion
The world of cryptocurrency is full of tribalism and politics. What a person makes in cryptocurrency will be influenced by which tribe the person comes from. Motivation and motivation are driven by pre-existing beliefs and prejudices.
Fortunately, code and mathematics are immune to all these things. The entire article above can be rewritten without using the word’Ethereum’ and replaced by an unknown roadmap of an overall optimized modular blockchain.
In fact, this architecture is not implemented by Ethereum alone. Rollups is not just an Ethereum business; Tezos is also embracing a Rollup-centric roadmap. NEAR is also designing data availability for shards. Celestia is building a security and DA layer dedicated to Rollup.
The point is, if we go back in time or jump to a different parallel universe and roll the dice again 10,000 times, the cryptocurrency industry will find ourselves in the conclusion of modular design 99.9% of the time.
This is the most reasonable conclusion of the development of blockchain technology. The only reason it is “politically linked” to Ethereum is that Ethereum has always been the only ecosystem that can fully fund R&D and can bring us to this point.
Over time, we will see that all L1 blockchains will either degenerate into a modular design structure (limit the L1 block space, push the execution to Rollup, increase the number of nodes), and become a global non-sovereign currency world Or they will cancel the burden of consensus and data, and just transplant their execution environment to a more decentralized chain.
The modular block chain design also illustrates the necessity of decentralization as a key attribute of the block chain, which enables all other functions to be realized. Ethereum solves the scalability trilemma by increasing decentralization instead of sacrificing decentralization. Only by optimizing decentralization can you get the benefits of modularity explained above.
If you embrace decentralization, you can own anything.
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