For Sale, At Scale

Headline:  Ethereum scalability issues

Body:  Bitcoin was the original cryptocurrency, but it had a very serious weakness.   One could not write into it, or use it to enforce contract attributes.  So, the second cryptocurrency was Ethereum, and with Ethereum, one could write smart contracts directly into the code, and these are called smart contracts.  So, Ethereum would appear to be a perfect, flexible cryptocurrency, right?  Well, maybe, maybe not.  As we shall see, even after some pretty fundamental re-design, Ethereum still suffers from some scaling issues.

Scaling issues?  I mean, I’ve cleaned a fish before, but…

Nope, the scaling issues have nothing to do with how sharp your knives are.  In terms of a restaurant, you might have an award-winning recipe for lasagna, but the amounts were for a family of 4.  Now, you’re serving lasagna to 80 people per night, and you now have a scaling issue.   When Ethereum started, it was woefully slow.  In an effort to speed things along, people would use side-chains that grouped together similar transactions, and then aggregate them before adding them to the main string.   These are often referred to as “rollups.”  (In a past entry, I suggested that these are like the scratch paper you might use when doing math homework.)  The problem is that each rollup is not written in the Ethereum language.   Said another way, it is like turning in one’s English homework, and one half of it is in Arabic or Greek.  Just like in the real world, there are interpreters, but not too many, and the ones that do exist are quite pricey.

So, the clear solution is to make (somehow) the Ethereum model interoperable with many other blockchains, and this is done to a limited extent, with bridges.   But, this extent has to be limited because each bridge makes the system more and more susceptible to hackers.  So, given this dilemma, we have 2 ways of scaling up

We could do on-chain scaling

In this sort of scaling, we are looking into doing something directly to the Ethereum information.   This is called sharding and fundamentally, the chain is broken up into segments and each segment is verified.

Or, we could do off-chain scaling.

This is also, often, called Layer 2 and sits atop Layer 1.    (OK, a word from our sponsor, pretend that the Ethereum blockchain is a lasagna.   The lasagna noodle is the Ethernet chain.  Trips along it can be sped up by moving one part of a noodle toward another.   This can be seen on the edge of the lasagna pan.  But, the cheese on top is the  standout here.   These create delicious shortcuts from noodle to noodle, and these top-mounted shortcuts are akin to the Level 2 network.)

Now that we have our culinary interlude, we can get back to Layer 2.    There are several methods of Layer 2 scaling but, essentially, most center around a server or cluster of servers.   The transactions are pre-sorted into related groups before being fed into Layer 1.  This is the crux of Layer 2 scaling.

This seems unnecessarily complicated.

Layer 2 is necessary because the quantity of transactions.  Without it, the congestion gets very bad, and by pre-sorting your transactions, gas fees can be minimized.  These rollups come in two major flavors. The first variety are called optimistic rollups, and assume that transactions are valid.   The second variety are Zero-knowledge rollups require a validity proof.  And, before you think you understand things, they are throwing us another curve.    The Merge has taken place where the Ethereum blockchain moved from Proof of Work to a Proof of Stake consensus model. 

The Verdict

Interestingly, this is all in the rearview now.  The Beacon Chain (with the Proof of stake consensus model) has successfully combined with the main-net (with the Proof of Work consensus model) and  all is well.  Even still, the literature still makes frequent mention of Layer 1 and Layer 2, so the distinction is still important to understand, to understand the progress that has been made.


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Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.