Bankless - Ultra Scalable Ethereum - Modular vs Monolithic Blockchains

Episode Date: October 27, 2021

In a special State of the Nation episode, David and Ryan unpack the concept of 'modular blockchains'. Are modular blockchains the path to ultra blockchain scalability? YES! ***** POOLTOGETHER | DEFI LOTTERY https://bankless.cc/PoolTogether  ***** SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  MATCHA | DECENTRALIZED EXCHANGE AGGREGATOR https://bankless.cc/Matcha  LEDGER | SECURE YOUR ASSETS https://bankless.cc/Ledger  ALCHEMIX | SELF-PAYING LOANS http://bankless.cc/Alchemix  ------ Topics Covered: 0:00 Intro 10:00 Consensus, Data, and Execution 16:55 The Scalability Trilemma 22:18 Developing in Parallel 29:00 Computer Chips & Nature 35:02 Modular Blockchain Design 43:10 Sharding & Data Availability 51:23 Consensus & Proof of Stake 57:06 Decentralization 1:01:55 Synergies 1:06:30 More Security 1:10:59 Future of Monolithic Blockchains 1:19:32 Triple Point Asset 1:25:19 Ultra Scalable Ethereum 1:31:45 Interest of the Token Holders 1:35:24 Ethereum's Roadmap 1:37:45 Closing & Disclaimers ------ Resources: Modular is Revolutionary: https://polynya.medium.com/processors-blockchains-modular-is-revolutionary-ded01824b603  Market Monday: https://newsletter.banklesshq.com/p/ethereum-2025  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

Hey, Bankless Nation. It is State of the Nation time. We're super excited to bring you this special episode on modular blockchains. David, what are we going to cover today? Oh, it's classroom time with bankless. And as we have developed into this world of blockchain, we are discovering new ways to build them. A lot of different blockchains have optimized for a lot of different things. And now we are getting into the world of modular blockchains, which is something, a new phrase that we're just kind of learning about how to describe what it is, this thing that we are building when we compartmentalize all of the things that make a blockchain a blockchain, what happens if we silo these from each of the other compartments and optimize for each

individual one? And so this has been growing in popularity, growing in mindshare, growing in steam. And so we want to take this lesson of what a modular blockchain is here to the bankless nation on today's state of the nation. Yeah, absolutely. Guys, we are so bullish on modular blockchains, and I think this will come through. And if you haven't heard that term, that's cool, because that's what classroom time is for. We're going to explore what that term actually means.

And we also hope you know that when we say classroom time, this is not necessarily just David and I, like, being the professors up here. We're actually learning this as we go as well. And the entire industry is learning this. But let me tell you really quick why it's super important. It's important because, as David and I have previously said, we have. think that Ethereum has the best scalability strategy out of any chain out there, like right now. Full stop.

Like, full stop, okay? And you won't hear that a lot on other shows in crypto Twitter out there. That is not the popular narrative, okay? But like, this show in bankless has never been about a popular narrative, all right? We were talking about ether when everyone thought it was dead in 2018, when no one thought it was money, right? And I feel like this year, some of our ideas about ether being a triple point asset have been vindicated and proven out. And now we get these like fund reports, these banks that are actually using that thesis to back why they are bullish on ether.

Right. So, okay, so that idea wasn't popular before. And then we, you know, we dug into it and brought it to the fourth light, to the light. Now I think modular blockchains are not a popular idea. To be clear, it's not just us, this entire community. Polynea has been talking about it. Anthony Sassana has been talking about some others, but it's still very early in this classroom, in this journey, in the development of the modular blockchain. But I think it is the next realization that is going to hit the industry.

Maybe not this year, but definitely I feel like next year, David, is going to be the era of modular blockchains where people are going to wake up and realize, oh, okay, Ethereum does have a very sustainable scalability strategy, and it preserved decentralization is maybe the best scalability strategy of them all. So that's what we're going to dig into today. And here's another challenge is David and I, neither of us are technical cryptography experts, okay? A little bit of technical foo, not a ton.

So we are learning as we go. And I think that actually helps position us to be sort of a bridge from the Vitalics of the world and the protocol developers of the world who, if we can understand it, you guys can understand it, all right? So like, we're going to try to make this accessible as well as we dive into it. Anything else, David, before we get to some announcements? Yeah, the cool thing about modular blockchains is the synergies that every single module has together. And at the end of this episode, I hope that we can teach the listener, the viewer,

the relationship between ultrasound ether, ultrasound money, and ultra-scalable Ethereum. because those things are not just words with the same memes, but they are actually directly connected with each other. The more scalable we make Ethereum, the more ultrasound we make ether the asset. And this is true, not just about Ethereum. This is an inherently neutral design philosophy, modular blockchains, roll-ups, sharding, all this stuff.

It just happens that Ethereum is implementing this technology. So it's a politically neutral endeavor that Ethereum is pioneering. And so that's what really gets me excited about this. This is why we're so excited, guys, so we can't wait to dig in. Before we get to it, a couple of things going on in the bankless nation. The first is we had Eric Peters, One River Capital Management. That episode came out on Monday. That was a banger of an episode.

In fact, we're getting a lot of people saying that it's like one of their favorites, if not their first favorite bankless episode, like top three, top five. Go check out that episode with Eric Peters. I think, you know, I've already listened to it twice more, David, because I thought it was that good. I was listening to it last night. Really? It's just a phenomenal episode. I don't know if there's anything more you'd add, David,

but all I could say is go download that episode, listen to it. Eric Peters comes from the traditional fund world, but he has such a, he's such a polym-like, he's got all of these other interests and ideas, and he's kind of brought that thesis into the episode. So what more can I say?

Also, David, there's a ETH versus Bitcoin debate going on. That's happening tomorrow. Look at this teaser, boxing gloves. Who's going to be in that debate? What are you guys talking about? Yeah, it's me and Justin Drake on the team Ether side, and it's Dennis Porter and Munib on the Bitcoin side debating.

Ether versus Bitcoin, which is more sound money? And that's a big question because there's a lot of things to talk about. Which asset holds its value over time? Which asset is more untinkerable? What is the relationship between Lindy and money? The differences between proof of work and proof of stake and how that relates to money? I did this debate with Dennis, just him and me, about two months ago, and it was a blow-up success.

Way more successful in terms of, like, audience than I ever expected. And so we're doing round two. I'm tapping in Justin Drake. He's tapping in Munib, and we are going to go at it. You guys are going to keep a civil, as always? Absolutely. That is one thing. People think, like, this is just going to devolve into yelling.

But, again, I did this one time with Dennis Porter, Dennis before it, and he was great. He was a fantastic and very honorable, very respectful debater. So I think this is going to be a really good time and hopefully a lot of lessons get learned. That's awesome. Well, the community leveling up together. That's why we're all doing this. And I think debates are a fantastic form for that as well. Last thing for you before we get into the episode, wanted to tell you about Pool Together.

They just released their version four. This is Version 4 of the no-lost lottery system that Pool Together has put out. And I'm super excited about this because Pool Together is kind of a go-to app in Defi, especially for people who are new. and David, why don't you tell them a bit more about version 4, what that includes? Yeah, there's a bunch of cool innovations. First off, if you don't like gas fees and who does, you can simply go to Polygon and use pool together on Polygon. But one critical upgrade to V4 is that all of the pools across all of the chains are actually condensed into the same pool. So rather than having just a fractured network of many different pools all over the place,

pool together has connected every pool to represent the same pools. A pool of pools. A cross chain, yeah. And so also there's anti-whale mechanisms. And so if you are a little guy and want to have a decent chance of winning, pull together has built in some little guy boosting mechanisms into their V4. And overall, it's really just a matter of just like being able to express how much chances of winning versus chances of losing that you would like to enter with pool together.

So overall, some fantastic optimizations coming with a V4 of pool together. I know it's called a no-loss lottery, but it's actually you're not actually gambling anything. You're not actually risking anything besides smart contract risks and defy risk that's associated with it because you get all of your principal back. And, you know, there's also some prize money that you can win too. I think they are releasing a million dollars in prizes to celebrate the launch of V4. So go check that out. Fun thing to win the lottery, especially in defy. You could be a winner.

you can check that out at bankless.c.c.c. And thanks to pull together for getting the word out in this message. David, got to ask you the question. I always ask the beginning of these, which is, what is the state of the nation today, sir? Ryan, the state of the nation today is learning. We are all leveling up. It is classroom time with bankless. This is some of my favorite episodes where you and I just get to unpack an idea together

and hopefully spread that into as many other brains as possible. So, Ryan, today on the state of the nation, we are learning. Absolutely. Well, can't wait to dive into this with you guys. We have no guests to announce when we get back. It'll just be David and I in the classroom going through modular blockchains and what that means. So stay tuned. We'll see you in just a few minutes after these sponsors. Arbitrum is an Ethereum scaling solution that's going to completely change how we use Defi and NFTs. And now it's live and has over 100 projects deployed. Gas fees on Ethereum L1 suck. Too many people want to use Ethereum and it doesn't have. enough capacity for all of us. And that's why teams like Arbitrum have been hard at work developing layer two solutions that makes transactions on Ethereum cheap and instant. Arbitrum increases Ethereum's throughput by orders of magnitude at a fraction of the cost of what we are used to paying. When interacting with Arbitrum, you can get the performance of a centralized

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over your ETH or any of the tokens list. and start having the defy or NFT experience that you've always wanted. Living a bankless life requires taking control over your own private keys. Not your keys, not your crypto. That's why so many in the bankless nation already have their ledger hardware wallet, which makes proper private key management a breeze. But the ledger ecosystem is much more than just a secure hardware wallet. Ledger is the combination of the ledger hardware wallet and the Ledger Live app.

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and get all of your Defi apps all in one place. Hey, guys, we are back talking all about monolithic chains. What does that even mean? David, you've got an article coming out tomorrow on the bankless newsletter about this. So, and some folks here on the podcast, that article may already be out. That's going to serve as a reference for this.

And you really dove into the topic, but we're going to kind of discuss it today, both your article, kind of your findings, and I guess this is the classroom. No guest to announce, no guests introduce. It's just you and I, man. So let's dig in. Where do you want to start? Should we start with this definition what a monolithic blockchain actually is? So we use this other term modular blockchains.

But I think before we understand modular blockchains, which is kind of the future that we're maybe moving into for some of these chains, we probably have to understand current state, which is something called monolithic blockchains. That's the era we're in right now is the monolithic blockchain era. So what is a monolithic blockchain and why are we in the monolithic blockchain era? A monolithic blockchain is basically every blockchain that people are familiar with, Bitcoin, Ethereum, finance smart chain, Solana, and even the side chains like Polygon are also all monolithic blockchains.

And what a monolithic blockchain is is a blockchain that tries to do everything at once in the same spot. There are three things that make a blockchain a blockchain. And we're going to unpack these more. There's the consensus. How does a blockchain come to consensus about what blocks are valid and added to the chain? With Bitcoin, this is proof of work. And the future with Ethereum, this is proof of stake.

With Solana currently, it's proof of stake. Then there's also the data availability, or literally how much block space, is actually available in each block. Bitcoin famously has one megabyte block space. Ethereum has a lot smaller blocks, but they come a lot faster. I think there's something around the lines of like 16 kilobytes.

And then Solana, or things also like Polygon or Binance Smart Chain, have really, really big blocks. And so that's the variable of block space, how much block space is added per second. And then there's also, what is the last one? The last one is,

oh my gosh. Execution. execution, right, here we go. The computation of a blockchain. So you have a block. It has a state of things. These are the account balances, what NFTs you own, how much ether you own in your wallet, how much USDC you own in your wallet. And then you make some transactions and then a new block is added to the blockchain. And that new block is computed by the execution of a chain. And so this is like the CPU of your computer, of your node executing the output of a state of a new block. And then that new block is added to the chain. Monolithic block.

have all nodes and all like hardware requirements of the monolithic chain doing all three things all that once. So if you are a node, you are doing all three aspects of what a blockchain requires in order to be functional. And so I think you might be able to see where we're going with this when it comes to modular blockchains. We are actually going to be compartmentalizing out these different three roles of what a blockchain becomes into different categories where the different roles and different reverse. responsibilities of network participants do these things separately. So we have monolithic blockchains where all computers, all nodes do all things at once. And then modular blockchains, we're actually compartmentalizing these things and separating these out to different ecosystem participants. And that's literally what it means to modularize these things. So we've got this

consensus layer, as you said, that really defines what's true. That's kind of the trust layer of these computer systems. Then there's the execution layer, which is like what's happening. That's almost like, I think of that, David, as like, compute layer, right? In a computer, right? And then we have the data layer, which is what's already happened in the past. And I think of this a little bit like it's the storage layer of a computer. So just to zoom all the way out, what is this new type of computer that we've created in the crypto era, right? All the way back to Bitcoin, you know, 2000, circa 2009 or so.

These are like trust machines, okay? These are trust computers. They're really, they're, they're crappy in almost every single other respect. Like, but they're really good at one thing, and that is like censorship resistant, reliable state. That's the consensus layer that backs all of these special economic, you know, computers that we call blockchains, right? So your regular computer does not have this consensus layer, but it does have an execution

layer and it does have a date availability layer. So these three layers together, the consensus, the execution, and the data layer, that's what forms a chain. And you're saying in monolithic chains, which is, to be clear, every chain that we've seen today. Currently, yeah. From Bitcoin to Ethereum, to Solana, to everything in the, you know, the cosmos ecosystem, they're all monolithic chains because they do all three of those things in the same chain, in the same place. right? Like Cosmos has a different approach where they'll string together multiple monolithic chains, but each of those chains are still monolithic chains. So Lana tries to do it all in one shot. This kind of brings us before we, I guess, get into the modularization of it, though, David.

Let's talk about why this is important, right? And the why goes back to something that our listeners have probably heard us talk about or others in the industry talk about, the scalability trilemma. So the entire history of crypto, since as long as I've been here, has been faced with this question of, okay, these blockchains are really cool, but how do we scale them? And there's two dimensions of scale, right? One dimension is how do you scale the value of the asset underneath these chains? Like, how do you scale the market cap? This is what Bitcoin's very passionate about. And Ethereum, too, is how do you increase the equity? economic bandwidth of Bitcoin get the market cap higher, right?

It's more believers, more holders, these sorts of things. Ether the same, right? More believers, more holders, more use of ether as money makes it increase in economic bandwidth. And that's been sort of one side of the conversation. The other side of the conversation has been more what traditionally we call kind of the scalability problem, which is we only have a limited number of transactions per second in these chains.

And like Ethereum right now caps out at 15 transactions per second. Bitcoin, it's even less. It's like, I don't know, 9 to 12, something like that. So that means only 15 transactions at any point in the world in this like global computer that we've built called Ethereum, this consensus trust computer that we've built, can happen at the same time. And that is like woefully inadequate if we ever want to use this for a payment system A global payment system, a global economy, a global economy, multiple uniswap trades at the same

time, like everything that we've talked about on bankless cannot happen unless we increase the transaction throughput, the trustless transaction throughput of this system. And that brings us to the scalability trilemma. Could you explain what the scalability trilemma actually is? And why is it a triangle? Yeah, listeners might be famous with the famous, like, pick two meme, where there's three things and you have to pick two of them because you can't you can't pick the third yeah yeah it's a menu exactly it's exactly right and so on the blockchain trillement we have the three properties of a

blockchain how scalable it is how secure it is and how decentralized it is so decentralization really just refers to how many central points of control are there if there are zero then you have a decentralized blockchain scalability or the scalable point of the triangle is literally how many transactions per second can your blockchain do and then there's secure which is how How secure is your blockchain? How many hashes does Bitcoin have per second? What's the hash rate? Or with Ethereum proof of stake is how many validators are there in the pool of validators

securing the chain, how much ether is staked. So these three things make up a blockchain. And historically, we've seen different monolithic blockchains optimize for two corners of these triangles while having to sacrifice the third. So Bitcoin and Ethereum famously have optimized for decentralization and security. They are very, very decentralized and they are very hard to attack. So they're at the bottom of this triangle. They're at the bottom of the triangle.

Right. They have, in addition to while trying to optimize for those things, they have sacrificed their ability to be scalable at the L1. So they maintain decentralization, but as an execution layer, Ethereum, Bitcoin, not so great, right? Like they haven't prioritized execution on the monolithic L1. Because if they did, they would have to have sacrificed decentralization and security, which is really the two things that underpin crypto more than anything else.

We have scalability in the Web 2 world, but we don't have decentralization or security in the Web 2 world. So that's really the main differentiator about a Web 3 monolithic blockchain is that we actually have decentralization and security as some of our properties. Other blockchains, finance smart chain, Polygon, Solana, have traded off decentralization for scalability. And so they have reduced the number of nodes that can run the blockchain, in order to produce more scale at the L1, produce more scalability,

produce better execution environments for all the transactions. And to be clear, they either reduce the number of nodes, David, or they make the node requirements very, very high. Which effectively is the same thing. Kind of can be the same thing, I guess. It becomes more difficult for an average individual consumer to actually participate. Right. There's a relationship between the hardware,

requirements of a node and how many people can do that. So as you increase the hardware requirements, the number of nodes go down, which actually makes the network more efficient because there's less nodes. You can do more things faster when there's less computers that have to keep up with the chain. You become more scalable. You become more scalable. You lose decentralization. And so this is the whole famous blockchain trilemma.

You only get two. And while Bitcoin and Ethereum, the first big chains of the world have optimized for security decentralization, it's left a huge niche open for monolithic chains that are interested in optimizing for execution, which is why so many of these execution optimized monolithic blockchains have generated so much traction. Because, well, there's a lot of demand for cheap fees. Okay, so I feel like when I think about that, that trilemma, it's kind of interesting, because I go back to how do we measure these things, right? And so I feel like the top of the triangle is scalability. And people generally measure that through transatlantic.

transactions per second, right? That kind of makes sense. And then at the bottom right, there's security. And I think a good measure of that for Bitcoin is like hash rate and Ethereum proof of work that's probably hash rate. A number of validators is maybe another good measure. But also like I think of economic security in general, right? So how much does it cost to actually attack the network? And that has to do as well with how valuable is the stake, how valuable is the token, how many, like how many, how much stake is inside of the network and what's the economic value of that? On decentralization, that's kind of a unique point on the triangle because some people have found that harder to measure over time, right? It's like, what does decentralization

actually mean? Maybe it means how many nodes there are, but I think you said one thing that, in your article anyway, that really caught my interest and use the phrase, where are the centers of power, right? Maybe that's how you measure decentralization. Like, when I was thinking of decentralization, I always think of decentralization as an anti-corruption mechanism, basically. So, if you're less decentralized, you're much more corruptible because there are fewer centers of power, and it takes fewer individuals or colluders inside of the network to actually, like, bend the rules in their favor. Any thoughts on decentralization or how you actually measure that? Yeah, people like to, I always joke when somebody asks, like, well, how decentralized is it?

Well, there's, we need reference points in order to compare these things. And if you want to talk about the most decentralized thing in this known universe, it's the microwave background noise of the universe. Like, that is the most like decentralized thing that you can get. And then things march towards more centralization after that. And then we, people generally consider Bitcoin as the most decentralized blockchain that is in existence. And there are certain levels of central They are actually numbers of nodes out there in the world. But those numbers of nodes are like 10,000 plus. So still pretty decentralized, right?

Like we've gone from an infinite number of just like background atoms down to like, you know, 10,000 nodes. So getting more centralized, but still very, very decentralized. And then we can keep going down that decentralization spectrum until we get to like a one-of-one database. That's only the story of nodes. There's also like humans of power. So there's a lot of applications out there,

compound, MakerDAO, Uniswop, AVE, and then some applications don't have admin keys, and some do. And if you have admin keys, like, it doesn't matter if you're on a decentralized network because the locus of control got collapsed down to whoever has the admin keys. So this isn't actually something that I think you can measure. And that's kind of why I always joke with, like, starting with the microwave cosmic background radiation of the universe. You can't measure it.

But you can, but it still is a property that exists. Well, yeah, yeah. That's hilarious. That's where you go. I want something to ask you about decentralization. So quick, just to recap, if we're to put chains in these various areas inside of the triangle, right? So everything inside of this triangle is a monolithic blockchain, right? So for the listener, we haven't yet gotten to the point at which we're going to talk about modular blockchains, which is the other end.

But like traditional chains, Bitcoin, Ethereum, they would all be towards the bottom. and then you might have a Solana, an avalanche there toward the top where they've trade off some decentralization for scalability and security. And maybe like a multi-chain ecosystem like, you know, Cosmos, maybe that's a bit more decentralized, but they do trade off some security, right? Every individual chain needs to have its own validator set, but they get in exchange for that, I guess, a bit more scalability. So that's, I guess, towards sort of the left side of the triangle.

That's pretty much everything, though, right? It's an optimization somewhere inside of this triangle. All monolithic blockchains are trapped in the triangle. It's just a matter of which point of the triangle do you want to sacrifice and which point of the triangle do you want to optimize for. Okay. All right. So let's get back to maybe the modularization part of this,

because I feel like what crypto has just maybe recently discovered. And I think that, by the way, the researchers are way ahead of us in terms of understanding this. I just feel like so much happens in like eth research forms and these very smart individuals

that doesn't kind of translate into the broader crypto ecosystem. But part of what we're describing is actually the Ethereum roadmap, like Ethereum's future roadmap, has been for the last year, year and a half to modularize itself. We just haven't really had good terms to describe this or a narrative to like describe what's actually happening.

So the researchers have been way ahead of this. What we're describing here is just what the roadmap works looks like and we're like trying to understand it and put it in our own words. I actually don't think the researchers knew to frame it in terms of modularization. I think it was very much a world of like all the researchers, some of the proof of state consensus researchers read like, okay, we should do proof of stake. And then the data availability researchers were like,

all right, we should do sharding. And then looking at it holistically, it's like, oh, you know what we're doing guys? We're actually modularizing everything. And everyone kind of just modularize it on their own accord. Like the developers are just like doing the whole blind men feeling the elephant thing. It's like, well, I'm going to go work on charting. I'm going to go work on a proof of sake.

I'm going to go work on roll-ups. Like there was never any grand design This happened organically Because they went through every possible door Right That was open to them And like many of the doors kind of slammed shut And this was the inevitable outcome

Was like it just kind of collapsed to this design And this is why Polynia's name has resurfaced So much in the last month or so Is that they actually Like for as far as I can tell It was the first person that really made the term modular blockchains as opposed to monolithic thick blockchains. And all of a sudden, that allows people like you, me, Anthony Sizano,

to actually understand the actual pattern of development activity that the Ethereum developers have been doing for the last two years. Well, let's start with maybe one of Polynia's articles. And by the way, we're going to share this. Polyniya is a pseudo-anonymous writer, basically, kind of a contributor, recent contributor to the Ethereum ecosystem who's written a ton about this. And there are a series of articles from Polynia on their medium posts as well. But this, I think, is a really interesting analogy from the world of CPU manufacturing. And maybe we could use this. Could you tee this up for us? So processors and blockchains, in both industries, it seems like modularization is revolutionary, is necessary to get these things to the next level. So talk about

AMD and Intel and what they found in their chip manufacturing processes. Yeah, it's important to note that a blockchain is a virtual computer. When we talk about Ethereum as a world computer, it's a single instance of a computer that many, many, many other computers all contribute their resources to, which means that blockchains are inherently hardware-based. Like, they come from hardware, but the difference is that it's a virtual representation of all the fragments of hardware that node operators contribute their resources towards. They have compute. They have storage. They have all of these things. All of the same things that

make a computer make a blockchain. And so when we see this evolution in chip design, CPU design, and go through this progression, it's important to take those lessons back to the blockchain world. Like, all right, guys, here's what the chip design industry figured out. Maybe we should apply those things. And so the story here is that Intel, which is like the gargantuan in the space, the incumbent, has been making just improving incremental improvements upon their chips by just making them larger and larger and larger in the sense of like a monolithic chip. Just like all of the things that a CPU does does it all in the same spot, right? And so like the fastest CPU Intel chip was the Zeon platinum.

It had 28 cores. It cost like $10,000. And then one day a AMD, which is a kind of the David Verth Goliath story, AMD comes out with a 64 chip CPU costing like less than half of the cost of the of the Intel chip. And it was a like it went from $10,000 down to $4,000. At the same time, a 4x improvement overnight in terms of processing power. And so it really just blew the doors open on a completely new paradigm of chip design. And basically what AMD did is they modularized the CPU.

They took all the components of what a CPU. does and they put it into different compartments, different compartments that were allowed to individually be optimized. And so instead of one gigantic slab of a CPU, AMD's brand new CPU had eight tiny chiplets, eight tiny modules. And then it had a medium-sized, what's called a dye, which is like the traffic controller of all the chips in the middle. And so instead of having all the resources take place in all the same spot, the chip compartmentalized everything. And it had this organizational chip in the middle that coordinated all the different activities of all the different little chips. If you are savvy with Ethereum 2 development, you might just replace this whole

medium size dye in the middle that's doing all the traffic controlling with the beacon chain. And then all of the peripheral tiny chiplets as sharps, right? These are the same design structures, the same designed like primitives. They were proved to be very successful in the world of chip design, and now we are trying to run that same sort of module, that same sort of a pattern design philosophy in the blockchain world. Yeah, it's kind of funny. So AMD just like absolutely crushed Intel through this modular design. It took a while for Intel to actually admit it. So for a while, I guess they were still sticking. But in secret, they were working on their own modular chip design because they absolutely had to or they would be outcompeted and obliterated

by AMD, and they started moving in the direction of a modular design, and I believe have improved their design after that. And that's where we are in the world of CPU designs. CPUs have now moved into the world of modular designs. Yeah, which is really exciting. It also strikes me that this kind of design exists outside of kind of the technical space, too. It sort of exists in nature, right?

This idea of specialization and division of labor. Right. So first of all, it obviously exists in economies, right? And it exists in like, you know, capitalist manufacturing, right? You divide later and you labor and you become much more efficient through specialization. Of course, everyone knows that's kind of economics 101. But also if you look at like the inside of a cell and how that sort of, I guess, organically has evolved to the place that it is, right? There's like a nucleus in a cell. And there's all of these special component parts of a cell that do various things, like energy production and all of the various functions of a cell. So this is not, and that was created through a natural process through nature.

So it's not like this design necessarily has been foreordained. It just seems like this type of modular design is the inevitable conclusion when you push a system to its scalability limits. You have to modularize at some point. that's exactly right. Like the division of labor and specialization is how just industry, civilizations, you know, species actually progress forward. They take the species and they split them into different groups and they say, all right, everyone, do what's your best at. And then as a whole, when it comes together and society comes together, everyone has been able to optimize for all

of the different things. And so this is just not, this whole like modular block chain thing isn't just happening in silo. Like it's following the same pattern that we've seen throughout, throughout history. Okay, so David, let's go back maybe to the layers that are important here and talk about what this modularization actually means. So recall, we have the consensus layer, we have the data layer, and then we have the execution layer, okay? Right now, that all occurs inside of a monolithic blockchain on the same chain.

But now we are talking about splitting this apart into three components. pieces. So these three functions live in different areas inside of Ethereum or inside of a modular blockchain design. Again, it doesn't have to be Ethereum. Any chain that adopts this sort of design philosophy. Can you talk about where these various things start to reside in the modular design scenario? Right. So with execution, where all nodes previously in the monolithic paradigm, all nodes would execute all of the same transactions and they would all verify each other's computation. So every single node would do all of the computation.

Now we have roll-ups. And what that has done is that is created a new execution layer that is separate from the actual L1 and has created a new execution environment on the L2. And the reason why this works is through what Harry Potter fans might understand to be the unbreakable vow, as in using cryptography to make an on-chain commitment that the roll-ups will always play by the rules.

And so since the roll-ups constrain itself to follow the rules and say, like, hey, we're going to go do some computation over here, but we're going to make a commitment to the L-1 chain that we're going to follow these rules so you can trust whatever shenanigans we get up to in our own centralized version of our roll-ups, right? Because roll-ups are centralized around a very few number of nodes. sometimes down as just a one-of-one node or just like a, you know, a set of three nodes, 10 nodes, a very low number of nodes.

And the reason why we get to have a low number of nodes, which is also the same reason why we get to have a beefed-up execution environment. We get to have transactions get executed for as cheaply and as quickly as almost a centralized database and sometimes even faster with DK roll-ups is because we've constrained everything down to just a few nodes. So where monolithic blockchains that have optimized for execution, trains like Binance Smart Chain or Solana, they do that by constraining the number of nodes, but they sacrifice decentralization in the process. On a roll-up, you do the same thing where you cut down the number of nodes, but that unbreakable vow that the roll-up made to Ethereum is actually where you retain

the decentralization of the Ethereum L-1. So no shenanigans can happen on the centralized roll-up, that the Ethereum L1 doesn't actually approve of. So you get the optimizations of an extremely efficient roll-up environment where the number of nodes go from just like maybe a centralized blockchain, a centralized monolithic blockchain, I would call like 1,000 nodes or less. This is either the Binance smart chains, the Salinas. But with roll-ups, you can go to like three nodes.

You're muted, Ryan. You can go to three nodes. And so, like, it's a way more transaction execution optimized than any, any monolithic blockchain that has optimized for execution ever can become. Okay, so let's talk about that for a second. So, okay, so now we've moved into this, and people may have heard about Ethereum's move to a roll-up-centric roadmap. This happened about a year ago or two years ago.

And again, I don't necessarily think there was a master plan. It was just the inevitable destination of you're continuing to optimize, optimize, you're not sacrificing decentralization and security. and so what do you converge on? Well, it's this sort of design. This means all of the execution no longer actually happens inside of the monolithic Ethereum Layer 1 chain.

It happens inside of these roll-ups. It can. But over time, there's a specialization where the majority, the bulk of execution, upwards of 90% maybe in the future, starts to happen in these roll-up environments. And when we say roll-up,

if you're not familiar with that, That's also just like, that's a chain, separate chain that is secured, as David said, by Ethereum. So the specialization here is the roll-up doesn't have to deal with security, doesn't have to figure out data availability or consensus. It can just focus on execution. And by the way, there's some other hidden gains here in that you can have a blossoming, let a thousand experiments bloom sort of experience here where all of these roll-ups try different things. They're all secured. They don't have to worry about consensus or data availability, and they all compete with one another, right, for ultimately the block space that is Ethereum.

But what we've just moved towards is Ethereum's future, which is most of the execution happens on top of these roll-ups. And of course, execution is one third of the components of like the three things that blockchain does. It do. Because execution is compute. that tells the chain what's actually happening or what's what's going to happen next. And so that's important.

Anything else you want to say on that or should we talk about the next component here? Yeah, one of the big efficiency gains that roll-ups has is that when you're on a roll-up, there's something like 10,000 transactions per second or something. Every now and then the roll-up settles up onto Ethereum and deploys new state onto Ethereum. Think of a roll-up and when it does all these bundlings of transactions and it creates one single transaction that it deploys to Ethereum. That's just like you having a bunch of files on your computer, throwing them into a folder and pressing the compress button.

It's like zipping up a bunch of transactions. And that's why when you have like a ton of transactions on a rollup, like a gigabyte worth of transaction, something that would be way too much data to ever go on the L1. Well, the rollup compresses everything down to the smallest possible packet of information. And it deploys just that information onto the L1. So a single megabyte worth of data on the L1 can actually translate into a gigabyte's worth of data on the L2 because roll-ups compress the data. That's a fantastic point.

And let's talk about the magic that makes this compression possible. This is cryptography, folks. Specifically advances in cryptography. A lot of the roll-ups of the future that we are going to see are going to be ZK Snark-enabled roll-ups. We had that conversation about moon math with Justin Drake. So these types of computers, the computers that we're building, in order to get advances, like magic advances where you have order of magnitude differences of scalability, it's not about like CPU manufacturing processes and fitting more chips in a smaller and smaller design space.

It's advances in cryptography that actually makes. this enable the compression that David's talking about. And so roll-ups, ZK, zero-knowledge technology, that's what makes this compression possible and has been a huge unlock for the space. And I think that's why we're entering this new modular blockchain design so fast. That's what makes it all possible. That's exactly right. And ZK roll-ups is actually like compressing the data even more than optimistic roll-ups. Optimistic roll-ups, it just bundles up a bunch of transactions and compresses it into a blob. I'm pretty sure the way that this works with ZK.

Roll-ups is it takes a bunch of transactions, compresses it, and then wraps it in cryptography, and then deploys that, which is why ZK. Roll-ups are generally known as being, like, the most scalable possible thing that we can ever come up with. And also, not quite here. We'll talk about, like, roadmap and timeline toward the end, but before we do, so we've got that, the first part, execution, right?

Where do you want to go next, David? Do you want to talk about the data layer or the consensus layer? Let's do the data layers. And so this is called sharding. If you are talking, have you ever been familiar with sharding? This is basically the same thing. There's terminology like data shards, data layers, data availability, shards, block space. These are basically all the same things.

Different aspects of talking about the same thing. But basically when we're talking about sharding, we're sharding the data of Ethereum, the data layer of Ethereum. And so in a monolithic blockchain, there's one single blockchain with one chain of blocks that move forward. and that blockchain, if we want to preserve decentralization, needs to be adequately constrained. But the thing is with, and it's actually impossible to really talk about all these different compartments

in silo with each other because they definitely relate. So I'm also going to be talking about some consensus properties here. But with proof of stake consensus and having a bunch of validators validating the chain, so like the target for Ethereum proof of stake is 10 million ether. We want 10 million ether to be staked in order to consider Ethereum secure. You divide 10 million by 32, and that gives you the number of validators that are validating Ethereum.

And that becomes a pool of validators, kind of in the same way a mining pool has come about to pool all the hash rate for proof of work mining. But with Ethereum, it's actually built into the protocol where there's one gigantic pool of validators. Now, instead of having something like 300,000 validators all validating one chain, instead of all of those validators being stacked on top of one monolithic blockchain, we can actually spread these validators out across many chains, which we now call shards. And so instead of having 300,000 validators validating one chain, we can have something like 4,500 validators validating one

shard, and then having many, many shards all be combined together. And so this actually increases the block space that's available at the L1, while also preserving decentralization. And so the more, when you add a validator to the pool, it gets directed towards a shard. And all of the ineffects efficiencies of all of every single validator validating all the same things. You can actually spread the validators out across, you know, initially 64 shards, but really up to in theory infinite. The next, after 64 comes 124. But, and you get to spread the ability to validate the chain across many, many different people,

which is just more efficient. You get more bang for your buck that way. And so we can actually add block space to the L1 that the roll-ups ultimately come to settle upon. Okay, so recall the difference between execution is kind of like compute. That's like what's happening, how you change state, that sort of thing, right? This data layer that David's talking about, that is history of everything that's been computed, right? So is state history may be a good analogy for this? And like, the reason this has to be all on chain is because when this data is available in this state is available on chain, then that's when you know it's censorship

resistant and trustless and has all of the properties of the underlying blockchain. So this is like the storage layer of the blockchain computer, if you will, and it's incredibly important. So, David, go over how does the roll-up and the data shards, how do they sort of work together? So the roll-up is the module that does compute, right? And then does it use these data shards for storage? Is that what it's doing? It's transaction history storage, that sort of thing?

That's exactly right. So your crypto punks, your ERC20 transactions, all of the things that you do ultimately become part of the data of a blockchain, of a system. And in a sharded system, it becomes part of the data of one shard of a system. So the roll-ups themselves are not a pay. canesia of scalability. They do really, really great things for scalability, but they are also bottlenecked by the data availability of the L1.

If there's more data available by the L1, roll-ups can consume more of that. And so when we go from having, like, you know, X amount of available data on the L1 to, you know, roughly the first iteration of shards will add roughly 18 times more data than the Ethereum L1. So the Ethereum L1 will get roughly 80. 18 times more scalable.

Because of the nature of the progression of the roll-ups, when you add roughly 18 times more scale to the Ethereum L1, it's not 18 times more scalable on the roll-ups. It's like 18, like orders of magnitude more because of the compression, right? So when you add one megabyte of scale to the L-1, or you add another shard or the shards can become bigger, we'll talk about that later, when you add just a small bit of data to the L-1,

the L-2s can use orders of magnitude more, more data because they ultimately compress it down to a very small packet of data. So one megabyte on the L1 turns into like one gigabyte of transactional data on the L2. So when we linearly scale out the number of shards that are on Ethereum, you exponentially scale out how many transactions roll-ups can process. So this is where the modularization of these things actually turns, it flips things on its head and rather being limiting factors, you actually turn the limiting factors into growth factors. More

decentralization of the shards, more validators, creates more block space, which creates more scale along the L2. I hope people are hanging with us so far on this. I know that's a lot of, like, we're literally explaining a computer, but here's why I think it's worth it for you guys to hang on and understand these topics, is because it informs the types of investments that you will make in this space. all right there is a massive narrative that there are all of these like eith killers out there that transactions per second are the only thing that that matters that Ethereum is not scalable okay

there's a lot of money sloshing around in that thesis what we're presenting is kind of a different thesis and a thesis um you know like we think will be the long term one that will actually win out okay so that's why all of this stuff is important 100%. um so we've got the roll-up layer, we've got the data sharding layer. I guess the other reason all of this is maybe a little complicated for listeners is some of what we're talking about is future and some is today. I didn't want to address. We'll summarize the kind of the timeline roadmap near the end of this, but just to give you guys a sense. So what you're seeing in this depiction, we have early stage rollups right now, okay? We don't have the, we have some ZK rollups. We don't have ZK VM rollups.

We don't have generalizable ZK rollups today. But we're in the early stages of roll-ups. So we have that piece. We do not have the data sharding piece that David just talked about, all right? What we have is one shard, all right, which is the Ethereum Maynest. We do have some data availability. We just have the monolithic chain. What David's talking about with these data shards where they turn into like from

1 to 64, that will probably happen sometimes circa 2023. Okay. So this is a component that's being developed in parallel, right? We're continuing to progress on roll-ups, and we're doing some things with the consensus layer, which we're about to talk about. But the data availability layer, where it splits off into 64 different pieces, and we get all of this additional data availability, that's not coming to 2023. That's why part of this is hard to understand, because, like, all of these modules are

being developed on it in parallel. So, like, picture a workshop, and there's, like, three different sections of the workshop. Somebody, a team's working on consensus. Another group of teams are working on roll-ups, and another team is working on data availability. And they'll be done at different points in time. And then, like, the entire thing comes together and informs the modular Ethereum roadmap. Anyway, I wanted to say that. The last piece here, David, is the consensus piece.

And of course, this is what makes a blockchain computer, a blockchain computer. It's like this is what makes it all trustless. We have the consensus layer and kind of this provides the security. So what is this layer and what module provides it in the modular blockchain design? And in the monolithic world, it's basically just proof of work and proof of stake. Ethereum is currently proof of work, but it's going to be transitioning into this proof of stake design structure that has individual validators. And so you, for every 32 eth, every instance of 32Eth that you have, you can spin up one validator and then add that validator to the pools of validators that are saying, hey, I'm willing and ready

to verify the Ethereum blockchain. I've brought along my 32 ether with me. So if I lie, you can slash it. And if I don't lie, you can pay me a little bit of ether. And so it's important to say that if you have 64 ether, you can spin up two validators on your one single computer. And so each set of 32 ether is one instance of a validator. And as a result of this, a pool of validators is generated.

And so each validator has its own address, right? It starts with 0x, 1, 2, 3, 4, ABC. And then as more and more validators come to the pool, more and more stake is being validated upon Ethereum. With the beacon chain, we could, in theory, go and literally look at the number of validators that are validating the beacon chain. And then in sharding,

we will be able to spread out these validators across each node. And so while instead of having, like I said earlier, instead of having all validators all verifying the same thing, validators can be spread out. And so it's also important to note that like when we have instances of 32 validators, under proof of stake, when the thing that is validating Ethereum is capital as an ether, ether is being bonded to the network.

You have capital that is validating Ethereum. And that is really what proof of stake is, is like, will you put up a bond of capital on the promise that you won't falsify the blockchain? So capital is what is verifying and securing Ethereum. And so when it's capital, capital, capital can be pooled. And so really the differences between staking 320 eth or 3.2 eth, in theory, should be very, very little and should actually collapse over time, the differences between those two things when innovations like staking pools come online. So 32Eath is actually supposed to be an arbitrary

number. And really, your return on your capital will be the same no matter how much capital you actually have because proof of stake will reward 3,200, 320, 32, 3.2, 3.2, eth, all at the same rate of return. So that's really important to know. And so when you have a just capital, as the thing that provide security to the blockchain, it collapses who can actually validate the chain down to somebody that has capital of any sort. You just have to turn that capital into ether and be willing to have that capital be ether denominated.

But the whole concept of proof of work is saying, like, no major investments into hardware, no major investments into proof of work economies of scale, just capital. Because you have to have something. You can't have proof of stake without having some sort of risk. So you have to have a bond of capital that has willing to be slashed. But when you collapse it down to just somebody with capital, you increase the number of viable ecosystem

participants that can be validators. And this is really, really important. Proof of stake in the whole validator model collapses and maximizes accessibility to become a proof of stake validator. And like I was saying earlier, and this is where some of these modules start to compound upon each other, The more validators you have, because you've democratized access to validating Ethereum, the more shards you can have. Because we are spreading out the validators across all the shards, the more validators come to Ethereum, the more shards we can spin up. And so the more shards we can spin up, the more data availability Ethereum has. The more data availability Ethereum has, the more data roll-ups can consume and become cheaper and faster transactions on the roll-ups. I kind of skipped ahead here in the

in the whole show. But this is where these things all start to compound upon each other. We'll get to more of the synergies in just a moment. So I just want to nail this home. So the consensus layer, David, this is what we now call the beacon chain, right? And in Ethereum, and this has been live for approximately a year, essentially. And this proof of stake beacon chain will replace the proof of work consensus layer. And so now we've just gone through and we've laid out these three parts in a monolithic blockchain world.

All of these existed in the same single chain, right? In the modular blockchain world, we have these three pieces that are being developed in parallel, and they exist in different modules, different areas of the stack. And again, the execution layer tells you what's happening. It's like compute. The data layer tells you what's already happened, that's storage, and the consensus layer tells you what's true. What's true is the entire point of a blockchain. These are trust computers, right? Okay, so this is the design for Ethereum. I don't know if folks know this or not. This thing that

people have called in the past like EF2 or Serenity, when you pop the hood and actually go through the roadmap and go through the design, this is it. It's a modular chain. Want to connect one more dot for you. And then I think we have to break for sponsors. We could maybe talk about the synergy. The last dot is back to something that David said. Okay. So the scalability trilemma, remember those different points in the triangle. The only way to embark on the journey, the only way out of the scalability trilemma, the only exit ramp is actually through the bottom left point on the triangle. Decentralization. You have to optimize for decentralization in order for this modular blockchain avenue to be open for you.

Because if you maximize for just scalability, you increase node requirements, you decrease the number of participants in the network, and you lose decentralization. Well, what are you? You haven't preserved the thing that makes blockchain special, which is this consensus layer, this trust layer. and you have to go retrace your steps and get back to decentralization, right? So this is why Ethereum and even Bitcoin, although Bitcoin has not moved into modular, I don't think they ever will. Those stay monolithic. But this is the reason Bitcoin has also optimized for decentralizations because

decentralization is very important for the Bitcoin network. So I wanted to make that clear. Lightning Network is actually the modularization of the execution environment. It's true. It's totally true. So this is the strategy I think some Bitcoiners have seen as well. So we will get back to this. We will be right back.

I think next we're going to talk about all of the flywheel effect and the synergies that this provides. I think we're also going to talk about what the fate of these monolithic chains are, how this is all going to play out in the future. Because once again, there's this narrative that monolithic chains, it's a multi-chain universe. Everyone's really happy. We don't think that plays out at all, okay? I think many of these monolithic chains will come crash and burn, all right? And then we'll talk about maybe where we see this all going from a monetary perspective

and a economic sustainability perspective. Really, really important conversation. The whole economic side of this conversation is absolutely fascinating. And we're going to try to fit it in like 20 minutes or so. But before we do, we want to thank the sponsors that made this episode possible. When you shop for plane tickets, you probably use. Kayak, Expedia, or Google to compare ticket prices. So why would you limit yourself to just one exchange when you trade crypto? When you make your trades, you want to make sure that you're

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go bankless. All right, guys, we are back with the discussion about modular blockchains. This indeed is the future. We are entering the modular blockchain era. At least that's what David and I think. Let's talk about the synergies that come when you move to

a modular blockchain, David. And I think before break, you mentioned three of them. The first is more decentralization, right? Let's talk about that. The second is more scale and the third is more security. And these all kind of feed into one another. It's sort of this flywheel effect. Let's start with the top, which is more decentralization. Of course, we ended the first part with the fact that in order to become a modular blockchain, you actually have to optimize for this thing called

decentralization. Talk about that. Once you do, what does that enable? Yeah. So with monolithic chains, there are monolithic chains that have optimized for execution, and those chains go really, really past. The blocks get added to the ledger very, very quickly, and the only kinds of computers that can keep up with these chains are super high-performance ones. And so if you have a slower computer or you have a computer where you want to use the computer

at the same time of its being running a node, so you can't contribute all the resources to the blockchain, you get left behind. The blockchain goes too fast. And so there's actually a solution for this when it comes to sharding. And so if you have shards, where instead of having all 30,000 or 300,000 validators

all trying to keep up with themselves, you compartmentalize things into smaller cohorts of validators. And so instead of 300,000, there's only 4,000. And so the competition and how fast these blocks are able to propagate happen a lot faster. How do we get there? How do we get more shards is by having more decentralization, more security at the proof of stake level.

And so again, the whole entire paradigm of proof of stake is collapsing the cost of validating the chain down to the absolute minimum. And the absolute minimum of validating the chain is just having capital. And so we do away with big mining ASIC farms. We do away with big expensive hardware. And we collapse the cost down to hardware that people already have in their own homes. So your MacBook Pro, your MacBook Air can validate the chain. So once all hardware costs are eliminated, the only thing that is left that is required to secure a chain is capital or stake because you need to have capital slashed.

And so all of this whole mining hardware, the buying requirements for mining hardware under proof of stake gets injected into the asset, into ether. And so this allows for more and more people to just have their capital and become part of the network by staking ether. And again, with staking pools can allow for people with below 32 ether to participate. And so once these barriers to entry to being a validator are collapsed, more and more computing units, computers, can be added to the Ethereum validator pool. And so when we fracture everything into a bunch of shards, if you contribute a node that has like not very good computational abilities, it's an old computer, you actually aren't slowing down the whole chain because you are actually adding your

computational resources to a shard. And so you, even if you have a kind of a crappy computer, you don't have to be in sync with 300,000 other people. You only have to be in sync with a very much, a much smaller portion of the validator network, something like 3 to 4,000 validators. And that difference between having to keep up with everyone

versus just a committee of people allows all these computational, like these, all these slower nodes to, keep up with all the other nodes because there's less nodes to keep up with. So I think what you're saying is like more decentralization means more individuals can start staking, more validators can be created. And once we have more validators, we can actually increase the number of shards, right? So we start with 64 shards, but where does it go from there? How do we scale up the number of shards? That could be a next chapter of Ethereum's trajectory. And the more shards, of course, because of like all of the compute and the compression technology that we're

talking about in the roll-ups, that will exponentially increase the transactions per second and the throughput capability of that execution layer, of the roll-ups essentially, okay? So that gets us to more scale, right? So we have more decentralization, it gives us more shards, which gives us more scale, and we're talking about orders of magnitude more scale. The third piece of this flywheel, David, is more security. Okay? So make this connection for us because I think what you might be about to say is we have all

of these different shards, right? They're still paying fees, aren't they? They're still paying Ethereum fees, transaction fees, in order to secure the roll-ups. Is that the security you're talking about? Where do we get the security in this flywheel? Yeah, absolutely. So when more shards come online, that data is made a very very important. towards the roll-ups.

And again, an addition of one-megabyte of data on the shards layer turns into a gigabyte's worth of data on roll-ups. So orders of magnitude more efficient on roll-ups. And we know in bull markets, a lot of transactional demand comes into this industry. And it really has completely congested Ethereum for two bull markets in a row. And we see all of these new monolithic chain spin up in the last bull market, it was EOS. And this bull market is Binance Smart Chain and Solana. And there just becomes an insatiable demand to transact on a blockchain.

And so it goes from the blockchains that have optimized for decentralization like Bitcoin Ethereum, a bull market comes. And all of a sudden we need a blockchain that is optimized for execution. And so this is where a lot of these monolithic blockchains get spun up very, very quickly, that optimize for execution because there is a ton of economic activity that gets priced out of Ethereum and it goes elsewhere. And then people complain about like Ethereum gas fees and then they go

onto like these execution optimized blockchains and they see that these economic transactions are costing them less than a penny and they're cleared instantly and they're saying, oh, this is the future. Roll-ups are where Ethereum's L1 transactional capacity can

overflow to while Ethereum also still capturing the fees of those transactions. And so kind of like we were saying earlier, even the transaction optimized monolithic blockchains still won't be able to compete with a roll-up because the roll-up has that unbreakable vow with the Ethereum L1

that allows it to just be a very, very small number of nodes, one node, two, node, three nodes, 10 nodes, something very, very small. And so the freedom to transact on these roll-ups is going to be insanely cheap and insanely fast. And all of this new block space that's created is going to unlock so. a vibrant ecosystem of economic activity that we've never been able to have before.

You can't do micro transactions on the Ethereum L1, but you can do transactions on an Ethereum rollup under a data sharded paradigm that has transaction fees, 0.001 pennies and instant finality. So this unlocks a completely new world of types of viable economic transactions that ultimately settles down to the Ethereum L1. Okay, so that's where we're getting the more security, right? what you're saying is, and all of these roll-ups opens up a massive new universe of, you know, financial applications, all sorts of different applications. These are not free riders.

They all pay their taxes. They all pay for the economic security of Ethereum because they pay back in ETH. And what happens to that ETH gets burnt, it goes to validators, it pays for security. That's the security budget. Other chains, side chains, the Salana is not paying Ethereum. It's a security budget. But a roll-up always does. And so that's where we get that flywheel of.

we get more decentralization, we get more shards, we get more shards, we get more scale, we get more scale, we get more roll-ups paying for economic security, we get more security, we get more decentralization again. It repeats and it repeats and it repeats, right? That is the virtuous cycle of what we're talking about. So, yeah, you look like you have something to add. Yeah, totally. So all of that new type of economic activity that's allowed to happen because of cheap fees,

those fees all get bundled up and compressed into a roll-up transatlified. action and then those fees go to be paid to the validator pool of the L1. When there's more and more fees being paid to the validators, that's more and more incentive to spin up new validators, to stake more ether. And so if there's more incentive to stake more ether, more validators come and stake their ether to capture some of the fees that the roll-ups are paying. And because more validators have arrived, we can spin up more shards. And now we're back at the beginning, where we can start this whole process over again.

Boom. Modular blockchains. It's a virtuous cycle. It's crazy. Okay. So let's talk about the future of monolithic chains then, okay? And there are multiple possible features. So again, this is as if AMD just came out with a new chip set that's going to like eat your lunch.

All right. It's not here yet, but like it's being developed. It's in the works. It's getting closer. What's going to happen to monolithic chains? And let's remember, of course, ETH1 is a monolithic chains. We're also talking about Ethereum. if it did not go through this transformation, somebody else would, and what would happen to it.

Number one, let's talk about the economic sustainability of these monolithic chains, because I think neither of us think these chains in their current form are economically sustainable. Why is that, David? This is where we get into the conversation that we talked about at the very beginning, where there is an intrinsic relationship between ultra-sound ether and ultra-scalable Ethereum. And so we've seen Ethereum, the L1, the monolithic version of Ethereum, establish this insane fee market. The fees paid to Ethereum are absolutely crazy. They're the object of everyone's ire's who doesn't want to pay fees. But from a protocol

perspective, it's really, really healthy because if a L1 blockchain collects a bunch of fees, that ultimately just gets routed into the security budget for the chain. So more security means you have a higher budget to pay your validators. Also, if you collect a bunch of You also don't need to issue. And so this is why we get into the meme of ultrasound money. Issue. Issue, you mean mint new supply. Exactly.

Blockchain subsidy. Right. So for every Ethereum block, there is two ether that is issued per block. So every 13 seconds, two new ether is minted. But times, there are times where the blocks, there's so much demand to purchase block space because block space is so constrained that there's more ether that is paid to buy the block space than is what is issued. And this is what we call ultrasound money because we're burning more ether than we are issuing. And so from an investment standpoint, this is very, very attractive.

Ether is becoming more and more scarce, the more it's burnt. And if we can actually burn more ether than we issue, then we drift into the ultrasound money territory. And so Polynaya in one of his articles makes this very, it's very simple claim that all blockchains need to collect more in fees than they issue. And this is just simply the relationship of a deflation. asset or an inflationary asset. Over time. That has to be the end destination. It doesn't have to start that way.

You can subsidize it by issuance and a hope for the future. But eventually, right, the reality has to catch up. And you have to make more in transaction fee revenue than you're actually issuing net new supply or you get the shittiest money on the planet. That's exactly right. And I think bankless episode two, Ryan, we introduced this concept called Gresham's Law, where bad money is called a good money drives out bad money. money. As in, and we know this from, just from real world anecdotes, if you're in Argentina and you

have dollars and pesos, you keep the dollars and you spend the pesos because the pesos are being inflated. They're being minted. They are losing their value over time. So it's simply a matter of you keep the money that you think is going to retain its value over time and then you spend the money that is being printed because, well, if it's being printed, it's losing its value. And so this is the fundamental paradox of a monolithic blockchain. that has optimized for execution. Because if you have optimized for execution, you've sacrificed decentralization,

so you can have more block space and faster block space. But if you have more block space, you have increased the supply of block space and you actually reduce the ability to capture fees. More block space is more block space supply. So if demand holds the same, you actually eluse the ability to collect fees from people purchasing your block space.

And also more importantly, things like finance smart chain and Solana truly advertise themselves as cheap, fast fees, like the very low fees, very fast transactions. What they're saying is they have optimized for an execution monolithic blockchain, but at the same time, you are also committing to not collecting fees, because if you collect fees, it kind of ruins the whole value proposition of a monolithic blockchain that has optimized for execution. Well, let me ask you, right, let me ask you a question, though. So Ethereum started as well with a very

low fees, I would say, right, until it got congested, until it got network effects, until it got traction, until it got product market fit. What about the idea that some of these chains, the salinas of the world, for instance, they'll just ratchet up fees as well, because they inevitably have to once they get product market fit, once they get saturation, once they have a built-in network effect, and then they'll be able to, like, quote, you know, extract to rent essentially and then people will happily pay a higher transaction fee. But their baseline is higher in terms of transaction per second than Ethereum is. What's your reply to something like that? So in that world, to me, that is just a monolithic blockchain that was

previously optimized for execution now moving into being optimized for decentralization. Because if you ratchet up fees, well, how do you do that? You don't just like take the fee meter and go higher fees, what you do is like fees are set by the free market. The free market, the fees that are ultimately set are determined as supply and demand of block space. So when you say ratchet up fees, what you're really saying is actually ratcheting down block space so you can instigate a fee market to emerge. Yeah, you kind of have to. And I guess if you're doing that, then you're following the path that Ethereum's already been on, which is the modular block. And you're already like, I don't know, four or five years behind potentially if you haven't already

made that pivot. But plus, you also have a, I think it's very hard for things that start off with those security tradeoffs to then move toward the decentralization quadrant. Because you already have the power structures in place, right? Is the community going to want to do that? Are the validators in Salana going to want to do that, right? Are the developers going to want to do that? Not unless they absolutely have to make this pivot. It'd have to be hard pressed in order to do that. And also importantly, the economy that has been built on these execution optimized monolithic blockchains is one that is inherently looking for a place of low fees. That's why they went there in the first place. So we'll just switch to another one. And this is why roll-ups are so awesome is because

anything that a execution-optimized monolithic blockchain can do, a roll-up can do 10 to 100 times better. So if they're looking for a place of cheap fees and these execution optimized blockchains decide to start optimizing for decentralization and not execution, they're just going to push all of these low fee-seeking economic activities to places where there are lower fees, which will be roll-ups. Which is why we said a lot of alternate layer ones are actually competing against Ethereum's roll-up ecosystem. They just don't know it yet. The market has not wised up to that. But I want to also put some numbers behind this. Like, economic sustainability issue, right? Because Pauli Naya puts numbers on it. We'll take an example of

Solana. So this is from post, I think, a couple months ago. So it should be in the realm of like what's recently accurate. But as for Solana, it captured 10K per day transaction fees. More recently, $100,000 per day. If you wrapped up to $100,000 per day, that's $36 million in transaction fees annualized. So that's revenue for Solana. Revenue for Solana, but it's giving out $4 billion in sole tokens as blockchain issuance, inflationary rewards. That is a net loss of negative 99.2%. So we said, in the long run, these chains have to be sustainable, economically sustainable,

and for that to be the case, transaction fees have to exceed inflationary costs, issuance cost, block reward costs, that is not the case with these monolithic chains now, which is why we think many of these things are not sustainable. They're sort of a short-term kind of pass through the narrative cycle. Everyone's hungry for additional block space, but like, do they have the mechanisms to sustain themselves? Which I think maybe brings us to another point in all of this. And I actually, you know, Kyle Simani is a Salana advocate. I think he's a big fan of this. And he actually agrees with our take on this, which is the triple point asset take, that all layer one chains are competing as a money. Okay. And the reason they need to compete as the money

is because the chains that have a monetary premium, that have a money at their base layer tokens, these are going to be the chains with the highest economic security. Okay. And economic security will bring all of the other amazing things that we talked about. Like the roll-ups are going to want to park on the chains with the highest economic security. So will the users, so will the governments of the world, so will the major exchanges, so will the banks, everyone wants the highest economic security change. That is the network effect. Okay.

So if you believe that, all layer ones are competing as a money, and you believe that essentially if it's a staking type of chain, triple point asset thesis, is basically in play where the asset is a productive asset, it's a commodity, and it also has a store of value, it's a monetary premium. Here's the problem for monolithic chains. They cannot produce a non-sovereign money. At least, they won't be able to compete with the modular chains in order to create a non-sovereign money. It's because they're going to be issuing far more than their transaction fees.

So they can't get to that state where they're actually like net deflationary or net low issuance on the path that something like Ethereum is on or on the path even closer to something like a Bitcoin. Talk about that a little bit more. Do you think that this is a hard limitation? If you choose a monolithic chain design, you do not have a non-sovereign money. At least you can't compete with other non-sovereign monies that are modular. Absolutely.

And really the two chains that I see out there competing for a non-sovereign store, money, both those chains talk about security through the fee markets, and that's Bitcoin and Ethereum. Can you actually get people to buy your block space? And if you can, then you actually don't have to issue money to secure your chain. And so when we talk about economic sustainability, it's do you depend on the external environment for purchasing what your product is, which is block space? Or do you have to issue in order to incentivize people to validate your chain and provide security. The idea behind economic sustainability is you do not have to incentivize anyone via

issuance. You incentivize people because they will buy your block space anyways because your block space is so incredibly useful. And this is why it's really, really important to constrain the block space of the L1 system because that is what generates a fee market. And in addition, there's actually a completely additional aspect with why compromising on decentralization can't produce money at the global scale is because if you compromise on decentralization, you compromise on who can validate the chain. If you can only validate the chain if you have an

extremely beefy computer, a supercomputer and the number of validators are a thousand or less. And you've separated your community into two camps of people, two classes of citizens. It's the people that can validate the chain and they receive the issuance. They receive the newly printed money and the people that can't validate the chain and if they want the money they have to buy it. They have to buy it by working for it by spending other money, spending resources, spending capital. And this is, in my mind, way too close to the same fundamental structure that we already have today with the Federal Reserve. There are people that can print the money and then there are the people around those people

that benefit from that. And then there's everyone else in the world who does not have the right to print money. And if they want the money, they have to work for it. And so this division, the division of ecosystem participants into two classes of citizens, really, I don't like that. That seems very dystopian to me. And it's very much a king-making, king-maker force. Well, I have another word for that, David, and that's just centralized.

Again, the entire point of these systems is, these blockchain systems is decentralization, right? Like, that's the base factor. And so what you just said is, like, you could have this division into. insiders and outsiders, into, like, elites and plebs. The elites, they can run the nodes. They are, they become the new institutions. This is where the institutional trust is kept. They dictate the truth.

They dictate the truth. They could collude to inject blocks. And if you are a pleb and you can't run a node and actually verify a chain, you have to trust these elites, okay? Like, you can't reject blocks. You don't have transparency. You don't really know what they're doing. goes back to an episode where we had with Vitalik on kind of, I think, our last episode with him,

where we talked about the importance of running a node. And the importance of running node is it's a check and balance on the elites. You have to have the ability to verify a chain. And so when we're talking about these high node requirements for some of these chains, right? By the way, we're not just talking about like being able to run it on your laptop. Like that's very important, but also it's bandwidth requirements. All right. It's like how many people have a gigabit, you connection from their home. Like, I don't. You see my video quality sometimes.

Data does. But like, I don't know, 5% of the world population, 10%, it's you're narrowing the pool, putting these things in data centers. That's what's going to happen. But like, let's start to tie this out, okay? Because at the very outset, we talked about how this modular blockchain narrative, this ultra-scalable Ethereum narrative is really tied to the ultrasound money narrative. these things really go hand in hand.

Can you talk a bit more about that? So I know we've touched on it a little bit where we talked about, like, you have to have a constrained fee market and like this kind of feeds back into the economic securities or anything else we should talk about on the relationship between ultrasound money and ultra scalability in this modular blockchain design. Yeah, so I think I'll just read the tying it together paragraph from the article that comes out tomorrow. And so the way that the modular Ethereum is designed is as such. Ethereum has a constrained L1 that optimizes for strong decentralization and efficient security.

This block space constrained L1 creates an expensive fee market that adds monetary premium into eth by burning ether via EIP-1559. Sharding increases the available L1 block space as a function of the size of Ethereum's security. If Ethereum has more security, it also can produce more block space. As of Ethereum's pool of validators goes up, the number of viable shards also goes up, making Ethereum more scalable as it grows in decentralization. Roll-ups create unconstrained execution environments that bundle up transactions and compress them into the tiniest possible packets of data. This unlocks new types of economic activity and allows a vibrant and cheap economy to flourish, increasing the net economic activity that settles on the L1. That's where the association,

ultra-scalable Ethereum and ultrassound money come hand in hand. When there's more and more economic activity that's flourishing on the layer two's, more and more of that economic activity comes to be settling to burn ether at the L1. And so simply, this is the concept of induced demand. If you create a bunch of block space, people will consume it. And so the having, we've actually never, as a society, seen what economic activity looks like when it costs 0.001 pennies and it's settled instantaneously. but I bet you there's going to be a lot more generalized economic activity as a result of this

possibility. And ultimately, because that possibility is unlocked, because of a modular design structure, that ultimately comes back to burning more and more Eath in this very sustainable long-term fashion. Ultra-scalable Ethereum, ultrasound money. That's the handshake. They're both tied in together in this roadmap. It's really important. I guess that kind of brings us to the question of what's the fate of these monolithic chains, right? So if you, if you stay with the status quo, and it feels to me like one of the things you said in your article, and this reflects Polynia's comments too, is it feels like they can maybe go in one and two paths, right? They could keep to the status quo, keep continuing to build, recognizing that that's probably

unsustainable over time, but, you know, but keep hammering away at it. Maybe next bear run. You could do anything in a bull run, right? Like, didn't Raul Paul when he said, like, hey, a monkey on a typewriter could make money in a bull run, right? Like, that's basically crypto. Anything sustainable in a bull run. But when actual, like, when the test comes, these things might not be sustainable and might collapse. But the other alternative is they actually just become a roll-up on top of Ethereum. Many of these chains have fantastic execution environments, right?

They've optimized for. Yeah, Solana is an example of this. And I think they have some innovations in execution environments that are really interesting. Do they want to become a money? Do they want to compete with Ethereum, like having souls be a money? Do they want to compete with Ethereum's decentralization with its consensus layer? Do they want to compete with its roll-up ecosystem? I mean, many of these chains have already decided not to compete in one way because they're all EVM

compatible chains, right? They're already using Ethereum's EVM. And so what would a ration, what could a rational like layer one, ETHKiller do? Well, they just become a roll-up. You can have a thriving ecosystem with full network effects, just use the security and the economic security and consensus layer of Ethereum. So some might choose that path. Some might might not. I think eventually, David, they'll just do whatever they have to do, whatever's economically viable, whatever is in the interest of their token holders. What I'm a little bit worried, though, is the narrative and the structure that we have now is not sustainable, right? So, like, when I see the valuations and like, ship aside, right, and all these dog coins, all these

mean coins, but when I see the valuations of many of these competing layer ones that are taking the monolithic chain approach, these are valuations for chains that are going to have a sustainable monetary premium. That's what the market is assuming, that these will become reserve asset, full competitors to something like an Ethereum or even a Bitcoin. And here's the thing. If this thesis holds true, the modular blockchain thesis holds true, that is not going to be the case at all, right?

They will become execution environments at best. They are not going to be competing against an Ethereum. or Bitcoin for like monetary supremacy, right? I guess the third approach is they go and they pivot and they start following the path that of the modular blockchain path, right? Eventually, Intel capitulated too. And they're like, okay, AMD, you guys won. We'll do modular chains too.

And now they're on this path to trying to out-innovate AMD at the game that AMD created. I think some might try to follow that path. And this is not about chain, you know, maximalism. What we're trying to do is we're trying to project. how things play out over the long run and escape from like the six-month, one-year temporary chain narratives.

Right? And so like another chain could totally do that, could totally compete against Ethereum and might be able to surpass Ethereum, might catch Ethereum flat-footed in some ways, and optimize and create a better modular chain design than Ethereum and could win that way. Is that how you see it?

What is the fate of these monolithic chains? Yeah, you said whatever is in the best interest of the token holders. And I think it's really important to try and instantiate value back into these tokens. Because as Paulineas says, a lot of the reasons why these highly inflationary chains that have optimized for execution, and optimizing for execution is why they're highly inflationary because they have so much block space, in addition to having to incentivize blocks to be produced, they also have to pay. for consensus and security. And so that is where a lot of the inflation comes from.

And if they are trying to truly optimize for what they are optimizing for, which is execution, they get to actually do away with all this unnecessary issuance by putting themselves onto a roll-up because they don't have to pay for security anymore. They don't have to pay for consensus. They only have to pay for execution.

And that is very, very cheap. And so the main investment problem with these execution optimized monolithics, chains is that there's way too much inflation. And at the same time, they've optimized for execution. On a roll-up, you optimize for an execution orders of magnitude more than any monolithic chain ever could. And you just absolutely remove the need to issue and inflate your currency. And so the minimum fees that Solana is actually generating actually becomes the dominant source of revenue if they were to put themselves on a roll-up because they don't need to pay for security

anymore. That's why roll-ups talk about outsourcing security to Ethereum. Roll-ups are the economic, sustainable environments for blockchains on top of L-2s or on top of an L-1, right? And so this is why, like, if you generate any sort of economic activity on your chain as a roll-up, it's pure profit, basically, because you don't have to pay for consensus and security. That's a really important point. So when we talk about, like, how to inject the most amount of monetary premium in these things, it's by outsourcing the roles of decentralization and security to a different L1 and just focusing on the L2. And that's why if you have decentralization, you can have anything built on top of that, which is why you must focus the L1 of a modular

blockchain to be as decentralized as possible, because the properties of a decentralized L1 work their way upstream up to the roll-ups and give those roll-ups the same properties of decentralization, but you have to start with decentralization. So this whole industry is built upon. Absolutely. You have to start with decentralization. And here's the beautiful thing about this. So if the modular blockchain thesis plays out, this is not only a bullcase for ETH, okay, which it definitely is, or for any chain that adopts this modular path, which by the way, is Tezos, near, some other chains are doing this as well. It's just a Ethereum only execution path. This is the bullcase for decentralization. This is the bull case for going bankless. That's why we're talking about it.

Like, this is what we care about, all right? Like, great that your chain is scalable, right? But if you're sacrificing the short run for the long-term decentralization of the entire industry, we're not on board with that. Like, I don't, why do that? Especially when we have this other path. That's why we're talking about it. Now, last thing I guess, maybe to end with is roadmap for when this stuff is going to happen. Because as David and I were talking about, this is kind of like Ethereum's emerging roadmap. It's not all here. There's pieces and parts of it. And we've got, I think of Ethereum's roadmap in kind of two places. There's the economic upgrades and then there's the scalability upgrades, right? We've talked about the economic

upgrades like the merge and issuance reduction. We've talked about that a ton on bankless. This is the scalability upgrades. Right now in 2020, one, we've seen our first roll-ups go mainstream, right? ZK roll-ups with D-Y-D-X that are app-specific, also optimistic roll-ups with optimism and Arbitrim and others. Okay, we're still in the early stages of roll-ups, the execution layer of this modular chain is being built out. I think the next milestone will probably happen in 2022-ish starting now, but in 2022, which is we will have general purpose ZK EVMs. I think that is coming next, and that'll be a big thing. I think that starts to happen in 2022.

After that, in 2023, we get the data shards that we were talking about. Again, that's the storage layer. And what is that going to do? That is going to supercharge all of the roll-ups. Simultaneously. It's like a cannonball of scalability. Yeah, just like, yeah. No one's talking about this, by the way.

But like we're talking, Polyneyes is 100,000 transactions for second, like overnight, right? So just massive scalability being added to every rollup that is currently working develop, whether that's the optimistic roll up or whether the ZK roll up, right? Like, we get that in 2023. Hopefully don't know the exact timeline of this. But it's going to be one of the next major upgrades after the merge,

and some things are tied off with the merch. That's what's going to happen. Where does this lead? Polynia estimates, right, if you think about like the improvements in optimization, the compression technologies, the ZK proofs, the addition of data scalability,

that we will have as much transactions per second as we need. Speculatively, he says, or he or they, says 15 million transactions per second by 2030. A brain-breaking number. It's all you need. We've scaled chains.

It's like done. It's over. Like the modular method works. We have roll-ups. We have this ecosystem. That's it, man. I, okay, so guys, I hope you were hanging with us until the end of this episode. I realize that is a lot to digest.

What David and I try to do, these very complex topics, is like pre-chew it a little bit, right? And this is not fully chewed. I think we're going to be talking about this more and more in more easily, digestible terms as well. And for some of you guys, this may have felt like a 300 level kind of discussion. Like, for us, honestly, it has been too. This is not, I mean, we're digging into a computer. I just figured this out like two weeks ago.

So hang with us. But I think this is a narrative that we come back to. And if you're here, if you're listening to this, you are still early in the scalability strategy. The long-term sustainable without sacrificing decentralization. the real scalability strategy that is coming to all of crypto, we think it's super important, and this is why we're bullish today.

Any concluding thoughts, David? Stay tuned for the article that's coming out on the newsletter tomorrow if you want something written about this. And then we're just going to keep on unpacking the same subject matter over and over and over again, as we have done with ultrasound money, because things need to get unpacked. It's a complicated subject, but it's really, really important. There you go, guys. Longest state of the nation ever, and we didn't even have a guest, David and I, but we hope you enjoyed it. Of course, risks and disclaimers.

Eath is risky, crypto is risky, defy is risky as well. You could lose what you put in. We don't know the future of these modular chains, but we are bullish. We're definitely headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.