Cyber Capital | Ethereum is dying without L1 scaling - Justin Bons | ETHDam 2024

Transcript

Introduction

[Music] please give it up for Justin thank you so the name of my talk the name of my talk is that ethereum is dying without layer one scaling it's obviously very clickbaity but I mean it and I think we're at a uh at a Crossroads I did a talk here last year on a on a similar subject and I think on some ways I've been somewhat validated in my

position I am obviously a Critic of modular scaling I'm a Critic of layer 2 scaling I think it's the wrong way to scale a blockchain I really think it's it's a losing strategy and if it's ethereum continues on its current path I am convinced it will lose to competitors fragmentation has been mentioned a lot here today which I think is great one of the differences from when I did this talk last year is that a lot of the core devs have actually acknowledged the problem this is why they talk about Shar

Ethereum's competition and lack of on-chain scaling

sequencing as a potential solution for that problem in this talk I'm going to explain why it's not a good solution to the fragmentation problem and I'm even going to go so far as to say that technologically this is solvable and I'm and I'm really especially want to drive this home to a lot of the developers in the room but there's a difference between a problem being solvable from a technological perspective to a problem being solvable from a political from a social and a social coordination perspective and I think that's the that a lot of people are missing in this entire equation the problem with fragmentation

today and if we look at the ethereum ecosystem today I would argue that you have the optimism ecosystem over here you have the arbitrum ecosystem over there you have the ZK sink the ion layer etc etc you have all these separate ecosystems and you also have the ethereum ecosystem over there do you realize what I just did there do do you realize what I'm doing here I'm saying these are separate ecosystems these are separate competing ecosystems optimism and arbitrum are competing with ethereum over fees and usage all while the core developers decide we are not going to scale the

Separate ecosystems within Ethereum

capacity of ethereum at all anymore and I can maybe dive into that in a little bit more depth why I can say that with confidence but as it stands today there is zero zero commitment to onchain scaling they literally removed raised the gas limit from the road map they removed it so sure they can Implement technologies that make ethereum more efficient that add to its quote unquote scalability but if you don't increase the gas limit none of it matters because you're still stuck at I would calculate at about around 100 TPS which is nowhere near enough nowhere near

enough so what it what it seems like to me it's a bit like ethereum is rolling around on rolled around and is showing its belly to Predators it's a surrender it's a surrender to even try to be competitive and obviously you know modular scaling Advocates they would say well everyone's just going to use these layer twos and the layer twos are going to pay um the layer one and this is how it works with this layered approach to scaling right this is the argument let me take a recent example I think you've all seen these uh statistics coinbase has made $40 million in Revenue because of

Base um and correct me if I'm wrong on these numbers but I think only about 200,000 or so if can someone correct me maybe yeah was a very small fraction of that is going back to the layer one tiny fraction of that money like orders of magnitude less so basically what Bas is doing is they're taking all of this usage they're getting all of these fees in and only a small amount is going back to the layer one right what I'm proposing wouldn't it be better if the layer one scaled if the layer one scaled all of that value which is flow directly to ethereum right if the system could just

Proposal for L1 scaling benefits

scale but instead we're in this situation and and and also want to point this out this was mentioned in the panel before if you look at the top 10 layer tws right now according to l2b every single one of them has admin keys they can steal all user funds okay they can censor transactions they can deny you access that's not the cipher Punk dream that's not scaling ethereum that's something else entirely that's not what I signed up for I LIF BTC entirely by 2017 because I was fed

up I was fed up with Bitcoin not scaling I was fed up with it abandoning its original Vision which was money for the world you can't be money for the world if if only a few people can use it at the same time you know that's ridiculous and and the claim obviously the claim by leer to Advocates is well we will decentralize in the future I just want to point out as a as a blockchain researcher as an investor in this space for over a decade the amount of times I've heard people say that versus the amount of times that actually happens it's just tiny tiny and there's something to be said yes I believe in

individuals doing the right thing at times that happens people can be heroes people can give up on money in order to some greater ideal I do believe in that right but if we're looking at a system of millions of people and there's this type of um Collective incentive mechanism uh Collective governance then I'm not going to rely on the Goodwill of individuals if I'm predicting what's going to happen with this system I'm going to say that the majority of people are going to follow this own self-interest that's my position yes the

M if you're talking about large systems of people if you're talking about civilization and Society the way you predict the future is by looking at incentives you don't you don't just just wish for the best that's a losing strategy okay so today all of these leer are centralized effectively and the idea is oh well they're just going to decentralize okay so you're saying they're going to willingly surrender their power coinbase is just going to give up by the way coinbase is a for-profit company based in New York okay I love coinbase by the way for the

record love coinbase fantastic company they've done a lot for cryptocurrency I just want to point that out and I really respect them for standing up for Cipher Punk principles for when it mattered they pick their battles but I appreciate that and as a company I don't blame them for building base right of course they build base they just made $40 million off it okay but in order for the um fragmentation problem to be solved and let me just come back to fragmentation so the fragmentation destroys the ux the fragmentation uh takes away fees from from the base layer the fragmentation destroys composability composability being you know the reason why ethereum defi was so successful in the first

Fragmentation issues in Ethereum's ecosystem

place you know that's also destroyed now um you know what you're saying is that if base were to decentralize they would have to give up all of that Revenue they'll probably make over $100 million this year it's a for-profit company with a B do you seriously think they're just going to give up that Revenue like that's crazy really like if if I was on that board I would vote no to that even though I love decentralization right like that's that's crazy so so I think there's so much of this like wishful thinking and and we have a lot of like computer scientists and engineers and and I would really just empath emphasize think about the human element here think about that

power corrupts an absolute power corrupts absolutely and that these lessons that we've seen repeat through history again and again and again these apply to ethereum as well these apply to cryptocurrency as well and we can be so blind to it sometimes it's especially upsetting considering that the exact same thing happened in BTC right like what I'm talking about BTC pivoted away from layout one scaling in favor of layer 2 scaling right the BTC chain got extremely congested and that is when ethereum became extremely successful that is not a coincidence okay because ethereum was committed to layer one scaling I signed up to ethereum because I'm like yes sharding layer one scaling

Shift in Ethereum's scaling strategy and its consequences

fantastic I'm on board I'm I was a DieHard ethereum supporter from the day it was launched I was mining it in the first week it's literally been the largest asset in the fund I manage for the vast majority of it history until very recently actually because you know I've come this far and I'm just more and more more losing hope for ethereum because you know a lot of the core developers a lot of your leadership is doubling down on this and I don't think change will come from leadership here because they're doubled down because they have massive perverted incentives like billions of dollars you know think about this example if I'm a core developer right I could go work for the foundation and get paid a

wage right or I could found a layer to blockch chain do a token distribution maybe even I make hundreds of millions of dollars it's lot better than a wage right I mean this is this is part of the perversion and the corruption that's happening in cryptocurrency right now you know you have only like the foundation is literally only probably spending no more than a few million on layer one scaling right no more really I mean real layer one scaling they they abandoned it completely in all honesty um but then in the layer two space what is it exceeding a hundred billion dollar of funding probably now I mean that wouldn't surprise me well just

Critique of L2 solutions

insane amounts of money insane amounts of money that's corruption right that's the people your leaders your leaders are saying we're not going to scale the layer one we're going to we're going to do this layer two thing and this layer two thing look my my main critique of L to is the fragmentation issue I'm I'm going to go back to that I want to go back to the core and I'm going to check my notes Here a bit too the main thing and the reason why I think it can't be solved and the thing I found really exciting was shared sequencing who who is aware of how shared sequencing work put up your hand wow two people three people oh my God okay I was expecting a little bit more an ethereum conference okay that's

fine okay let me explain shared sequencing for you so Justin Drake recently uh came out on a bunch of prominent podcasts Justin Drake fantastic researcher by the way not just because he has the same name as me um and he came out and he actually acknowledged yes fragmentation is a problem and that's said validation I was talking about before where I think a lot of the etherum community was pushing back and now the core developers themselves are saying fragmentation is a problem okay who agrees that fragmentation is a problem hands up there we go more people that know what the proposed solution is at least so that's good so the proposed Solution by the ethereum core developers as far as I see it is this idea of

sequencing so as of today um the majority well pretty much almost all layer tws have a what's known as a centralized sequencer and that's where the majority of say base revenue is coming from right now they're able to order transactions they're able to extract me and they're able to skim the fees and the idea behind a Shar sequencing is that and and in principle I'm actually in favor of the idea I actually like the idea year I do I just don't think it's possible to implement for social coordination reasons and I'm going to get into that more um now what the shared sequencer does says instead of everyone just using their own shared

their own centralized sequencer how about we put the sequencer on the layer one which in principle I like right because I want I want to inshine everything on the layer one I'm a I'm a monolithic scaling guy right so I in principle I'm like oh yeah this is great this is a step in the right direction right however and here comes the problem in order for that to work everyone needs to use the same Shar sequencer okay and we're in an environment here this environment where optimism is saying hey we have a solution to the we have a solution to the fragmentation problem it's the optimism super chain and then ion layer

Shared sequencing

comes along and they say hey we have a solution to the um uh to the fragmentation problem through ion layer and then polygon comes along and they say hey we have a solution to this interoperability protocol because of the EG layer right and arbitrum also has an equivalent thing and and and and there's there's coffee there's a there's a there's a bunch of them right so this is the irony of it it makes me sad and laugh at the same time but when I hear these people talk about when I hear optimism or arbitrum or coffee say hey we're solving the fragmentation problem because we're building the shared sequencer that everyone's going to use and then you're all going to pay us a fee it's not going to it's not going to work see this is a free market and what

naturally happens is that you're going to have competing parties with each other in a in a real free market which is good right that's a that's a that's a good thing okay but the idea that that base will give up its ability to censor so be compliant right um will give up all of it Revenue in favor of this higher ideal of using the base sequencer I think is total nonsense I really do I I I just I don't see a path from A to B even though technologically it's completely feasible I acknowledge that the problem is social the problem is coordination and the irony behind all of

this is that's the problem that the layer one solves the layer one is supposed to be a cred neutral platform that we can all come together around a common shelling point this is why I believe in layer one scaling and if I'm being completely fear to the uh modular Advocates I think at least the ones that I most respect okay like their position is that it's impossible to scale the layer one that is their position I mean who who agrees with that statement that it's impossible possible to scale the layer one while preserving decentralization hands up oh one oh wow I think last year

was very different that's amazing so we're getting further um who thinks it is possible to uh preserve decentralization while scaling the layer one hands up oh wow I was not expecting this had an ethereum Conference of area enlightened crowd so if it is possible to scale the layer one while while preserving decentralization all all of these trade-offs that we're making the fragmentation the trust tradeoffs the high fees on the L1 like all of this the the horrible ux as Joel very well described you know oh do I have arbitrum USD or optimism USD oh do I need to go through this bridge or that bridge it's

a total nightmare as far as I'm concerned I'm not taking any ux seriously unless it's just like one click like seriously it should just work I the way it should work this is how it should work right so I have ethereum you have ethereum okay what I'm going to do is I'm going to scan a QR code and I'm going to hit send that's it that's it that that works that's how ethereum worked for Forever Until it until it became congested um and now the layer two experience is very different okay so I have I you have I what layer two who are you on can I transact with you directly oh no I can't

no I need to go through a bridge first oh that bridge is um centralized so I'm getting some risk you know hundreds of millions have been lost in Bridge hacks FYI um and then and then okay is a bridge is the layer too secure well like I said all of them have admin keys right now all of them can sensor that's a lot to consider isn't it that's a lot to consider and a just if you consider those comparisons in ux it's not even a competition anymore and look ethereum pursued shouting for most of its history and it pivoted away from it

silently I would say 22 23 right and I I think it should pivot back and when I talk to some of the core developers even though I have the most respect for some of these individuals they tell me that shouting is impossible that's what they tell me shouting is impossible it it blows my mind considering that we have multiple shatter chains fully implemented in cryptocurrency right now proving them wrong so all of this this entire layer to scaling road map is based on a false dichotomy the false dichotomy is we

Reflection on the systemic governance flaws in cryptocurrency projects

can't scale the lay we can't scale the layer one while preserving decentralization and all of this people point back to the to the blockchain TMA I'm telling you today the blockchain TMA has been solved it's been solved okay when vitalic first talked about the tyma I think it was in the 2015 paper or 14 I don't recall exactly you know he referred to the tyma as this is a scaling tyma that applies to traditional blockchain designs yeah that's why he was pursuing shouting because it's a non-traditional blockchain design we can overcome these limitations you know and look I think a lot of you might not like salana today and and I I have my my own critiques of

salana it's far from perfect there's a lot of flaws but the fact that salana has been outperforming the way it has the fact that salana even with all of the problem it's going through which is even more embarrassing for ethereum by the way considering the crappiness of salana it still has more TPS than ethereum and all layer 2os combined you're losing you're losing the main use cases that people actually use blockchains for right now which is the speculation and the meme coin and all the stuff as technical people hate but that's but those are the Stepping Stones towards Mass adoption okay open your eyes ethereum is is is is on a train it's

heading into a brick wall and yeah it's going to be a slow deaf just like BTC in my view slowly losing its dominance over many years and can continue believe and you can have your little niche coin but I'm all about global domination I'm all about like Freedom right like I'm all about making the world a better place of this technology and I just don't think this modular scaling road map can do that and it's just utterly uncompetitive there's no no way that that that can actually succeed and I and I don't see the proposed Solutions working and those come back to this idea to this idea and and and the incentives are perverse I mean there's a lot of talk of other potential

Technologies like uh zkm um and these type of things but the situation we're in now let's say ethereum were to scale ethereum scales its main chain what happens to optimism what happens to arbitrum what happens to ZK sync what happens to all these blockchains huh yeah they disappear they they become worthless billions of dollars down the drain so yeah this whole idea that oh ethereum will scale if they can no I'm not I'm not convinced of that at all I'm not convinced of that at all because there's so much money on the line that's bidding on the contrary outcome so and look from a VC's perspective it's great right you can you can get in on the pre pre pre-sale you

Diversification strategy for investing in Ethereum competitors

can then dump on retail you can play the hype wve you know but that's not that's not building the future of of of decentralization that's not building the future of cryptocurrency that's a baiten switch that's not what I signed up for that's not the cyer punk Vision so yeah I think ethereum and look the leadership has gun ho on this I've been I've been chatting with them and I don't think they're going to change their mind so the only way that ethereum can actually um course correct here is that you the community needs to rebel against your own leadership that's not easy right that's what happened in BTC with the block size debates and they failed even even in BTC

when uh when the majority of industry was was on board of bigger blocks the majority of miners were on board of bigger blocks the majority of companies were on board of bigger blocks the majority of users majority of stake was all in favor of bigger blocks and they still lost in favor of what the developers wanted not what the people wanted not what the market wanted and this comes down to the core problem in all of this that I think few minutes left the core in all of this is this ultimately this is a yeah scalability is a problem yes but the bigger problem is governance because how do we get in this situation in the first place how could this repeat again and again it's clearly a systemic flaw in governance it's

Projects that have tackled the blockchain trilemma

clearly a set of perverse incentive that's going to lead to the same outcome again and again that's we need to escape that cycle I hope ethereum can do that but over time I'm becoming more and more skeptical of that actually becoming a reality and that makes me very sad because there's a lost opportunity there you know I care about this movement I want to see Mass adoption and now you know when I talk to a lot of people people say oh I don't believe in cryptocurrency because it's slow and expensive yeah I don't believe in that either okay I don't and I also don't believe in compromising in terms of your your custody and I don't believe in compromising in terms of censorship it's just just it's mind-blowing that

some of you even think that's okay you know so the solution is a pivot back to a shattered system I think it's unlikely so the more likely solution is uh people are just going to ape into uh other cryptocurrencies even if they are salana which should make you all feel even worse so thank you everyone actually hold on this awesome thank you so much Justin for this very spicy very very enlightening uh conversation I'd love to pull up the the slido so we can answer a few

questions ah yeah all right here we go don't go easy on me okay bring it on all right the first question we have is if BTC and eth are dying l1s while representing the majority of the market cap what is the the actual solution for trustless scalability I really appreciate this question cuz I had it in my notes to actually cover the alternative solution here um so the alternative to me I mean my favorite solution is shouting and the reason for that is because it's a form of horizontal scaling uh vertical scaling I think we can all agree is um I'm sorry um quadratic scaling we can all agree is a bad idea right because if you increase capacity times 10 you can do that once increased capacity times 10 again your cost are maybe going to go up 100 fold

after that so it's not a sustainable way to scale a blockchain I can I can all agree with you there in principle so I particularly like shattered systems because it's a true form of horizontal scaling where we can increase the capacity of the network while simultaneously keeping node requirements low look I'm not against purely paralyzed blockchains like uh salana as well I just think they have a significantly uh lower upper limit and what they are doing in a fix compared to sharding is they're actually trading off um capacity for Speed and uh in shouted systems the tradeoff just to be fully transparent is that a shouted system adds a few seconds to confirmation time so there is a

legitimate trade-off between something like salor and a shouted system however if you compare that to the layer 2 ecosystem obviously it's way worse when it comes to layer twos and uh settlement times between chains Etc so great and we have another question um what are the competitors to which ethereum would lose you did talk a bit about salana but is there anyone else well that's that's like the trillion dollar question isn't it that's what everyone wants to know where do I put my money um look I don't think anyone really knows that to any degree of certainty I mean it's my job to know that that's literally what I do um I would recommend people diversify um I mean what I tend to do is I go okay I want to invest in ethereum

competitors I'll invest in like five and if two of those do well I'm doing great so because some things are just not you know e even even if you're just the best researcher in the whole world just some things are just outside of our ability to predict from politics to narrative to Global events so you know di diversify that but I think what matters to me is is it a scalable system is it decentralized is it programmable I like proof proof of stake as well um by the way ethereum's economic model what happened with EIP 1559 love it it's beautiful it's the best economic model as far as any cryptocurrency goes that's also something I look for I think that goes into this other question we have uh

naming l1s that have solve the blockchain trilemma yeah there's a few um so egld uh also known as Multiverse X formerly known as Alon also know as eold terrible marketing very disappointing um but actually I believe it's the only blockchain that has fully implemented sharding and properly so uh there's four shards uh validated by uh separate validators of course randomized shuffling the works and it's got all the other bells and whistles to it as well the more well-known blockchain obviously is near so near is uh hasn't fully implemented shouting yet but they're they're close um and then there's ton as well uh it's also a shouted blockchain

um but ton has got a lot of red flags attached to it so you know word of warning there um buer beware um and obviously you have the paralyzed chains as well so be your salanas your suis your aptes your uh you know your your monads coming along which has a paralyze evm but this is the perfect example of complacency in ethereum by the way I see no good reason not to paralyze the AVM even if you don't care about increasing gas limits if you paralyze the evm and you do it with a way like minimal trade-offs right you can decrease your node requirements like Eightfold right it's ridiculous we all have computers of multiple cores why would you not utilize multiple cores it's just this ridiculous

bottleneck but it's just it goes to show there's a there's a degree of complacency that happens once a cryptocurrency becomes successful people get comfortable fire some of these developers is what I would say high a new once I think that's a perfect spicy note to end this Q&A on Justin I'm sure will be available afterwards for all your further questions but I just want to give you another round of applause for this incredible thought thank you everyone awesome thanks