Key Terms
Term | Description |
---|---|
Data Availability | Data availability is exactly that - how available the data regarding transactions is to users. Data can be readily available on the blockchain (more expensive and secure), or on a third-party data provider (cheaper, less “available”) given there are trusted third parties. |
The Merge | The Merge refers to the joining of the existing execution layer of Ethereum with the new proof-of-stake consensus layer, the Beacon Chain. Ethereum moves from PoW -> PoS. |
Monolithic Blockchain | A blockchain that does execution, settlement, history and data availability within one layer secured by one honest majority consensus. (Source: Polynya) |
Modular Blockchain | A blockchain that outsources at least one of the above-mentioned properties to a different layer e.g. outsourcing execution to rollups. |
EVM | The Ethereum Virtual Machine (EVM) defines the environment in which all smart contracts and accounts exist. Ethereum has only one ‘canonical state’ at any time and the EVM defines the rules for computing a new state for each block. |
Rollups | Rollups perform transaction execution outside L1 and then the data is posted to L1 where consensus is reached. As transaction data is included in L1 blocks, rollups inherit Ethereum L1 security. (Source: Ethereum Foundation) |
Proto-danksharding | Proto-danksharding is a midway implementation of full danksharding, and notably introduces data blobs (explained below). It is expected to enable between 10-100x cost improvements for rollups. Data is pruned from the system after ~1 month which is regarded as satisfactory so long as there is a single honest actor that maintains a record of the data. |
Data Blobs | ‘Data blobs’ are a transaction format which contain a large amount of data that cannot be accessed by EVM execution, but whose commitment can be accessed. Rollups posting data as data blobs rather than calldata will make them significantly cheaper. Data blobs are pruned from the blockchain after ~1 month. (Source: EIP-4844) |
Danksharding | Danksharding turns Ethereum into a unified settlement and data availability layer optimized for rollups. Danksharding moves away from the previous sharding roadmap and is not actually sharding per se. In fact, the only element of sharding is that validators do not need to download all the data - instead they sample pieces of the data. It introduces Data Availability Sampling and Proposer Builder Separation (explained below). |
Data Availability Sampling (DAS) | DAS is a system that allows nodes to securely verify data availability without having to download everything; nodes will only have to ‘sample’ small portions of a blob through techniques such as Erasure Coding. Blockchain nodes are typically required to download all data - whereas, with DAS, nodes only need to sample small portions of data which is distributed among validators. With many nodes sampling different parts of a block simultaneously, its availability can be verified with high statistical certainty. (Source: Ethereum Foundation) |
Proposer Builder Separation (PBS) | Nodes no longer need to build blocks and propose them to the network for approval - these two tasks are separated. Block building will be computationally intensive and inevitably centralized, whereas validation will be highly decentralized. ‘Proposer’ = Validator; ‘Builder’ = Block builder |
crLists | In PBS, crLists (censorship-resistant lists) are lists of transactions to be included in a block, submitted by validators to Block Builders. |
ELI5 Ethereum
Ethereum was the first generalized smart contract platform and is widely regarded as one of the most decentralized and secure blockchains. It has been described as a ‘world computer’ - meaning that Ethereum can be permissionlessly accessed from anywhere in the world, and all interactions are treated the same way (as defined by the rules of the Ethereum virtual machine (EVM)).
Ethereum’s strong security and decentralization properties have come at the expense of scalability. This has resulted in extremely high transaction costs during periods of high activity, with the chain having a maximum of ~15 TPS. This is hardly fitting of the ‘world computer’ - however, the Ethereum ecosystem is developing some of the most exciting scaling technologies in crypto - namely rollups. Ethereum is pivoting to a rollup-centric roadmap, optimizing and scaling the mainchain for hosting rollups. At a high level, rollups enable off-chain transaction execution while posting the relevant transaction data on Ethereum L1. By moving computation off-chain, they greatly reduce the cost of transactions - bringing scalability to Ethereum. In addition, by posting the transaction data on L1, they benefit from the security and decentralization of Ethereum.
Furthermore, Ethereum is expected to move from PoW to PoS later this year - widely expected in Q3 2022. This will drastically reduce Ethereum’s energy consumption (estimated at -99.95%) and will also reduce ETH issuance to 0.5m ETH per year, which is equivalent to a ~90+% issuance reduction. This could make Ethereum a deflationary asset (depending on network activity) as a certain portion of transaction fees are burned (due to EIP-1559).
What is the core thesis on Ethereum?
As mentioned previously, Ethereum is regarded as the most secure and decentralized smart contract infrastructure. It has by far the largest ecosystem in crypto, with the greatest wealth of infrastructure, tooling, and developers of any blockchain ecosystem. This infrastructure and tooling have been built to work with the EVM - creating a very strong network effect around Ethereum and specifically to the EVM.

The report by Electric Capital demonstrates the strong dominance of Ethereum in terms of open-source developers.
Ethereum’s dominance is demonstrated by the rise of L1 blockchains. BNB Chain, Avalanche, and Fantom notably rose to prominence in 2021 - all of which are EVM compatible. The network effect of the EVM is apparent in that 9 of the top 10 chains by TVL have EVM compatibility. A noticeable exception is Solana, but even they are experimenting with the EVM via Neon.
Due to Ethereum’s level of decentralization and security (at the expense of scalability on the mainchain), it makes it attractive for rollups to build atop Ethereum to inherit the superior base chain security. Rollups are increasingly held to be the most feasible solution to blockchain scaling, and rollup infrastructure has improved drastically over the last year, with Arbitrum, Optimism, and StarkEx already demonstrating high performance and adoption. This should only continue to improve.
In addition, Ethereum has a sophisticated scaling roadmap that aims to retain its security while increasing scalability by orders of magnitude. It has pivoted its focus to be optimized for rollups rather than end users. This means that the vast majority of user activity and applications will occur on rollups which will be settled on the mainchain. If rollup infrastructure continues to improve and Ethereum executes on its ambitious scaling roadmap, Ethereum should be able to consolidate and build upon its already sizeable competitive advantage as the primary rollup chain.
Takeaway
Ethereum mainnet makes changes to optimize for rollups and rollups make changes to optimize for the user-facing applications. The aim is that the majority of users will never interact with Ethereum mainnet if rollups scale as intended.
Furthermore, Ethereum’s tokenomics of continuous issuance (to reward validators) and transaction burning (EIP-1559) means that there will always be incentives to contribute to the network while potentially becoming a deflationary asset. This has resulted in the meme describing ETH as ‘ultra-sound money’.
Arthur Hayes wrote a blog about ETH being considered as a bond. Note that this cannot be taken at face value and has a bullish bias.
Justin Drake, an Ethereum researcher, produced a model for the behaviour of ETH post-merge. Again, these are mere projections from a biased source - Justin Drake coined the term ultra-sound money and has dedicated his recent career to contributing to the Ethereum ecosystem. It should not be taken at face value but may be informative.

Ethereum Merge
Source: Ethereum
Merging with Mainnet
Ethereum Mainnet is currently secured by PoW, while the Beacon Chain runs in parallel using PoS. The Merge refers to the event when these two systems come together. When ready, Ethereum Mainnet will Merge with the Beacon Chain, and become a PoS shard. Stakers will be selected to validate the Ethereum Mainnet once The Merge occurs. There will no longer be a need for PoW mining. Ethereum mainnet will also bring along with it the full history and state of the blockchain, and allow smart contract execution on the PoS system.
The Merge will help advance Ethereum’s aims of becoming a sustainable and scalable blockchain. It is important to highlight that the ability to withdraw staked ETH will only be made available a little while post-Merge in the next upgrade following the merge which can take a couple of months. PoS brings other core statistics including a projected 99.95% reduction in energy consumption and a 90% reduction in ETH issuance.
Although Ethereum is transitioning to PoS, it is also inheriting some of the benefits of being a PoW chain prior. For instance, any new PoS chain must bootstrap a decentralized validator set to secure the network but this is very difficult to do. Usually, only a few entities (which can run many validators) control a majority of the stake and receive the compounding inflationary rewards for their efforts - Bitcoin maxis refer to this as the rich getting richer given these large companies’ portion of stake increases with inflation.
However, Ethereum has had many years in PoW during which many miners were forced to sell to the market to pay for the costs of PoW mining equipment and electricity. This constant sell pressure from miners helped to decentralize the network. Additionally, Ethereum has existed for a long time which has helped ETH to become well distributed across many actors. Time has alleviated this concern and time will likely help decentralize other PoS chains but Ethereum clearly has a lot of lindy due to its strong foundation and time of existence. However, major exchanges and staking platforms such as Lido have accumulated very large quantities of ETH which is a development that warrants attention so as not to jeopardize the decentralization and censorship resistance of the network going forward.
Scaling
Vitalik argues that centralized production is an inevitability for blockchain scaling:

Ethereum will follow a general scaling strategy that centralizes block production while maintaining a highly decentralized validator set and anti-censorship resistant properties. In this model, even if there is just a single block producer who is malicious, the worst-case scenario is that they go entirely offline and block production stops until a single honest block producer is set up to continue building blocks. This is the vision of how Ethereum will operate at the base layer. This extends to rollups as well, whereby block production will be inherently centralized but transaction validation and censorship resistance decentralized.
EIP-4488 - Reducing Calldata Costs
EIP-4488 (if implemented) is expected to reduce gas costs by approximately 5x. This is designed to improve the capacity of Ethereum for rollup transactions. However, EIP-4488 is not without controversy and it is unclear as of now if it will be implemented. A key point of contention is that blockchain growth would accelerate, making it more expensive to run a node (thus reducing decentralization). EIP-4444 gives nodes the option to prune this history after a year. EIP-4488 is considered by some to be an interim solution to improving scalability as the community awaits the implementation of protodanksharding.
Note the potentially confusing similar names of the EIPs.
EIP-4444 - Enabling the option to prune historical data older than 1-year
EIP-4444 gives clients the option to remove historical data (greater than one year), therefore, reducing the network burden and storage requirements. EIP-4444 would arguably be necessary if EIP-4488 is implemented, otherwise the blockchain history would grow to the extent that node operation would inevitably become more centralized due to the heavy burden of downloading lots of historical data which would cause users running nodes to need larger disks.
EIP-4844 - Proto-danksharding
Proto-danksharding is a significant step towards Ethereum’s vision of being a highly scalable settlement and data availability layer. EIP-4844 introduces ‘data blobs’ which are a transaction format that contain a large amount of data that cannot be accessed by EVM execution, but whose commitment can be accessed. Rollups posting data as data blobs rather than calldata will make them significantly cheaper. This is expected to reduce costs for rollups by up to 10-100x from the current state. Data blobs are pruned from the blockchain after ~1 month. The Ethereum Foundation has taken the position that 1-month is a satisfactory timeframe for this data to be downloaded so it can be made available when required.
- The rationale for removing data older than 1 month is that maintaining it on-chain is practically unnecessary and doing so would make the costs of running a node prohibitively expensive, leading to the centralization of the blockchain.
- In addition, it is assumed that the data will be downloaded and maintained by at least one actor to ensure that it is readily available when required. This data can be stored cheaply on HDDs.
- Proposed actors to store pruned data include:
- Block explorers
- Indexing protocols
- Application-specific rollups could require the nodes to maintain all data that is relevant to their project
- History could be uploaded through torrents such as BitTorrent
- and more.
- It is unlikely that all of these will fail to store the data meaning that the data pruning from Ethereum is widely considered acceptable.
- Proposed actors to store pruned data include:
- Polynya argues for an “Ethereum History Network” building on/collaborating with the likes of Arweave, The Graph, BitTorrent etc. The greater the decentralization of this, the safer the data.
Furthermore, with proto-danksharding, there will be a new gas fee market specifically for data blobs with floating gas prices and limits. This means that periods of hyperactivity will not impact rollup-specific costs, but proof settlement costs will rise. This is positive as the primary rollup costs are posting data to L1, not the proof settlement.
Given that most of the transaction cost in optimistic rollups is from posting the calldata to L1, EIP-4844 will deliver far greater cost savings to Optimistic Rollups vs ZK-Rollups.
Nodes are still required to download all data - whereas, with danksharding, nodes only need to sample data which is distributed among validators. Proto-danksharding is a necessary middle ground between Ethereum in its current state and full danksharding as it implements many of the features required for danksharding.
Danksharding
The purpose of Danksharding is to enable Ethereum’s to become a unified settlement and data availability layer. Ethereum’s original scaling plan was to shard the chain. Danksharding moves away from this, and is not actually sharding per se. The only real element of sharding is that validators do not need to download all the data - instead they sample pieces of the data. This greatly reduces the bandwidth burden on validators and ensures a large and decentralized validator set remains possible. It is also considered significantly less complicated and risky than the original sharding roadmap.
Danksharding includes many of the elements that will be introduced by protodanksharding, with key additions of data availability sampling and proposer-builder separation.
Data Availability Sampling (DAS)
DAS is a system by which nodes can securely verify data availability without having to download everything; nodes will only have to ‘sample’ small portions of a blob through techniques such as Erasure Coding. This means that even light clients can participate as nodes, which is critical for decentralization as requiring nodes to download all data would require expensive hardware.
- Validators carry out DAS to ensure that all data is available. Only 50%+ of the erasure-coded data is required to reconstruct an entire block.
- KZG commitments ensure that the data was submitted correctly (and that there was no junk).
- Block builders create a block with the beacon block and shard data confirmed together.
It is important to note the similarities and convergence of ideas between Ethereum and other protocols. With DAS, Celestia is also using erasure coding and empowering the light clients to be more ‘powerful’. It is worth noting that Celestia is optimized for data availability, whereas Ethereum is not - it must perform settlement and execution. Given Celestia is optimizing only for DA, they will be able to accommodate other execution environments outside of the EVM (their first support is for Optimistic Rollups). However, they can extend support for ZK-Rollups, Substrate chains, Cosmos SDK chains and others that come along. The main differences between them are the levels of security associated with either and the relevant timelines that they will be shipped. Celestia will provide a good DA option for volition systems on Ethereum, so it is a win-win relationship that is built on one premise - rollups are the future.
Proposer Builder Separation (PBS)
In PBS:
- ‘Builder’ = Block builder
- ‘Proposer’ = Validator
This is a key feature of danksharding and ensuring Ethereum retains satisfactory decentralization as it scales. DAS should enable the easy and secure verification of data without the need to have to download it all. This means that even light clients can participate as validators. However, block building is resource-intensive and specialized. This will make block building inherently more centralized - and most of the nodes will be unable to participate in it. However, as long as there is an honest majority of validators (proposers, nodes), the blockchain should remain secure.
- Proposer builder separation is essential for danksharding as validators would otherwise lack the capacity to process a block of rollup’s data blobs. PBS, therefore, maintains the decentralization of the network.
As block builders are now centralized, one may intuitively question whether the blockchain is censorship resistant. However, censorship resistance can be achieved by the inclusion of crLists (censorship-resistance lists).
While crLists do not have a definitive design as of yet, the general consensus of how they would work is as follows:
- Validators (proposers) submit a list of all the eligible transactions that the builder is forced to include in the block. This way the highly decentralized validator group should always publish crLists with all eligible transactions that must be included in the block, ensuring censorship resistance. This is because the Builder must prove that all transactions on the crList were included, otherwise the block will not be accepted.
- However, issues include proposers submitting an empty list and selecting the builder with the highest bid due to economic reasons. Ideas are being worked on regarding how to avoid this undesirable outcome.
Danksharding is a clear demonstration of the general thesis of Vitalik’s Endgame blog post - namely - how the future of scaling would be centralized block production with decentralized validation. In this, the block builder role is centralized and specialized, and so long as there is an honest majority of validators then this is acceptable.
Danksharding will likely take several years to implement, however, it is ironically much simpler and easier to implement than the original sharding scaling plan and with fewer security assumptions and risks.
Another key outcome of danksharding will be a single fee market for data - rather than split across various shards.
One potential outcome enabled by danksharding is synchronous calls between L1 and ZK-Rollup execution. This is because blob transactions can immediately confirm on L1 as it is all produced in the one Beacon Chain Block. This gives rise to the potential for things like shared liquidity e.g. dAMM. Of course, this is hypothetical and it will be interesting to see how and if use cases like this materialize. Again, the time frame for this is likely years away, leaving room for other solutions to win out that provide a means for shared liquidity or composability across sovereign chains and rollups.
- Such examples include Inter Blockchain Communication (IBC) which allows for liquidity on one chain to be used by another in a composable way without competing for liquidity and ending up with fragmentation across a number of chains. This battle for liquidity is something that many L2s will have to do until something like a dAMM is a reality. An example of this shared liquidity over IBC is that a yield aggregating application on Juno Network (independent L1 chain) can compose with the liquidity on Osmosis (independent L1 chain). This example shows how apps across different chains can compose with one another today - a working solution today can build up a lot of network effects given sufficient adoption. However, IBC introduces new trust assumptions and Tendermint chains are not as decentralized as Ethereum so many applications will opt for more or less security depending on their needs.
With danksharding, more nodes will be required for higher scaling. This is the converse of what is true today - and also leads to the issue that more nodes are necessary to safely and securely increase throughput. However, this is a double-edged sword as Ethereum needs to scale the validator set in order to ensure data availability security.
State
Requiring nodes to prove the state of the blockchain is a major scalability challenge for Ethereum at present. With danksharding, Ethereum aims to transition to ‘weak statelessness’ - whereby validators do not need to verify state, but block builders need state to create blocks. This is in line with the purpose of PBS - to ensure decentralization at the validator level and have more centralized block builders carry out the heavy lifting.
The Ethereum scaling roadmap is covered in greater detail in The Hitchhiker’s Guide to Ethereum (Delphi).
Rollups
As stated above, Ethereum has pivoted to a rollup-centric roadmap whereby the vast majority of user activity occurs on rollups. Rollups move transaction execution off-chain while retaining L1 security by posting the transaction data on L1 where it can be validated. Maintaining some of the data on-chain enables anyone to verify the validity of the transactions being executed off-chain.
Rollups are an exciting solution to blockchain scaling as they can leverage the security of the underlying blockchain (with Ethereum L1 widely considered one of the most secure and decentralized). Transactions are executed off-chain, with various ways to massively scale e.g. validiums, AnyTrust and volitions for specific applications. The ability to leverage the security of Ethereum while benefiting from the scale that rollups can make them a powerful value proposition.
Rollups are generally classified into two generalized categories: Optimistic Rollups (ORs) and ZK-Rollups (ZKRs).
OR vs ZKR Cheat Sheet
The following cheat sheet is provided to contextualize ZK-Rollups in the L2 space. Check out Nansen’s report on ZK-Rollups here and Optimistic Rollups here.
ZK-Rollups | Optimistic Rollups | |
---|---|---|
Proofs | Validity proofs relying on cryptography. | Fraud proofs are initiated by validators who identify incorrect transactions. |
EVM compatibility | Complex, only limited applications live today but various zkEVM implementations are being developed. | Easy, live today and first to market. |
Withdrawal back to L1 | As soon as the proof is verified on L1 (can be up to a few hours). Instant withdrawals are also possible with bridging protocols such as Hop or Synapse. | Up to 2 weeks to leave room for fraud disputes, but products like Synapse or Hop can mitigate this and reduce it to minutes. |
Computation | On-chain: Lower; Off-chain: High (Validity proving is computationally intensive). | On-chain: Higher (needs more data on-chain for fraud disputes). However, fraud proofs only occur in the event of a challenge. ; Off-chain: none (all assumed to be valid). |
Operating | Requires powerful machines, currently done by one operator (StarkWare) for StarkEx and StarkNet. These are called provers. Sequencers then order transactions. | Sequencers are responsible for ordering transactions from L2 bundles that are then committed at L1. Currently centralized. |
Sentiment | Short term: Dominant for “simpler” tasks (payments, exchanges, application-specific tasks etc.) Medium-Long term: Dominant overall as the technology matures. | Short term: Dominant for general-purpose EVM computations due to “first-mover advantage” and ease of EVM compatibility. Long term: Far less competitive if ZK-Rollups fulfill their potential and decentralize satisfactorily. |
General Approach | ‘Guilty until proven innocent’ approach to verification. Relies on mathematical integrity. | ‘Innocent until proven guilty’ approach to verification. Relies on game theory. |
Validiums
Validiums are similar to ZK Rollups given they compute transactions using validity proofs. However, validiums maintain their data availability off-chain. As they do not need to post calldata on-chain, they are extremely cheap and suited to high-volume applications. Some examples of validiums include Immutable X (NFT-centric L2), Sorare (fantasy football game), DeversiFi (decentralized crypto exchange).
Volitions
Volitions allows users to choose between a “ZK-Rollup mode” and a “validium mode”. This means that users of volitions have a choice between on-chain and off-chain data availability. This allows users/developers to select the security they need for their specific applications. For example, a gaming application may opt for a validium as the additional cost of ZK-Rollup security is not necessary, whereas a DeFi application will likely opt for ZK-Rollup due to its enhanced security and on-chain data availability.
AnyTrust Chains
AnyTrust Chains are a scaling solution being developed for Arbitrum. Only transaction hash is posted to L1, with the data maintained by a committee of nodes. This enables far greater scalability, with the trade-off of an extra trust assumption. AnyTrust chains operate by a committee of nodes, with an assumption that a minority of committee members are honest/functional e.g. 2/20. AnyTrust solutions are suited to high throughput applications that do not require institutional-grade security e.g. games. Read more here.
Enshrined rollup
Enshrined rollups have consensus integration with the L1. This means that it is not an L2, but retains the technical benefits of rollups while existing at the L1 and benefiting from its social consensus. Execution and settlement would occur on the enshrined rollup, which is a part of L1, making it highly secure (assuming no bugs). The Ethereum Foundation is seeking to transition Ethereum to an enshrined ZK-Rollup in the future using ‘ZK-SNARK proofs for everything’. This would require the creation of a fully zkEVM rollup. This remains hypothetical and its potential implementation will be years from now.
An enshrined rollup is more secure than other rollups as it is embedded at the L1 level. They do not require re-execution which would speed up most synchronization strategies. Other rollups introduce a layer of separation and additional risks such as governance and centralization issues. However, non-enshrined rollups can benefit from business development and faster innovation.
Read more about enshrined rollups here as discussed in an AMA with the Ethereum Foundation.
Sidechains
A key difference between a sidechain and rollups is security. Rollups inherit the security of the L1, while sidechains rely on their own layer of security. Sidechains have their own consensus protocols that are designed to be suited to their own needs, which allows for more customizability. However, the trade-off is having to face headwinds for their own security layer, instead of adopting tailwinds from Ethereum’s security properties. An example of a sidechain is Polygon PoS.
MEV
Maximum Extractable Value (MEV) refers to the practice of validators extracting the maximum value from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block (Source: Ethereum Foundation).
PBS is designed to mitigate the harmful impacts of MEV but may not be implemented for at least a couple of years. In the meantime, Flashbots (a project set up to combat centralizing forces of MEV) operates by enabling mining pools to easily aggregate MEV bids and democratize MEV. However, following The Merge, extracting MEV will again become a nuanced activity that could have sinister implications for centralizing the network. Flashbots is offering MEV-boost which will enable validators to outsource the elements of block building for MEV.
Top Market Participants and Protocols
Starkware
Starkware is building ZK-rollup scaling solutions on Ethereum. This includes both StarkEx and StarkNet.
StarkEx is a deployable self-custodial tool for high-performance dApps. It can be thought of as a scaling engine or ‘scaling-as-a-service’ for dApps. NFT minting, transfers, and trading are currently enabled on StarkEx.
Examples of projects using StarkEx include:
- dYdX (perpetual contracts trading)
- DeversiFi (trading)
- Immutable X (gaming and NFTs)
- Sorare (NFT sports game)
The following graphic shows the significant total activity on StarkEx:

All dApps that use StarkEx have an off-chain component that executes transactions and holds state of the off-chain system, while periodically sending updates to the on-chain component. This on-chain component ensures that state transitions are valid.
StarkNet is a permissionless ZK-Rollup network that will support sophisticated smart-contract applications. StarkNet is designed for general-purpose computation e.g. similar to what Ethereum is like today. StarkNet uses the Cairo programming language, and already has a large number of applications building atop it. A Solidity to Cairo compiler is currently being developed to make it easy for legacy Ethereum dApps to launch on StarkNet. StarkNet is launching a token in order to decentralize.
StarkNet is developing fractal scaling - whereby it introduces a third layer - L3. L3 is to L2 what L2 is to L1. This opens up further scaling possibilities and atomic composability between StarkNet L3s. This is still conceptual, but an exciting scaling prospect, with L3 indirectly inheriting security from Ethereum L1.
Read Nansen Alpha’s report on StarkWare here.
Optimism
- Optimism is the second-largest OR by TVL. It has a number of top-quality Ethereum apps building on it which is a testament to builder confidence in what the Optimism team is building.
- Optimism is notable in that it uses single round fraud proofs which makes them instant. Effectively, L1 executes the entire L2 transaction on-chain to verify the state root.
- Optimism has incorporated EVM equivalence into its design - which goes beyond EVM compatibility that some of the competing L1s and Rollups have incorporated. Optimism is focused on aligning itself as much as possible with Ethereum L1.
- Optimism notably launched the OP token on 31st May. OP enables holders to vote on protocol upgrades, project incentives, and more. This is part of the Optimism Collective
- which will be described below.
Arbitrum
- Arbitrum is by far the largest Optimistic Rollup, typically boasting ~80%+ TVL of all Optimistic Rollups. For a more in-depth overview of Arbitrum, check out Nansen’s report here.
- While extremely similar to Optimism in most aspects, the difference arises in how Arbitrum processes a disputed transaction off-chain. Arbitrum only sends the disputed part of the transaction back through the EVM - rather than the entire transaction.
- Arbitrum also has a number of blue-chip Ethereum protocols building atop it which is a testament to developer confidence in its infrastructure.
- Interestingly, Offchain Labs (the company developing Arbitrum) has previously stated that they will pivot towards validity proofs (as used by ZK-Rollups) in the future if it becomes apparent that they can overcome EVM compatibility and equivalence challenges. However, the team has taken the view that this is unlikely and remains convinced that Optimistic Rollups are the best scaling solution.
- Arbitrum is developing AnyTrust chains as a further scaling solution. AnyTrust will work as follows
- AnyTrust chains will be operated by a committee of nodes, with a minimal assumption regarding how many nodes are honest e.g. 2/20.
- This is arguably better than sidechains which may require a ⅔ honest majority. The reason for only needing a low proportion of nodes is that if the nodes fail or refuse to cooperate, the transactions will revert to rollup mode and be confirmed on the L1.
- With the assumption that 2/20 are honest, there is no need to record transaction data on the L1 as nodes can rely on the committee for data instead. Only the transaction hash is recorded on L1.
- Another benefit of AnyTrust Chains is that withdrawals can be executed immediately (if vouched for by the committee).
Polygon
Polygon is building an ecosystem of Ethereum scaling platforms. By far the most notable, and indeed what most people associate as Polygon is Polygon PoS. This is an Ethereum sidechain secured by a validator set
However, Polygon is developing a number of different scaling solutions for Ethereum.

These solutions range from the zkEVM Polygon Hermez, the STARK-based ZK-Rollup Polygon Miden, the data availability Polygon Avail etc. Polygon’s rollups will settle transactions on Ethereum with the rollup token being MATIC.
Polygon Hermez open-sourced their zkEVM code on 20th July 2022.
Scroll
Scroll is building a ZK-Rollup that seeks to be EVM-equivalent. It is implementing the EVM at the bytecode level, going beyond the EVM-compatible zkSync which requires an additional step of an intermediary transpiler.
This was previously thought unfeasible, however, various advancements in technology have enabled this.
Scroll seeks to achieve a bytecode level zkEVM by using a modular design. This means that tasks will be split among various different components that operate under independent constraint sets and have separate (but not unrelated) execution traces.
If successful, this would be a safe environment for Ethereum-based dApps to deploy on a secure and scalable environment.
It’s likely the closer a protocol is to EVM compatibility, the better chance it has for hosting DeFi, high-value NFTs etc, due to the security capital that has been built up. However, for novel applications that didn’t exist before - like on-chain games - it is possible that Cairo could be the best solution. Regarding the different rollup designs, it is likely that those with the closest EVM compatibility/equivalence will onboard high value DeFi applications and NFTs (once they have demonstrated their security), whereas custom systems like Cairo from Starkware could be the winner for new types of applications.
Check out Nansen’s report on the ZK-Rollup design space here.
Sign up to partake in Scroll’s pre-alpha testnet here.
Trust/Security Assumptions
Code Assumptions
A general assumption is that the code behind Ethereum and the EVM is highly secure. While this has been true so far, Ethereum’s scaling roadmap greatly increases its complexity which notably adds additional risk to the network. This explains why Ethereum is so slow to implement network upgrades as any imperfections could pose significant issues.
Note that there are 5 consensus clients and 5 execution clients currently under active development, and as long as none of the clients hold a supermajority (currently there is a risk of this with Geth) the chain will not finalize any bugs. If none of the clients hold ~33% or more share of the network, the chain should continue finalizing if there is a bug in any single client.
Data Storage Assumptions
Protodanksharding and danksharding assume that at least one actor will download data to be made available when required. This assumption should hold true.
Censorship Resistance Assumptions
It is assumed that crLists can be incorporated into Ethereum with crypto-economic guarantees. Intuitively, validators would have no incentive to provide crList to the block builder and simply select the builder with the highest bid. This outcome needs to be avoided and incentives aligned for crLists to be incorporated into the design.
Rollup Assumptions
- One honest actor for security
- One honest actor for history provision
- Potential for 51% governance attack
- (A validium will add the further assumption of X of Y actors providing data availability)
The first two points carry low weight. However, the third point should merit further consideration. Rollups should ideally have good governance distribution to avoid bad actors/centralized actors negatively impacting the ecosystem. There will be many rollups and ideally those with the greatest security properties, including governance distribution, will receive the greatest adoption. Rollups should also develop ‘escape hatches’ that enable anyone to permissionlessly withdraw their funds to L1, ideally including those locked in smart contracts.
Node Provider Centralization
Infura's Ethereum API solution is widely used by developers to ease the communication between their dApps and the blockchain. Most notably, the default RPC endpoint for MetaMask users is Infura. Infura is developed and owned by Consensys, a centralized entity. Infura has also had downtime in the past, which halted communication between some dApps and the blockchain temporarily. Other decentralized alternatives such as Eden Network and Pocket Network are gaining traction, but Infura is overwhelmingly the largest RPC node provider currently.
What Would Cause Ethereum to Fail?
A failure to properly implement the scaling roadmap would cause Ethereum to fail. The blockchain space has matured significantly since 2020, with increased recognition of its objective benefits and opportunity. This has led to an influx of alternative blockchains - most of which have thus far yet to show any real threat to Ethereum. However, Ethereum has a significant first-mover advantage, and if it fails to implement the roadmap or takes too long in doing so, it could be supplanted by other blockchains.
The design and implementation of rollups is extremely important for Ethereum’s success. With a rollup-centric roadmap, Ethereum’s success or failure depends on rollups. While rollups are much-hyped by leading commentators such as Polynya, they are complex and require significant further development. They are far from being as safe and secure as mainnet as of now. Safe decentralization of rollups is essential, as is the ability for users to use a permissionless escape hatch to L1 should the need arise. This is complicated by funds locked in smart contracts. Rollups remain a very nascent area and it is possible that we will see serious issues with them in the future before the design and implementation best practices emerge. L2Beat provides high level overviews of some of the risks involved with using rollups.
dYdX - arguably the most celebrated rollup application, recently announced that it would be leaving StarkEx to set up its own blockchain on Cosmos. The team cited better performance potential and decentralization as reasons for pursuing this. Although this cannot be taken at complete face value, it shows that rollups are not an omnipotent solution and that there remains significant scope for improvement.
Ethereum would be negatively impacted if any of the upgrades resulted in security issues to the blockchain. This risk is possible due to the complexity of Ethereum and the additional complexity of its proposed upgrades. If these turn out to jeopardize the security assumptions of the blockchain, this could be disastrous for Ethereum.
Unforeseen malignant crypto-economic incentives that reduce the security, decentralization and censorship resistance of the blockchain.
However, the main underlying concern for the immediate future is the technical problems that may arise during the Merge. While rigorous testing on the testnet reduces the chance of any difficulties, such as validators not producing blocks, there is still a non-zero chance of an unknown problem occurring, which could be devastating to the blockchain.
Furthermore, there may be an unknown smart-contract risk with the ETH2 staking contract. A development that could corrupt the core thesis of many Ethereum investors is the chain becoming too centralized. In particular, the majority of the validator stake being controlled by a small number of entities. This problem is becoming increasingly apparent. Lido holds ~32% of total staked Ether (stETH). Regarding Lido itself, LDO ownership is concentrated posing governance centralization issues. This could potentially compromise Ethereum’s value proposition of being the most decentralized blockchain. A Lido community vote for capping Lido dominance had 99% of holders voting against it. This is the obvious outcome as the LDO holders will vote in their best interests (the growth of Lido and by effect token price over time). There is a risk of a misalignment of interest arising between LDO holders and Ethereum the network. It will be interesting to see how this risk manifests and how the Lido DAO can reduce/avoid these outcomes. Lido offers attractive yields for users and a tragedy of the commons situation could arise whereby nobody will want to give up the benefit of staking on Lido - despite it being potentially harmful to the network. The network loses its core value proposition if it becomes centralized and corruptible. However, the Lido DAO appears to be actively seeking to avoid such a situation and high quality staking solutions that are decentralized will be crucial to combatting centralization of stake with centralized entities like CEXs.
- The large size of the Lido node operator set and the economies of scale that arise from this give them a unique ability in procuring MEV. This includes cross-slot opportunities. Network effects help it continue to compound its competitive advantage. Some argue that the 21 different node operators in Lido make it decentralized. However, there is an argument that they can essentially act as one entity as they are unified by the LDO token. It is permissioned to become an LDO validator and LDO holders get to decide. This logically results in alignment among the validators. Other risks arising from this that have been flagged are potential vertical integration of the MEV supply chain. This could end up with a monopolistic block builder in Ethereum - leading to censorship resistance issues etc. Awareness of these risks is important for finding solutions to avoid them which Lido appears to be doing. While the success of Lido is tightly correlated with Ethereum, the DAO is looking to introduce dual governance whereby stETH holders can veto governance proposals that adversely affect their interests. This is done to better align LDO holders with stETH holders.
One point to consider is if Ethereum succeeds in transitioning to a rollup-centric chain with enormous capacity, and economic activity moves to the rollups who become the main transactors on the mainchain: will there be sufficient demand to meet the supply shock? This question is worth posing as Ethereum’s economic security requires a large validator set to be economically incentivized to contribute to the network. This requires large revenue. As transactions are batched from L2 and L3 to be settled eventually on L1, will there be enough revenue generated to support a sufficiently large validator set? This would require a dramatic increase in on-chain activity.
What Would Cause Ethereum to Succeed?
Ethereum can succeed if it implements its scaling roadmap in a timely and orderly fashion. Ethereum’s scaling roadmap is extremely exciting and would give Ethereum a capacity orders of magnitude greater than the blockchain industry today. The focus on highly efficient block production and a highly decentralized validator set is the logical progression of true blockchain scaling, and Ethereum’s implementation of this modular design should consolidate and build upon its competitive advantage going forward.
Rollups fulfilling their potential of high performance coupled with the security and decentralization of L1 is key to Ethereum’s success. There has been great hype about the potential of rollups, however, this needs to materialize in practice. Too often, the benefits of new technologies in crypto have been overstated. Trustless interoperability between rollups will be a critical value add if it can be achieved. Bridging between different blockchains has proven unsatisfactorily secure, and trustless bridging on Ethereum would be a strong value proposition but there is not yet consensus on how this can and will be achieved.
Monolithic blockchains have shown clear limits to their scalability, which will only worsen over time due to state bloat. Ethereum is being optimized to host rollup scaling solutions which themselves should compete with alternative L1s. Ethereum’s unrivalled infrastructure adoption and first-mover advantage in optimizing itself for rollups should be key to its continued dominance.
Keep on top of developments in the Ethereum ecosystem
Guides: The Hitchhiker’s Guide to Ethereum (Delphi).
- This is an excellent report on Ethereum’s scaling roadmap. It goes into it in lower-level detail than this piece and is good for further enhancing understanding of how Ethereum should work going forward.
Podcasts:
- Bankless
- David Hoffman and Ryan Sean Adams
- The Daily Gwei
- Anthony Sassano
- Into The Ether
- Eric Conner and Anthony Sassano
- Uncommon Core
- Hasu
- Top 10 Twitter Accounts to follow (a mix of devs/VCs/ecosystem leads):
- Vitalik Buterin (Co-Founder of Ethereum)
- Ethereum Foundation
- Justin Drake (Researcher at Ethereum Foundation)
- Evan Van Ness (Founder of WeekInEthNews and Starbloom Ventures)
- Hayden Adams (Founder of Uniswap)
- Michael Sonnenshein (CEO at Grayscale)
- Tim Beiko (Ethereum Core Developers Moderator)
- Joseph Lubin (co-founder of Ethereum and Founder of Consensys)
- David Hoffman (co-founder of Bankless)
- Austin Griffith (Ethereum Foundation Dev)
DAOs
Ethereum is a strong foundation for DAOs for a number of reasons:
- It is considered highly decentralized and secure.
- A trusted intermediary is not required to manage group funds. Smart contracts have the ability to transmit and receive funds according to a defined set of rules.
- The Ethereum community has proven to be more collaborative than competitive, allowing for best practices and support systems to emerge quickly.
Types of DAOs
There are various types of DAOs on Ethereum ranging from DeFi DAOs to gaming DAOs and investment DAOs. Some of the different types of DAOs can be seen in the figure below.
Some of the DAO tools and resources used in the space:
Aragon - Aragon is a DAO launcher and manager. It offers tools for on-chain and off-chain decision-making, tokenomics, dispute resolution, scaled voting through a designated blockchain, optimistic governance, and more. It is governed by the network of Aragon DAOs.
DAOHause (Moloch) - DAOHause is Moloch DAOs' factory. Manufactured DAOs bear a set of minimally viable functions, including ragequit, delegation and emergency. DAOHause is governed by holders of the HAUS token - moloch DAOs, their members and contributors.
DAOstack - DAOstack has built software for creating, managing, and communicating between DAOs, including collective attention management, governance sandbox, UI and methods library. While it still operates, its development is currently idle.
Gnosis Safe - Gnosis Safe is a crypto wallet with multiple signatures to approve transactions (multisig). It enhances funds security and offers DeFi and NFT integrations, often used by DAOs for treasury management.
Syndicate - Syndicate is an investment protocol allowing communities to easily create strategically focused, blockchain-based investment funds - DAO syndicates.
Boardroom - Boardroom is a governance and data portal for its integrated, mainly DeFi protocol DAOs. It offers a dashboard allowing easier participation, ideation workstreams, and real-time treasury and governance data; and an explorer for the integrated DAOs.
TokenSets - TokenSets runs the permissionless Set asset management protocol, which integrates various DeFi products into investments/treasury portfolios.
Kleros - Kleros is a crowdsourcing, smart contracts dispute resolution protocol, coupled with an Identity verification product. Its use cases currently include oracle, insurance, escrow and other transaction disputes.
OpenLaw - OpenLaw is a co-leader in merging legal standards with smart contracts, and co-founder of thereby legally official DAOs. It extends a legal engineering sandbox and the Tribute DAO launcher, with native legal and NFT modules.
Coinshift - Coinshift (previously: Multisafe) is a treasury management platform for DAOs and crypto-native companies. Operating on users' Gnosis Safes, it currently serves ongoing, team and mass payments, direct swaps, gas-saving integrations, and asset risk assessment in collaboration with the Credmark project.
Colony - The Colony platform offers a free suite of tools to launch and run DAOs - Colonies, which make up Colony as a DAO-of-DAOs. Served capabilities include native DAO setting and launching, token issuing and selling, and flexible structure, attention and treasury management tools.
Gitcoin – An independent platform that looks to fund developers and builders that are creating open source applications. Donors can browse projects listed on the platform and choose what they would like to fund. The DAO’s governance token is GTC, which will be used to manage its treasury, grants, disputes and more.
Commonwealth - Commonwealth serves management tools and 1-stop integration platform for on-chain discussion, proposal-making and voting products, including identity services and native crowdfunding.
Tally - Tally is a portal for Compound Governance DAOs, offering a decision-making and management UI and an explorer for their activity and membership. It also serves educational materials and a newsletter focused on decentralized governance.
Gardens - Gardens is a launcher, management, discussion and documentation pack for DAOs, called Gardens. Gardens' governance is rooted in a coded constitution, conviction voting, consensus-building, and official dispute resolution.
Llama - Llama produces a suite of products and services for DAO treasuries, including asset management and analysis, financial reporting and DAO-to-DAO financial interactions.
Parcel - A treasury management tool for DAOs, serving inbuilt Gnosis Safe, recurring and mass payments, and strategies for yield and asset management.
POAP - POAP introduces a decentralized network of Identity verification that relies on individuals' combined collections of tokened Proofs of Attendance in events hosted by verified POAP partners.
Multis - Multis is a financial management application for DAOs. Built on Gnosis Safe, Multis accounts serve monitoring, collaboration, analysis and accountancy for multiple wallets across multiple blockchains. It expects to launch debit cards and USD exchange for US-based DAOs in July 2022.
SafeSnap (Gnosis Safe / Snapshot) - SafeSnap is Gnosis Safe served by Snapshot voting. It allows DAOs to effortlessly implement their community's off-chain Snapshot decision as binding on-chain transactions on Gnosis Safes.
Solv - Solv is a platform for minting and managing Financial NFTs - silos of digital assets tradable as vesting, bond, or other financial rights. It is designed to serve a codeless, flexible setup for typical DAO operations, including fundraising, community-building, asset allocation and more.
Collab.Land - Collab.Land offers integrated identification-as-human services on community social platforms, and management of such membership permissions according to tokenized parameters.
Mirror - Mirror is a writers' collective, ideating and community-building through Web3 media and publications. Participation is NFT-based and content may be easily NFT-minted and managed on-platform by its creators.
XDAO - XDAO is a no-code DAO launcher for EVM-compatible blockchain networks, focused on investments. It offers a native suite of tools for treasury management and operation and a hybrid on/off-chain voting system to save gas fees. It currently builds a palette of modules to enrich governance and other DAO utilities.