Proof of Stake
Ethereum's Scaling Design: Fractal Scaling
BitOoda Ethereum Market Research, 7/20/23
Vivek Raman
Ethereum, the altcoin ecosystem, and Bitcoin have been fairly stable from a market price perspective over the past week, despite the frenzy of enthusiasm around last week’s XRP decision. Meanwhile, traditional stock markets and tech stocks continue to surge, thus far outperforming the crypto markets.
We are now at the stage where the Ethereum ecosystem needs a major catalyst before it can outperform. While the regulatory freeze is one large overhang which seems to be (slowly) thawing, it will take some time before there is actionable clarity for the crypto ecosystem. Therefore, we return to fundamentals: the ETH ecosystem needs to onboard its next wave of users.
Scaling has always been the bottleneck for Ethereum – and for all blockchains. This is because blockchains will always be slower than existing centralized database systems due to blockchain design. It will always be faster to run a game, a social media app, or a financial transaction, from a single server controlled by Google or a bank, than to run the application across a distributed network of nodes on a blockchain.
Then why would anyone use a blockchain when they can use an existing system? This comes back to the core thesis for blockchain, which is not “decentralization” or “self-custody” – because pragmatically, in the US, nobody cares about that at the consumer level.
The real reason to use blockchain over the traditional closed single-point-of-access model is that with fractal scaling technology which Ethereum has adopted, blockchains cut out enough middlemen that transactions using blockchain systems can ultimately be cheaper, faster, and more secure than the existing system.
Therefore, we do not expect blockchains to replace existing tech / financial systems, but we could see the existing systems integrating Ethereum’s tech stack into the back end to cut costs, improve security and transparency, and allow for more seamless 24/7 transactions with no downtime. This is the value proposition that ETH offers.
We will examine what ETH’s fractal scaling design looks like, starting with this week’s short summary.
As we have mentioned, the base blockchain layer cannot scale to a threshold that is superior (cheaper, faster) than a centralized database. A key property of a blockchain is having enough distributed nodes that the chain cannot be shut down or censored – this is the big differentiator from a closed, centralized system. While chains like Solana have scaled the base layer by reducing the number of nodes and increasing the hardware requirements to run a node (hence, trending toward a centralized system), the Ethereum community has chosen to keep the base layer slow to make it easy for anyone to run a node on consumer hardware.
Ethereum has therefore chosen the path of fractal scaling, where the majority of consumers will not live on layer 1, but on a web of layer 2 (and layer 3 and beyond) ecosystems. This design solves for the best of all worlds – a robust, secure base layer that cannot be shut down, with a web of innovative L2s and L3s that will have all the applications that consumers need. And the best part? Fractal scaling was the endgame at ETH’s inception; it is now here!
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Ethereum, the altcoin ecosystem, and Bitcoin have been fairly stable from a market price perspective over the past week, despite the frenzy of enthusiasm around last week’s XRP decision. Meanwhile, traditional stock markets and tech stocks continue to surge, thus far outperforming the crypto markets.
We are now at the stage where the Ethereum ecosystem needs a major catalyst before it can outperform. While the regulatory freeze is one large overhang which seems to be (slowly) thawing, it will take some time before there is actionable clarity for the crypto ecosystem. Therefore, we return to fundamentals: the ETH ecosystem needs to onboard its next wave of users.
Scaling has always been the bottleneck for Ethereum – and for all blockchains. This is because blockchains will always be slower than existing centralized database systems due to blockchain design. It will always be faster to run a game, a social media app, or a financial transaction, from a single server controlled by Google or a bank, than to run the application across a distributed network of nodes on a blockchain.
Then why would anyone use a blockchain when they can use an existing system? This comes back to the core thesis for blockchain, which is not “decentralization” or “self-custody” – because pragmatically, in the US, nobody cares about that at the consumer level.
The real reason to use blockchain over the traditional closed single-point-of-access model is that with fractal scaling technology which Ethereum has adopted, blockchains cut out enough middlemen that transactions using blockchain systems can ultimately be cheaper, faster, and more secure than the existing system.
Therefore, we do not expect blockchains to replace existing tech / financial systems, but we could see the existing systems integrating Ethereum’s tech stack into the back end to cut costs, improve security and transparency, and allow for more seamless 24/7 transactions with no downtime. This is the value proposition that ETH offers.
We will examine what ETH’s fractal scaling design looks like, starting with this week’s short summary.
As we have mentioned, the base blockchain layer cannot scale to a threshold that is superior (cheaper, faster) than a centralized database. A key property of a blockchain is having enough distributed nodes that the chain cannot be shut down or censored – this is the big differentiator from a closed, centralized system. While chains like Solana have scaled the base layer by reducing the number of nodes and increasing the hardware requirements to run a node (hence, trending toward a centralized system), the Ethereum community has chosen to keep the base layer slow to make it easy for anyone to run a node on consumer hardware.
Ethereum has therefore chosen the path of fractal scaling, where the majority of consumers will not live on layer 1, but on a web of layer 2 (and layer 3 and beyond) ecosystems. This design solves for the best of all worlds – a robust, secure base layer that cannot be shut down, with a web of innovative L2s and L3s that will have all the applications that consumers need. And the best part? Fractal scaling was the endgame at ETH’s inception; it is now here!
Purpose
This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.
Analyst Certification
Vivek Raman, denoted by an “AC” on the cover of this report hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.
Conflicts of Interest
This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.
General Disclosures
Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or throughhttp://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such.BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.
The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance.
Ooda Commodities, LLC is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.
BitOoda Technologies, LLC is a member of FINRA.
“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.
Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.
Ethereum, the altcoin ecosystem, and Bitcoin have been fairly stable from a market price perspective over the past week, despite the frenzy of enthusiasm around last week’s XRP decision. Meanwhile, traditional stock markets and tech stocks continue to surge, thus far outperforming the crypto markets.
We are now at the stage where the Ethereum ecosystem needs a major catalyst before it can outperform. While the regulatory freeze is one large overhang which seems to be (slowly) thawing, it will take some time before there is actionable clarity for the crypto ecosystem. Therefore, we return to fundamentals: the ETH ecosystem needs to onboard its next wave of users.
Scaling has always been the bottleneck for Ethereum – and for all blockchains. This is because blockchains will always be slower than existing centralized database systems due to blockchain design. It will always be faster to run a game, a social media app, or a financial transaction, from a single server controlled by Google or a bank, than to run the application across a distributed network of nodes on a blockchain.
Then why would anyone use a blockchain when they can use an existing system? This comes back to the core thesis for blockchain, which is not “decentralization” or “self-custody” – because pragmatically, in the US, nobody cares about that at the consumer level.
The real reason to use blockchain over the traditional closed single-point-of-access model is that with fractal scaling technology which Ethereum has adopted, blockchains cut out enough middlemen that transactions using blockchain systems can ultimately be cheaper, faster, and more secure than the existing system.
Therefore, we do not expect blockchains to replace existing tech / financial systems, but we could see the existing systems integrating Ethereum’s tech stack into the back end to cut costs, improve security and transparency, and allow for more seamless 24/7 transactions with no downtime. This is the value proposition that ETH offers.
We will examine what ETH’s fractal scaling design looks like, starting with this week’s short summary.
As we have mentioned, the base blockchain layer cannot scale to a threshold that is superior (cheaper, faster) than a centralized database. A key property of a blockchain is having enough distributed nodes that the chain cannot be shut down or censored – this is the big differentiator from a closed, centralized system. While chains like Solana have scaled the base layer by reducing the number of nodes and increasing the hardware requirements to run a node (hence, trending toward a centralized system), the Ethereum community has chosen to keep the base layer slow to make it easy for anyone to run a node on consumer hardware.
Ethereum has therefore chosen the path of fractal scaling, where the majority of consumers will not live on layer 1, but on a web of layer 2 (and layer 3 and beyond) ecosystems. This design solves for the best of all worlds – a robust, secure base layer that cannot be shut down, with a web of innovative L2s and L3s that will have all the applications that consumers need. And the best part? Fractal scaling was the endgame at ETH’s inception; it is now here!
Purpose
This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.
Analyst Certification
Vivek Raman, denoted by an “AC” on the cover of this report hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.
Conflicts of Interest
This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.
General Disclosures
Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or throughhttp://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such.BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.
The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance.
Ooda Commodities, LLC is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.
BitOoda Technologies, LLC is a member of FINRA.
“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.
Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.
In this report, we offer a variety of institutional frameworks to analyze ETH, alongside BTC, as a part of a diversified crypto portfolio. Bitcoin has transcended into the mainstream, accelerated by the acceptance of spot BTC ETFs. ETH, while more complex, has unique use cases that could position it as a premier crypto asset alongside BTC.