The Tie Research
Danksharding: Ethereum’s Scalability Killer
Danksharding gets its name from its creator and Ethereum Researcher: Dankrad Feist. The change in name is intended to indicate a transition from the traditional sharding system to this paradigm shift, which is being colloquially called the “Scalability Killer”.
Ethereum is Going the Wrong Way
This is not to say that Vitalik and his Ethereum wizards are representative of John Candy and Steve Martin, but the fact remains: most L1s today are trending towards rapidly increased levels of centralization (aka the wrong way). This is the result of a deep flaw in the system called Miner Extractable Value (MEV). In fact, just last year, experts were warning that it had the potential to kill the entire network.
If you’re just having your morning coffee – MEV exists due to DEX arbitrage bots that front-run users and exploit inefficiencies. By selling valuable block space through Priority-Gas-Auction, miners can profit by charging excessively high transaction fees. Miners could also reorder or censor transactions to profit from on-chain liquidations, or to arbitrage for themselves. The high fees paid for priority transactions pose a systematic risk to the entire Ethereum security infrastructure. Various solutions have been theorized, but most involve off chain solutions, which inevitably ends up leading to more centralization. If you’re thinking that maybe a proof-of-stake update will help? Nope. In-fact, many believe that it will simply exacerbate the issue, along with increase in centralization.
But fear not! It’s always darkest before dawn and despite the dark shadow that's been seemingly cast, I genuinely believe that Ethereum has the best roadmap to scalability. This is all thanks to danksharding, so let’s dive deeper.
To understand what’s going on here, it's best if you’re up-to-date on what's going on with traditional sharding. Danksharding is designed to circumvent MEV, therefore maximizing decentralization and security. This is done through a combination of proposer-builder separation (PBS) and crList.
As discussed earlier, in a traditional blockchain, a block proposer (i.e.: miner) can pick and choose which transactions to include in its block by looking at which transactions pay the highest fees. PBS proposes to fix this by splitting the block proposer into two roles: builders and proposers. Builders represent an entirely new class of actors who get the list of transactions from the proposers in the form of a special list called a crList, which specifies which transactions the builder must include. Builders can then reorder the transactions to maximize MEV without being able to censor anything, thanks to the crList (making everything faster). This essentially optimizes MEV benefits for miners, while nullifying the MEV hindrances for users.
Looking at the image above, we see that as a result of danksharding, execution blocks and shard blocks are now built together. Resulting in all validation data being done in aggregate. That means no delays in shard blocks confirmation, replication of data won’t occur, and shard blob confirmations don’t need to be tracked – making data immediately visible to L1s. Since there’s no separate shard for transactions, the Ethereum mainnet itself becomes a unified settlement and data availability layer, leading to a probable ~6400x increase in throughput (leading to low gas fees, huzzah!).
But wait, there's more: danksharding will result in a tighter bond between the execution chain and the shards, allowing for much simpler rollup designs (yay for devs!), and now synchronous calls between zk-rollups and the Layer 1 (as in confirmed in the same block). This opens the doors to so many possibilities, one being: the Ethereum execution layer could just be an “enshrined” rollup, implementing optimistic rollups and then zk-rollups.
Who Are the Winners?
Though in theory danksharding sounds perfectly reasonable, there are still chinks in the armor that need to be hammered out. That said, implementation is set to happen on the Shanghai hard fork by the end of this year (we are in the proto-danksharding phase). If danksharding is truly as big of a revolution as rollups were (and I believe they will even surpass rollups in terms of importance), then let’s investigate some projects that will directly benefit from its consequences.
Rollup-centric projects in general would be set to benefit the most from the implementation of danksharding, with a potential ~1000x drop in fees. For the sake of brevity, I’m going to look into Arbitrum (with a dash of Optimism) alongside Chainlink and a new arrival in the scene: LayerZero.
Arbitrum is a L2 optimistic rollup solution that currently has a little over $2 billion in TVL and is the leader of rollups. I’ve discussed at length how Arbitrum’s time-to-market advantage gave them the upper hand in the rollup wars, but with Ethereum set to implement danksharding, their growth could become exponential. In fact, Uniswap had originally intended to launch on Optimism, but delays in Optimism's launch caused the community to pivot to Arbitrum.
Something interesting to note: just as Arbitrum’s TVL started mooning, their GitHub commits dropped significantly, while Optimism’s remained steady. This is curious because one would imagine as greater and greater interest is shown in a project, development would rise as well, but that does not seem to be the case here with Arbitrum.
In early 2020, co-founder of Offchain Labs, Ed Felten, announced Abritrum’s plan to integrate with Chainlink’s decentralized oracle network, allowing for reduced gas costs (270x lower) and increased throughput.
In addition, the Chainlink-Arbitrum integration resulted in outsourced valuation to Chainlink nodes, as well as allowing developers to integrate Chainlink Price Feeds into their dApps without rewriting any smart contracts. As danksharding enables the tighter coupling between the execution layer and sharding, we can expect to see the demand (especially in rollup-centric environments) skyrocket.
With Chainlink already being the dominant leader in market cap amongst top oracles as well as establishing partnerships with A LOT of projects, it’s safe to say that they will be primed for a massive spike in volume/market cap come the end of the year. One primary issue with Chainlink is that it's not really decentralized (strictly in terms of governance), although this does not appear to be impacting the system’s overall health.
LayerZero is an “omnichain” interoperability protocol, and is on a mission to provide a “future-proof” immutable infrastructure in which developers will never have to alter interfaces in their smart contracts.
They’ve introduced the “ultra light node” (ULN), which professes to have all the security of a light node along with the cost-effectiveness of middle chains. This is done by streaming the block headers on-demand to the oracles, rather than keeping all block headers sequentially.
At a high level, LayerZero is simply an on-chain endpoint that uses ULNs. Data is transferred between on-chain endpoints using Oracles and Relayers. LayerZero takes advantage of the security properties of oracles like Chainlink and adds another layer of security via the relay system. The LayerZero Endpoint design is in-fact lightweight enough to run on expensive L1s without passing off much of the cost to the end user.
Though cross-chain transference isn’t the only thing LayerZero solves; in fact with LayerZero we can engage in cross-chain lending/borrowing, swaps, governance, as well as state sharing. With LayerZero, one no longer has to deal with a protocol like SushiSwap existing on 12 different chains. Instead, SushiSwap would have one codebase for all cross-chain pairings. LayerZero’s omnichain bridge, Stargate (which just went live today), is setting the stage for a fully composable liquidity transport protocol.
Long story short, LayerZero connects all chains seamlessly, regardless of it being EVM or non-EVM. Essentially creating an Inter-Blockchain Communication Protocol, except it's everywhere.
With danksharding in place, traffic volume and throughput of Ethereum is expected to rapidly pick up. Currently, all combined bridges have over $22 billion in TVL, with Avalanche leading the way.
The high demand that will be brought from Ethereum’s rapid global adoption will render these bridges cumbersome and hurt the speed of onboarding. Cheap interchain communication will be greatly sought after, and LayerZero’s Stargate will step right in to fill that demand.
Development of LayerZero is in relative infancy, as evident by multiple ‘Info Coming Soon!’ pages on their gitbook as well as their GitHub page basically being a one-man-band. Nevertheless, progress is chugging along at an astonishing rate, which is incredibly impressive considering the elephantine task that CTO Ryan Zarick has set out to accomplish. I’m excited to see what the future holds for LayerZero as we enter this brave new world of scalability.
Danksharding isn’t just a redesign of classic sharding, it’s a game changing proposal that, when implemented, will signal a new era for all blockchains. In one quick stroke, Dankrad Feist and the magicians at the Ethereum Foundation were able to address scalability, decentralization, and security issues. Danksharding will invigorate rollup ecosystems like Arbitrum and oracles like Chainlink, while creating an environment that will foster innovative ventures like LayerZero. Though there is still much to be done, the lightning pace of progress demonstrated by the people at Ethereum, Arbitrum, and LayerZero give me confidence that we are soon approaching the endgame. I’d recommend getting a pair of sunglasses, the future is blindly bright.
This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.
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