Ethereum’s next goal: the mother of all chains?

Author: David Hoffman; Compiler: Vernacular Blockchain

Decentralization, censorship resistance, permissionless, and trusted neutrality. If these can be maintained on L1, then they can be functionally expanded in an unlimited number of L2s, which are cryptographically bound to Layer1.

Between 2015 and 2017, Bitcoin experienced an infighting known as the "block size war". This was a key conflict in Bitcoin's history, with both sides arguing over what they believed to be the correct Bitcoin network expansion strategy to ensure that it could meet growing demand over time.

The two factions in this debate are known as big block supporters and small block supporters.

Big blockers advocated for increasing the original size of Bitcoin blocks from 1MB to 8MB. This would increase the throughput of Bitcoin transactions eightfold while reducing transaction costs.

Small blockers advocated for keeping the block size unchanged, arguing that increasing the block size would jeopardize Bitcoin's decentralization by making the Bitcoin blockchain more difficult for ordinary users to run and verify. Small blockers ultimately proposed an alternative path called Segregated Witness (SegWit), which would optimize the number of transactions that can fit into a block rather than directly increasing the block size.SegWit would also open the door to scaling solutions outside the core Bitcoin protocol, known as Layer 2 scaling.

To better support these views, small block proponents hope to expand in two ways

-Increase block density so that more transactions can fit in the same space

-Open the door to layer-level scaling strategies, creating space for functional off-chain scaling solutions

So, this is the focus of the debate: Should we increase the block size? Or keep the block size limited and force expansion to higher layers?

01. Modern big blockers and small blockers

The block size debate echoes in the halls of crypto history and still exists today.

We no longer call these factions big blockers or small blockers, and today people prefer to find more modern factions to identify with, usually defined by a specific first layer (Layer1). Nonetheless, the different philosophical views expressed by these two camps exist in the culture and belief system of each Layer1 faction, whether they realize it or not.

In modern times, the small blocker vs. big blocker debate continues to be reflected in the Ethereum vs. Solana debate.

The Solana camp says that Ethereum is too expensive and too slow to bring global users on-chain. Consumers will not use crypto assets unless transactions become instant and free, so we need to design as much capacity into Layer1 as possible.

The Ethereum camp believes that this is a fundamental compromise of decentralization and trusted neutrality, which will produce a fixed set of winners and losers and ultimately produce the traditional social financial stratification we are trying to get rid of. Instead, we should focus on increasing the density and value of Layer 1 blocks and force expansion to Layer 2.

This debate is not new. The crypto asset landscape changes, adapts, and evolves, but the debate over small blocks vs. big blocks philosophy remains.

1) Precision blocks vs. primitive blocks

Ethereum’s big innovation from 0 to 1 was the addition of a virtual machine (EVM) inside the blockchain. All chains before Ethereum lacked this key element, and instead tried to add functionality as separate opcodes rather than a fully expressive virtual machine.

Early Bitcoiners philosophically disagreed with this choice because it increased the complexity and attack surface of the system and increased the difficulty of block verification.

While both Bitcoin and Ethereum are “small blocks” philosophy chains, the increased scope of the virtual machine still created a huge divide between the two communities. Fast forward to today, and you can see clear connections between some of the biggest factions in modern blockchain philosophy.

“Block size” contains two variables: the size of the block and the number of blocks per unit time. In fact, “block size” is “throughput” or “data per second”.

While this view may remain in 2024, I believe that these four Layer 1 blockchains occupy four different types of valid logical conclusions in the Layer 1 architecture:

- Bitcoin's Layer 1 design is super restrictive, taking every possible measure to limit the capabilities of Layer 1.

- Ethereum is sufficiently restricted at the Layer 1 level, but by increasing Layer 1 capabilities, it creates room for unlimited block supply at the Layer 2 level.

- Celestia limits the capabilities of its Layer 1, but maximizes its capacity, forcing more features to be pushed to Layer 2, but providing them with maximum room to build (hence the "build anything" slogan).

- Solana is ultra-unrestricted, maximizing the capacity and functionality of Layer 1 while limiting the ability to build higher layers.

2) Functional Escape Velocity

My crypto asset investment thesis is that the blockchain that incorporates both small blocker and big blocker philosophies into its design will ultimately win the crypto game throne.

Both the small blockers and the big blockers are right. They both have reasonable points. There is no point in arguing about who is right and who is wrong. The key is to build a system that maximizes the advantages of both.

Bitcoin, as an architecture, cannot accommodate both the small blockers and the big blockers at the same time. The Bitcoin small blockers claim that expansion will occur in Layer2, and guide the big block supporters to the Lightning Network, telling them that they can still enjoy Bitcoin in the Bitcoin system. However, due to the functional limitations of Bitcoin Layer1, the Lightning Network cannot gain sufficient development, and the big block supporters have no other choice.

The article entitled "Base Layer and Functional Escape Velocity" published by Ethereum founder Vitalik Buterin in 2019 clarifies these situations and advocates for minimizing the functionality of Layer1 so that a functional Layer2 can be produced.

“While Layer 1 cannot be too powerful, because greater power means greater complexity and therefore greater fragility, Layer 1 must also be strong enough so that Layer 2 protocols can actually be built on top of it.”

“Keep Layer 1 simple and make up for it in Layer 2” is not a universal answer to the blockchain scalability and functionality problem, because it fails to take into account that the Layer 1 blockchain itself must be scalable and functional enough to make this behavior of “building on top” actually possible”.

My summary:

We need to expand the scope of Layer 1 blocks, rather than just pursuing small blockism, to ensure that Layer 2 can reach “functional escape velocity”. We need more complex block designs.

However, we should not expand the scope of Layer 1 blocks beyond the point of achieving “Layer 2 functional escape velocity”, because this will unnecessarily compromise the decentralization and credible neutrality of Layer 1. Any additional Layer 1 functionality can be pushed to Layer 2. We should stick to the small block philosophy.

This represents a compromise between the two parties. Small blockers must accept that their blocks become more sophisticated and (slightly) difficult to verify, while large blockers must accept a layered scaling approach.

Once this compromise is reached, synergies emerge.

02. Typical Cases

1) Ethereum Layer1 - The Root of Trust

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Ethereum is a root of trust.Ethereum Layer1 maintains its small block philosophy by leveraging advances in cryptography to achieve functional escape velocity at higher layers. By accepting fraud proofs and validity proofs from higher layers, Ethereum can effectively compress nearly unlimited transactions into easily verifiable bundles that are then verified by a decentralized network of consumer hardware.

The crypto industry made a philosophical promise, and Ethereum turned this philosophy into reality through cryptographic research and traditional engineering technology.

Imagine small blocks at the bottom and big blocks at the top, that is, decentralized, trusted neutral, and verifiable consumer blocks on Layer 1, and highly scalable, instant, and cheap transactions on Layer 2!

Instead of viewing small blocks and big blocks as a horizontal continuum of trade-offs, Ethereum flips this continuum vertically and builds a big block structure on top of secure, decentralized small blocks.

Ethereum is a small block anchor in a big block world.

Ethereum allows 1000 big block networks to bloom and generate synergies from a consistent and composable ecosystem, in contrast to the fragmentation of many Layer1s.

2) Cosmos: The Lost Tribe

Okay, but where does Cosmos fit into this argument? Cosmos does not strictly follow the alignment of any network design. After all, there is no "Cosmos" network, Cosmos is just an idea.

The idea is a network of interconnected sovereign chains. Each chain has maximum, uncompromising sovereignty, and through shared technical standards, they are able to unite to a certain extent and abstract away their own complexity to a certain extent.

Translation: Cosmos is not just a technology or an ecosystem, it represents a choice: the choice to build an independent and autonomous application that interoperates with other applications. The more independent your Layer2 is, the more it reflects the choice to become a Cosmos application. 

The problem with Cosmos is that it insists too much on sovereignty, so that the Cosmos chains cannot coordinate and build themselves well, and cannot share each other's successful experiences. Over-emphasis on sovereignty will bring too much chaos to the development of Cosmos. The great pursuit of sovereignty inadvertently optimizes anarchy. Due to the lack of a central coordination structure, the concept of Cosmos has remained within the scope of a niche.

03. Synergy

Similar to Vitalik's concept of "functional escape velocity", I believe there is also a phenomenon of "sovereign escape velocity". In order for the Cosmos concept to truly take root and thrive, it needs to make some minor compromises on network sovereignty to maximize its potential.

The Cosmos concept and the Ethereum Layer2 vision are basically the same thing. This is a horizontal landscape composed of independent, sovereign chains that have the power to choose their own destiny.

The "Indivisible Vow" scene in "Harry Potter"

The core difference is that Ethereum Layer2 sacrifices some of its sovereignty and publishes its state to their Layer1 bridge contract. This small change turns the previous internal operation into an external operation, by selecting a centralized Layer1 for local bridge settlement.

By extending the security and settlement guarantees of Layer1 through cryptographic proofs, the infinite Layer2 developed from the Ethereum foundation becomes a substantially identical global settlement network. This is where the extraordinary synergy between the small block and large block philosophies emerges.

1) Synergy 1: Chain Security

Layer2 chains do not have to pay for their own economic security, thus eliminating most of the network inflation of the underlying assets, retaining 3-7% of the annual inflation rate in the value of their respective tokens.

Take Optimism as an example: on its $14 billion FDV (Fully Diluted Valuation, that is, fully diluted valuation, refers to the consideration of all issued tokens of a crypto project, including currently circulating tokens and tokens that have not yet been released, to determine the total market value of the project. Formula: FDV = current price of circulating tokens × total number of issued tokens), assuming an annual security budget of 5%, this actually means that $700 million is not paid to third-party external security providers each year. In fact, Optimism Mainnet paid $57 million in gas fees to Ethereum Layer1 in the past year, which was measured before the advent of EIP-4844, which reduced Layer2 fees by more than 95%!

The cost of economic security drops to zero, leaving only DA as the only meaningful ongoing operating cost of the Layer2 network. Since the DA cost is also close to zero, the net cost of Layer2 is also close to zero.

By creating sustainability for Layer2 chains, Ethereum can unleash all the chains that the market demands, creating more total chain sovereignty than the Cosmos model can generate.

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2) Synergy 2: Composability

Layer2's customer acquisition costs also become marginal because the settlement of cryptographic proofs to Layer1 provides a trusted connection between all Layer2s. By retaining the settlement guarantee of Layer1, users can shuttle between Layer2 without having to "test" every chain they come into contact with. Naturally, users will not engage in this activity either, but service providers that provide chain abstraction services (bridges, intent fillers, shared sequencers, etc.) can provide a more powerful service if they have uncompromising security over the foundation on which they are building their business.

In addition, as many Layer2 chains come online, each Layer2 will attract its own edge users to the larger Ethereum ecosystem, creating a clustering effect. Since all Layer2s add their users to the "heap", the total pool of Ethereum users becomes larger as the network grows, making it easier for edge Layer2 chains to find enough users.

Translation: Ethereum is criticized for its fragmentation, but it is actually a network of combined chains. "Many L1s" are the real fragmentation. 

Ethereum is criticized for "splitting", which is actually ironic because it is the opposite of reality. Ethereum is the only network that connects other sovereign chains together through cryptographic proofs. In contrast, the numerous Layer1 spaces are completely and thoroughly fragmented, while Ethereum's Layer2 space is only fragmented due to latency.

3) Synergy 3: Accounting Unit

All of these benefits focus on the consensus point of ETH as an asset. The more network effects there are around the Ethereum ecosystem, the stronger the boost ETH will be.

ETH becomes the unit of account for all its Layer2 networks because each Layer2 network creates economies of scale by centralizing security into Ethereum Layer1.

In simple terms, the growing distributed settlement network of Ethereum makes ETH a currency.

04. Conclusion

The Ethereum project pursues a unified architecture that covers the widest possible range of use cases. This is a network that can do everything.

The small and powerful Layer1 combined together is the foundation needed to open the widest design space in Layer2. Early Bitcoin supporters often said, “If it works, it will eventually be built on Bitcoin.” I fully believe in this concept, it’s just that I think Ethereum is the more optimized network because that’s what Ethereum has been optimizing for.

Maintaining the values ​​of the cryptocurrency industry happens at Layer 1.

Decentralization, censorship resistance, permissionlessness, and trusted neutrality. If these can be maintained on L1, then they can be functionally extended in an unlimited number of L2s that are cryptographically bound to Layer 1.

In the battle for the throne of cryptocurrency, the core investment thesis for Ethereum is that any other Layer 1 can either be better built as a Layer 2 or integrated into it as a feature of an L1.

Do you want lightspeed consensus? It’s faster as a Layer 2.

Do you want a completely private blockchain? It will be more effective as Layer2.

DA as a blockchain? Why not just establish it on Layer1.

Eventually, everything will become a branch on the Ethereum tree.