The First Chinese Translator of the Ethereum Whitepaper Discusses Why Modular Blockchain Will Prevail
Original Article: Fireside chat, Twitter Spaces with chainfeeds https://substack.chainfeeds.xyz/p/228339a3-9ae0-4ab7-83d2-31ae5f9b7b8a
Background
The Dencun upgrade will take place on March 13th. As an important milestone on Ethereum’s development roadmap, the EIP-4844 introduced in this upgrade will significantly improve the efficiency of Ethereum L2 networks. By introducing a new data structure “Blob”, it will help Ethereum achieve higher and lower costs on Rollup.
At this historical moment, ChainFeeds invited Ethereum OG Gulu to discuss key topics in the Ethereum ecosystem, including understanding the chain, the importance of decentralization in blockchain development, and potential developments in DeFi, stablecoins, and value storage.
Gulu’s Background
- Gulu is the Chinese compiler of the Ethereum white paper and participated in the Ethereum crowdfunding.
- He founded the blockchain education platform Bihu and the multi-chain smart wallet MYKEY.
- He is also an Evangelist of DeGate, a ZK-powered Ethereum Layer2 orderbook DEX.
Key Points
- The end game of the blockchain industry is modular blockchain (Modular Blockchain), namely Layer1 + Layer2, and Layer3 may appear in the future.
- Blockchain provides a “non-state independent space” that promotes the development of global financial infrastructure, allowing any user to freely trade through private keys, and will foster applications beyond imagination.
- When the underlying infrastructure throughput is not a problem, the blockchain transaction paradigm will change, and the order book trading model may become the final form.
Modular Blockchain vs. Monolithic Blockchain
The debate between modular and monolithic approaches in the blockchain space has never ceased, with each camp firmly believing that their solution is superior. Twitter is abuzz with discussions on these two approaches, covering issues such as cost, speed, decentralization level, and scalability.
In a recent Twitter Spaces session, Gulu also shared his views. He believes that the ultimate goal of the blockchain industry is a modular blockchain — a combination of Layer 1 and Layer 2. He further illustrates this point by considering factors such as gas cost and decentralization level.
Gas Cost
In a monolithic blockchain, each consensus node must validate every transaction in every block. This means that when processing a large number of transactions, each node will bear a significant computational burden. For example, if the blockchain transaction demand increases to 100,000 transactions per second, then each consensus node must process 100,000 transactions per second, posing a substantial challenge.
In contrast, Gulu believes that modular blockchains have lower gas costs. Taking the Ethereum Rollup expansion path as an example, Layer 1 provides computing and data storage services, while Layer 2 handles actual transactions, which eventually evolve into application transactions all occurring on the second layer. For example, assuming that there will be 50 Layer 2s in the future, each handling 2,000 transactions per second, and the entire modular ecosystem can handle 100,000 transactions per second. The verification of transactions is finally completed at the Layer 1 node. Such a model is more economical for the entire ecosystem because it does not require each node to verify and calculate each transaction, only needing to pay the hardware cost of 2,000 transactions per second. Additionally, after the Dencon upgrade is completed, Layer 2 will become very cheap to use BlockData, and the gas fee at the data layer is expected to drop by at least one or even two orders of magnitude. Taking into account the cost and gas cost, the gas cost can be reduced by at least 80% for different Layer 2s.
Decentralization
From a decentralization perspective, monolithic blockchains may eventually be left with only a dozen or even fewer nodes, likely operated by data centers. In such a scenario, governments or other entities could interfere with blockchain operations by controlling these nodes, thereby compromising its decentralization. Using Bitcoin as an example, governments could potentially limit its issuance or manipulate trading rules. In such instances, the blockchain would lose its core value, namely independence. Therefore, monolithic blockchains may fail to achieve true decentralization, making their ecosystems vulnerable to attacks.
In contrast, in modular blockchains, Layer 2 does not possess strong independence, as the overarching design aims to limit Layer 2’s autonomy and grant management rights to Layer 1. In other words, while Layer 2 retains some degree of autonomy, ultimate control resides with Layer 1. This design pattern can preserve the decentralization characteristics of the entire Layer 1 network. For instance, Arbitrum has already achieved trustless and permissionless features.
On Blockchain “Stateless Space”: Trust, Scaling, and Financial Revolution
Historical Context
The term ‘stateless space’ in history refers to the period in the early formation of states when most areas were not yet governed by states. Consequently, large expanses of ‘non-state space’ emerged between the scattered territories under state control. These spaces were inhabited by various primitive forms of human organization, such as tribes. Within this concept, crossing the state border symbolized independence and liberation. In the early days, the jurisdiction of a state was typically limited to a radius of approximately 48 kilometers, representing the extent of effective control by the state.
Mapping to Blockchain
Mapping this concept to the blockchain, we have the so-called independent space, which means independence from the state system. This independent space provides a decentralized, autonomous, and free environment that allows individuals to better control their data and assets. Similar to the early “stateless space”, the “stateless space” on the blockchain is a network composed of decentralized nodes without a centralized governing body.
Further Insights
Gulu highlights that Bitcoin stands as the earliest application within the blockchain’s ‘stateless space,’ showcasing a seamless alignment between its decentralized features and the monetary market. Subsequently, more adaptable applications have emerged, leveraging blockchain technology architecture, such as DeFi, NFTs, and lending. The core of these applications, akin to Web2, lies in harnessing the ‘non-state space’ of the blockchain. Why, then, opt to construct applications on the blockchain? What advantages does the blockchain’s ‘stateless space’ offer?
Trust: Blockchain applications enhance user trust by virtue of their publicly visible and tamper-proof data. For instance, token issuance contracts can be publicly recorded on the chain, allowing anyone to verify their validity.
Scalability: In his article ‘Endgame Interpretation (Part 1): Ethereum is Winning’, he mentioned that the blockchain’s ‘stateless space’ will progressively evolve into an Internet financial hub, encompassing Bitcoin, various DeFi applications on Ethereum, decentralized trading, collateral, stablecoins, and more, thereby furnishing users with an array of financial options and services.
Product-Market Fit: A good example will be the product-market fit of stablecoins within the blockchain’s ‘stateless space,’ particularly in cross-border payments. Unlike traditional international remittances with exorbitant fees, stablecoins offer low transfer fees and swift transaction speeds, facilitating global economic activities.
Dollarization Process: Despite the US dollar’s entrenched consensus, national borders pose a hindrance to its gradual adoption. However, with the proliferation of blockchain technology, a second wave of dollarization may ensue, making assets like the US dollar more prevalent within the blockchain’s ‘stateless space’.
Asset Tokenization: The demand for asset tokenization is inherently attractive. Blockchain technology enables the digitization of assets, thereby broadening the scope of potential applications. For instance, a Proof of Property on the blockchain can be transformed into an NFT token, serving as collateral for convenient lending services. From a long-term perspective, on-chain asset tokenization represents a promising avenue that will catalyze a wave of new applications and innovations.
Evolution of Blockchain Trading Paradigm
As an Evangelist of ZK-rollup order book DEX DeGate, Gulu shared his views on the future forms of crypto exchanges.
He believes that decentralized trading is crucial for the blockchain ecosystem. He stated that when blockchain throughput is sufficient to support 100,000 transactions per second, on-chain transactions will become the lowest cost and most convenient option for users. However, the current high gas fees limit applications like DeFi, resulting in most transactions still occurring on centralized exchanges. Nevertheless, as chain throughput increases, more transactions will shift to on-chain platforms. This transition will take time, but once underlying infrastructure throughput ceases to be a bottleneck, the order book model will ultimately prevail among exchanges.
The earliest decentralized exchanges on the blockchain were based on order books, such as EtherDelta. However, with the growth in users, gas fees increased, leading to low efficiency in the entire order book type DEXs. Consequently, the AMM model gained prominence due to its high gas efficiency. However, in terms of trading products, it suffers from low capital efficiency. The traditional exchanges like the New York Stock Exchange and the Shanghai Stock Exchange opt for the order book model because it offers flexibility, high capital efficiency, and supports various complex trading strategies through APIs.
DeGate Features
In addition, sharing some of the key features of DeGate:
- Self-custody of assets: As with all DEXs, users hold the private keys to their assets on DeGate, and the assets belong entirely to them. No one can use or freeze users’ assets without authorization.
- Order Book Trading: DeGate offers a superior user experience, higher capital efficiency, and greater flexibility through order book trading.
- Permissionless Listing: Users can list any ERC20 token compatible with the protocol on DeGate by paying only the gas fee.
- Decentralized Grid Trading: Similar to Uniswap V3, users can provide liquidity within a specified price range on DeGate. The protocol will automatically help users buy low and sell high in a decentralized manner to earn profits.
- Decentralized DCA: DeGate allows users to set the time interval for asset purchases, helping to mitigate the impact of market fluctuations.
- Zero-Fee Limit Orders: Users do not need to pay gas fees or transaction fees for placing limit orders on DeGate.
