The evolution of Ethereum's scaling struggle has been a long journey. A previous discussion on the path to hybrid rollup technology revealed an elegant and practical solution: a layered blockchain design. In this model, Layer 1 serves as the main chain, handling consensus and data availability, while Layer 2, known as rollups, offloads computational verification for all blockchain users. This creates a scalable blockchain solution.
Ethereum's rollup-based scaling solution is so powerful that it has begun to guide Ethereum toward a rollup-centric future.
How will this rollup-centric future shape the Ethereum ecosystem? If we compare this ecosystem to a living economy, we need to examine both the supply side (technology) and the demand side (applications and use cases).
Before we explore further, this article serves as an introduction to the vision and solutions offered by projects like ZKM.
A Hard-Fought Battle
It has been nearly a decade since Ethereum mined its first block. Almost immediately, the network struggled with scalability. This challenge is not unique to Ethereum; it has plagued many other blockchains, including Bitcoin. Ethereum co-founder Vitalik Buterin coined the term "blockchain trilemma" to describe this phenomenon.
Vitalik's blockchain trilemma illustrates the difficulty of scaling decentralized systems. Decentralization and scalability are almost opposing characteristics in systems like Ethereum. This contrasts with traditional distributed systems, where scaling throughput is often achieved through centralization and simply enlarging the system. Fortunately, due to Ethereum's continuous evolution, light is visible at the end of the tunnel.
Phase 1: Separating Consensus and Computation
To escape the trilemma, Ethereum began evolving into a rollup-centric, layered architecture. The Layer 1 main chain handles consensus (security in the trilemma) and data availability, while rollup-based Layer 2 handles execution (computational verification).
Since the trilemma suggests that Ethereum can optimize at most two of the three properties, we must choose one to ensure its optimization does not weaken the other two. We chose scalability.
First, we separate consensus and execution verification to Layer 2 via a mechanism called rollups, which maintains consensus on Layer 1 through data availability. This is the first phase of Ethereum scaling. With it, we can process more transactions at lower gas costs. However, this is not enough. We need to scale Ethereum further, leading us to Phase 2.
Phase 2: Hybrid Rollups and a Thriving Ecosystem of dApps
We have achieved the first-phase goal of Ethereum scaling, with numerous Layer 2 rollups emerging in recent years. However, at this stage, rollups only achieved incremental throughput improvements by bundling multiple transactions into a single proof within the confines of Ethereum's base layer. Phase 1 rollups have some limitations.
One notable Phase 1 rollup limitation: withdrawing funds using an Optimistic Rollup requires a 7-day fraud-proof window before funds enter a Layer 1 Ethereum wallet. We had to endure this delay because, at the time, it was the only rollup solution implementable with EVM equivalence. Another rollup solution, ZK Rollup, struggled for a long time to achieve EVM equivalence.
Fast forward to today. The hybrid rollup approach plans to solve the most annoying Phase 1 rollup problems in an efficient and elegant manner: retaining the best features of Optimistic Rollups (fast, cheap, simple) while providing ZK proofs for near-instant withdrawals back to Layer 1.
To scale Ethereum further, the second phase of Ethereum's scalability evolution will introduce more innovations. One is sharding. However, the concept of sharding conflicts so intensely with decentralization that it is difficult to apply to blockchain system design without weakening it.
An innovation called erasure coding could be a game-changer. Sharding solutions supported by erasure coding allow blockchains to scale via rollups without sacrificing security and decentralization—escaping the blockchain trilemma. The consequence is that, for the first time in Ethereum's history, unlimited scalability can be achieved without the constraints of the trilemma by adopting erasure coding-based sharding for data availability.
To match Layer 1's DA (data availability) scalability, we can achieve what we call functional scaling on Layer 2 with rollups, i.e., letting each dApp (decentralized application) run its own rollup operation (some call these parallel rollups). We will discuss functional scaling later.
Of course, if we use an economic analogy, the most challenging part of the second phase is not the supply side but the demand side. The supply side is Ethereum's new scalability, but the demand side is more complex. To foster broader demand for Ethereum, we must upgrade Phase 1 rollups to a new variety called hybrid rollups.
The Invisible Hand Feeding the Machine
Ethereum is currently the fastest-spreading blockchain technology. Bitcoin may have a higher market valuation, but Ethereum dominates in terms of the vibrant applications built on its network. However, the demand side for Ethereum (or blockchain technology in general) remains a tricky topic. Many lament its lack of penetration in mainstream application markets and the broader economy. To blockchain newcomers, Ethereum seems primarily focused on fringe financial applications, driven mainly by speculation rather than organic growth.
Interestingly, Ethereum's technical development has been like a hammer in search of a nail, exacerbating the regrettable situation where the technology has spent nearly a decade still seeking product-market fit. This is why you see cyclical hype, on one hand pushing Ethereum to the top of all blockchains, and on the other giving us an ambiguous ultimate goal for Ethereum—ICO, DAO, DeFi, NFT, or whatever next year's speculative wind direction is. Will Ethereum find widespread, widely adopted use in the real world?
The Unrealized Web3 Dream
Let's do some soul-searching. Remember when Ethereum was dubbed the "world computer" by its founders? In Ethereum's early days, the narrative was that, like Bitcoin, Ethereum was money—but with the added facility of smart contracts to manipulate that money, as Bitcoin's smart contract capabilities were (and are) very limited. Bitcoin's scripting system isn't even complete, a shortcoming that ultimately prompted Vitalik and friends to create Ethereum.
Smart contracts opened up a fictional space for blockchain applications, and people couldn't stop comparing blockchain apps to web apps. Smart contracts brought a new kind of web application, hence the birth of the term Web3 (our ordinary web thus became known as Web2). Therefore, Ethereum would become the world computer to bring us Web3. Ethereum's scaling struggle is about fulfilling the promise of becoming a world computer capable of supporting an entire Web3 ecosystem, running thousands or even millions of Web3 applications on top of it. As it stands, this world computer is quite weak compared to Web2's computational infrastructure.
The Unbearable Lightness of Money
When most people think of cryptocurrency and/or blockchain, they see it as a new form of money or a new monetary instrument (e.g., the internet of money). Associating with money is both a blessing and a curse. Unable to replace Bitcoin as the de facto money of the blockchain world, Ethereum settled for being the next best thing—a tool to facilitate activities around this new money. This is how DeFi (decentralized finance) took off, coinciding with real money flooding the real world thanks to the U.S. government's runaway money-printing during the COVID-19 pandemic.
Since then, after the Federal Reserve slowed the printing presses and began raising interest rates, sending crypto into a bear market, the DeFi wave has receded. Beyond the economic downturn, DeFi may have delayed much-needed innovation. Hunger drives innovation, not wealth. Speculative behavior and fraud abound when money is everywhere for the picking.
Imagine what it would have been like if Ethereum's second-phase scalability had arrived during the DeFi boom. We know the real world increasingly views blockchain/crypto as a threat rather than a benevolent ally (let alone the savior many die-hard crypto libertarians believe it to be). But even so, if DeFi were equipped with high-performance second-phase Ethereum scalability, more external capital would depend on this superior DeFi technology, not the other way around. Now that second-phase Ethereum scalability is here, what will DeFi do with all this power? As a project vying to be a leader in providing second-phase rollup solutions, ZKM has a grand vision for Ethereum.
Decentralized Social Structures and a Universal Settlement Layer
Ethereum is also being explored for many non-financial applications: governance, social welfare, alternative economies, to name a few. These topics deserve their own discussion; we will return to them as they are indeed very important. Here, we are primarily interested in what these applications mean for Ethereum's ultimate goal.
Ethereum's scalability doesn't work in the traditional computing world. No matter how performant, it cannot compare to the performance of traditional distributed systems. The value of Ethereum and blockchain lies in their use cases: they exist in a completely different world—the decentralized world—for computation.
Both DeFi and non-financial applications deal with decentralized social structures. Decentralized social structures are where innovation should exist. Ethereum's ultimate goal should be to serve those truly decentralized use cases, not to compete with traditional social structures—centralized money and centralized social institutions. Serving decentralized social structures is why we are painstakingly solving Ethereum's scalability problems.
So now we can answer the question: What is Ethereum's ultimate goal? We want Ethereum to be the foundational layer, providing a solid foundation for all kinds of decentralized social structures, whether they are on Ethereum or any other blockchain.
We call this foundational layer the universal settlement layer. This is the starting point for our next phase of the journey. Join us again soon in this space as we explore further.
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Frequently Asked Questions
What is the blockchain trilemma?
The blockchain trilemma refers to the challenge of achieving scalability, security, and decentralization simultaneously in a blockchain system. Optimizing for two often means compromising the third. Ethereum's evolution aims to solve this through layered architecture and innovative technologies like rollups.
How do hybrid rollups improve upon previous solutions?
Hybrid rollups combine the best features of Optimistic and ZK Rollups. They offer the speed and low cost of Optimistic Rollups while leveraging zero-knowledge proofs for near-instant withdrawals, eliminating long waiting periods and enhancing user experience.
What is functional scaling in Layer 2?
Functional scaling refers to allowing each decentralized application (dApp) to run its own rollup operation on Layer 2. This parallel processing capability significantly increases throughput and efficiency, enabling the network to support a vast ecosystem of dApps without congestion.
Why is Ethereum considered a 'world computer'?
Ethereum was dubbed a 'world computer' because it aims to provide a global, decentralized platform for executing smart contracts and building applications. Its goal is to become the foundational infrastructure for Web3, hosting countless dApps that operate without centralized control.
How does erasure coding help with scalability?
Erasure coding is a data redundancy technique that allows for efficient data recovery and verification. In blockchain, it enables sharding solutions to scale without compromising security or decentralization, thus helping to overcome the trilemma by ensuring data availability and integrity.
What is the universal settlement layer?
The universal settlement layer is envisioned as Ethereum's role as a foundational base for various decentralized social structures and applications. It provides security, consensus, and data availability, allowing other chains and dApps to build on top while settling transactions and disputes in a trustless manner.