NFTs are supposed to capture what media lacks today, by focusing on creating a synergistic relationship between creator and fan in even the smallest niches in the blockchain world. In Web 2, there are consumers and producers. Gaming Studios do what they want, music from an artist will always change, and YouTubers/streamers will be more conservative or less entertaining to their fans as all of them are under a central authority. Central authority doesn’t maximally allow communities to actually be real communities, leaving the player base at a whim or control. However, the relationship between gamers and producers, artists and fans, and creators and audiences could be even stronger. Web3 and NFTs can bring back real communities in the entertainment world, restoring the two biggest flaws today.

NFT VALUE

1) Solving the agency problem for the overall community by participating in the creativity, ownership, and vision for the future.

2) Sustain efforts into monetizing smaller, yet more dedicated groups

Today, decisions are entirely based on management and not the players. Corporations benefit from revenue, and hardcore gamers benefit from gameplay. When companies and consumers interact, they are not focused on both parties winning, but more focused on trying to negotiate terms more favorably i.e. be the A-side.

Through nfts, we can create new proposals that Venn diagram both parties wants by promoting decentralization and freedom for users to customize. With NFTs, I can control my own fate because I can either sell my access to a buyer, who will join the lane if they believe in the artist’s direction, or what will be mentioned later create my own story with the NFT.

Nfts disrupt the agency problem entirely. Models that incorporate this will be the next phase.

What do we have instead? Nfts mistakes. What did web3 neglect that web2 has**?**

Crypto kitties were a huge success as well as other prominent games such as Degods, which are still around today. Game cycles don’t last 6 years, so clearly, nft games back then had something going right. What happened, implementations stalled, and progress stagnated as scalability and, gas fees truly got magnified. Problems such as blockchain infrastructure are hard to ignore, thus development slowed down. There’s only so much you can develop on chain before it becomes a detriment to build.* **“ *That’s why most popular crypto games, which generally take conventional game designs and add a cryptocurrency element on top, are often centered on making money exchanged as digital currency or NFTs’’ to deal with the costs of these issues. Less focused on experience and value, and more on surviving.

As a result, the main draw of NFTs became $$$ while the actual value was neglected.

**Note: **NftFi has a real value proposition, i.e. unlocking liquidity in illiquid RWAs, but this is not the focus of my paper.

Over the years, a lack of utility development in the space and slow growth led to the mania that started and ruined it all. The first time I personally heard of this industry was the Beeple sale. A jpeg for $$$ was sold, which was sketchy*.*

*Nft financialization isn’t a bad thing. Nft hyper-financialization is. *A lot of Financialization occurs when there’s a large mix of non-believers and believers in a project. Nfts seem to have this, but their interests are misaligned because the utility and economic value don’t match, especially for pfps. Logically, the nft market should be stable because people who care about the music, art, or game won’t want to sell it so rapidly anyways unless they are not aligned with the creator’s vision. Even then, they would prefer it as a collector’s item i.e. I got it first value.

Mihai in his article on Blur nuking explains the concept as genuine vs mercenary liquidity. “Mercenary liquidity is less stable and more opportunistic. It is liquidity that comes from participants who are primarily motivated by short-term profits or incentives, rather than a belief in the long-term value of the asset’’. Most pfps run out of traction, cash, and hype because it’s harder to maintain prominence when little utility is there. In addition the lower the utility, the more aligned you have to be with your community because holders are requiring a higher premium. Thus there is much less room for error unless you want half your community gone. Nft's primary purpose, whether it be for art, music, gaming, and RWAs isn’t meant to be sold in such a quick turnaround. Instead, hyper-financialization made the market turn exclusively into a ponzi, where buyers sell to someone at a higher price, with this someone also waiting to sell to the next highest bidder. Where is the actual value creation and community? Everyone makes money derived from the scheme, except for the final purchaser! This purchaser becomes an unhappy holder resulting in the belief that the industry is a scam on the outside. Nfts failed in connecting communities and creating ethos because all parties were concerned with themselves.

Furthermore, they failed in solving the 2 largest problems with web2, achieving straightforward relations between those who like the provider on a deeper level and having fun.

Nfts have become a bidder’s market instead of digital communities.

Therefore, Perceived value is the problem. Nfts are perceived to have value by the market only once sold for a profit, while it actually gains value through the first principles mentioned.

1) Solving the agency problem for the overall community by participating in the creativity, ownership, and vision for the future.

2) Sustain efforts into monetizing smaller, yet more dedicated groups

Now the focus of my paper….

Diamond hand Resurrection

Principles are not equal to implementations, but there is a solution. It can be attained by asking how real diamond hands can be resurrected (not bleeding hands). How can it not be a joke of the crypto community and actually be attained without the value of the project plummeting***? ***All these problems can be solved when artists, developers, and musicians focus on providing value first and then money later, which is difficult in practice because of the costs associated with the project. However, if they can strengthen their fan base and create the connection missing, we will see innovative use cases and higher probabilities in a successful mint. Mihai writes “Genuine liquidity provides a more stable market environment, but it can be harder to establish, as it requires building a community of participants who believe in the long-term value of the asset’’. Nfts were so volatile because of the risk premium people were taking to hold; when we focus on real subcultures and utility, the risk decreases, nft financialization stabilizes, and diamond hands increase. We are not ignoring people who require a return, rather they shouldn’t be the sole community that should be pleased and expanded on. The focus of NFTs should be to expand the universe of devoted and passionate community users. This will help project value accrue, and create genuine liquidity in the market.

Let's be more specific on the solutions…

Subcultures and Aesthetic

Confucius believed that enhancing your senses through enjoying what you’re doing instead of just doing it is the center of Chinese philosophy. To achieve this, you must be concerned with the aesthetic object rather than the physical object itself i.e., the immediately apprehended experience of said object. Northrop writes, “‘there is pleasure in lying pillowed against a bent arm after a meal of simple vegetables and a drink of water’’ (323). Life shouldn’t be looked at for what it is but what can be experienced through imagination and thinking.

Knowledge is derived from the warm and vivid personal experiences felt when experiencing the beauty of the concrete object, thus learning to appreciate the little things such as eating and drinking. Being in the moment when drinking tea, feeling its taste and sensation is knowledge. By having personal experiences with these things, you will be able to study and have the knowledge.

How can NFTs implement this Eastern philosophy of chih (knowledge and appreciation of beauty)?

**Jen is the first immediately felt factor ever truly experienced by the individual man. Jen (**Compassion/man-to-man-ness) is the first immediately felt thing that is experienced when looking at nature. The nature of the individual man is to immediately feel compassion first. This feeling is naturally and cognitively within us and our character, as well as the universe It is not an attitude we derive. It’s in our nature to feel compassion when looking at things in nature. Both Jen and chih(knowledge) are inherent in man because it is derived from our internal self, thus those two things are the bridge between the inner self and the outer world.

Jen existing throughout the universe and within us is the connection between our inner self-expressing itself to the outside world. With this innate ability to feel compassion, it also gives way to the other immediate aesthetic, vivid experiences in our personal lives.

Jen is the fundamental virtue in Confucianism and the basic Dao in Daoism. As Northrop writes, “his painters ‘become bamboo’” (334). That is why many of these artists before they paint will surround themselves in nature listening, feeling, and expressing themselves while being equally immersed in nature through the senses. It is the immediate experiences felt including the all-around aesthetic continuum that connects ourselves and the nature we are not surrounded in, but a part of. Between the aesthetically given self and the aesthetically given natural object there is one ness and identity.

That was a lot of nature talk. But the focus is to demonstrate the ability of projects to capture a community aura or aesthetic through the art and value being provided to that subset. The online world has allowed us to be our truest form, until now, due to censorship and corporate control to maximize revenue.

The NFTs of today and the past focus on the outcome of the mint rather than experiencing the entire process to feel Jen. Western doctrines have been placed on nft culture, what we want is Eastern philosophies. Nft success= eastern philosophy + utility

This is where Nft Art standalone can capture aesthetic value and community. If you can capture Jen and oneness such as Milady’s subculture fashion tribes of y2k Japan, or through progressive unlocks like Opepen, you have found your unique vp. If you are able to capture a community’s digital identity aesthetic value and emotions, you will be more successful*. *IOW, NFT art that captures the Jen of specific digital tribes of internet natives will grow, stabilize and have an ecosystem of genuine actors. Nft art is not an extension of the project, but of the entire community as they seek fit.

Milady’s website says “Milady is an aesthetic, a lifestyle, and a community. We are constantly conceptualizing and developing social extensions of the Milady vision”

This is the first step in a stable NFT world, Jen through capturing a community’s vision, appeal, and aesthetic. This will more likely make you not a needle in a haystack.

What do you feel when looking at Doodles or Pudgy penguins? Whatever that feeling is, these projects have mastered capturing it. These projects have captured not only their own brand vision but a community that already exists (Anime, dolls, etc.) and have used NFTs to tell their story.* *Who doesn’t like cute fat penguins?

This need not be an internet community either. An interesting case of this is what meta labels are. When you try to create a community in person where you meet people with the same care, and creativity in a shared space, the credibility of your project strengthens, and therefore your community **understands the perceived value of your work which interacts with who their digital identities are. **You are together with the fans when you bring it to real life like meta labels, so diamond hands increase.

Examples of creating credibility offline can be artwork on walls of New York City that access a website, handing out newspapers or placing codes in places around the city, showing perceived value and mystery, and then communicating (better ideas than this but get the idea). **Create a secret society in a sense first, like a fight club. **This offline cultivation is even better because you meet with supportive creators and fans, decreasing costs to bring people to the project culture in the online world.

Some might say that targeting a larger audience rather than digital tribes is better as it allows for frequent royalty sales, etc. Reddit is a great example of the opposite. Everyone is a Knicks fan in NYC (nope not Brooklyn Nets) but not everyone has a jersey, but I would bet the NYKnicks Reddit page has a higher proportion of Knicks gear purchases because of their compassion and investment into the team. The Pareto principle says 80% of revenue comes from 20% of customers; when those focus on the “internet local” it provides a strong source of revenue to cover costs associated with minting. Furthermore, no agency problem, less tragedy of the commons through greater overall participation from the community, and overall brings art/ internet culture closer. Those who don’t believe in the vision of the artist anymore will then identify a buyer, who will join the lane if they believe in the artist's direction. A new car enters the highway, and one exits, without any scam.

We can’t ignore human phycology when money comes into play. It’s too enticing and as mentioned blockchain L1 costs and nft risk premiums all combined with money don’t mix well.

Fear not though, money is not the root of all evil in web3. The issue is a combination of a lack of identity among sellers and buyers of the project and the risk of failing projects. With Jen into the equation, NFTs reduce risk, embrace a community, and tell their story which can now successfully stabilize a market, even with new participants joining. Again, when you are only listing nfts in the marketplace, you are betting that new fans will show up. NFT art that captures Jen to satisfy specific/existing digital tribes of internet natives will grow, stabilize and have an ecosystem of diamond hands.

Last Step- Utility.

Jen is captured initially, and now the community has formed from existing web2 members and crypto devotees. One last step for stable real-world nft expansion is utility, which is derived from expanding a community’s story and more importantly, expanding a user’s development in that community (something nfts haven’t done yet).

I asked myself Why do Nft mints only last one day, when they are supposed to represent long-form stories? Dilution is an issue but it isn’t what I was actually thinking of.

I realized the real questions and concerns I had about the space.

Why does the bulk of a project’s revenue come from one-day mints? How can a business function on a day to day when most of their cash comes from these probabilistic mints?

This got me thinking further. Because so much of a NFT project is all geared towards mint day instead of long form stories, projects won’t even show the art until mint day, to keep speculation as high as ever (elementals). This prays on peoples’ fear of missing out because of Twitter people hyping it up to push fake economic value.

You cannot expand a story, vision, or aesthetic if you are hiding your art until mint day because it is a pulse of enticement and phycology rather than community. No unknown art before a mint, clearly identify the roadmap and how it will represent the aesthetic and story of the set. Plan, execute, and iterate.

By having a real community and creating a storyline, we create genuine liquidity in the NFT marketplace where buyers and sellers are actual comprising of collectors, traders, and users for said project. This makes the utility problem much easier to understand.

The basic idea for expansion is a collaboration with supporting visionary projects. Nft project x nft project collab. Everyone is going solo like it’s a battle royale hoping to be the winner. When communities have synergies, Collabing will provide a massive opportunity to grow within both channels. An example of this is a Collab between NOUNs and PudgyPenguins. In a bear market like now, it is perfect to come together to address fans and general audiences that they are strong. These instances can be offline as well, such as a basketball 5 v 5, if web3 people are actually athletic LMAO….

Next, since you have a strong community, and this is important, it is not entirely up to you to decide how to benefit the user’s long term. In other words, your fans can help decide and create the value that they want for the project. This is what I call….

Layer2 NFT

Roblox and now Fortnite have gone in the direction of player-created game modes. However, they lack individual storylines as decisions are still entrusted to an authority. If both NFT holders and projects are aligned, companies can allow holders to go in whatever direction they want, like a Pokémon journey. This isn’t the case today, as even though you own the nft, you cannot decide what direction you** personally** want to go with it. If you decide one direction and the Dao or company decides otherwise, you’re pretty much forced to sell your nft. In essence, most companies would prefer to hold the power, so they don’t allow their intellectual property to go in a direction that would be against their vision and ethos. However, alignment of interests allows for the ability for holders to decide how they want the community to grow, without it being against the project, because it won’t be against the project. Through this, organic growth can be achieved because holders are moving the Ip across many forms of content and media without the costs. This adds to the first point because it allows for* projects collabing with each other on the micro level; holder collabs. Efficient Micro collabs that help built upon the nfts vision. Essentially, while you’re telling the plot of a community, the characters themselves have their own mind and way of telling their story in the plot*.**

**Right now, there can be extensions of a nft community but not extensions of the person within the group. For instance, in a video game, not everyone prioritizes strength, others value dexterity, intelligence, etc. It would be ridiculous to place all NFT holders in one box if other members prefer other directions. Furthermore, this issue will magnify because sooner or later, like web2, projects will have **matured their targeted audience. Besides the nft properties itself, what will actually differ a bored ape from another ape, besides traits given on mint day whose nonexistent value is determined by the market which will eventually fade away.

Both penguins equally capture the brand image, but how does one image differ from the other besides it being harder to mint a trait?

Through NFTs, companies don’t need to incur high costs to expand to newer frontiers and people, if you let the community do it themselves. One way for allowance of layer 2 Nfts is nft gaming, because it is easier to develop and level up your individual story in a virtual world. However, gaming isn’t up to that standard yet. So, instead of storytelling virtually, we allow **dynamic nfts based on decisions a person cares to take in the real world. **This would allow traits of characters to truly be unique and not based on the luck of the draw. If a trait is accessible through certain quests created by the community and project, decisions and quests that are deemed difficult will hold value to the community and others outside of it. If I create a quest that all NFT holders deem valuable to add, then it should be the case that it be created. Nfts need not be rare on mint day but through time and leveling up, like a season 1 Fortnite skin or a level 1000 character unlock. At the end of the day, venture capitalists aren’t the audience, your fans are, so by creating accessible yet valuable on-chain experiences with dynamic rewards for your community NFT holders, nfts don’t become solely a shareholder vote and pay-to-win system; they become an active long-form story that creator’s control, which achieves value and the visions of the community and project.

This is where the next point comes in, what are the on-chain quests that are not only for web3 natives, such as rabbit hole, or layer3 but bring users and creators from today’s internet onboard seamlessly? For Rich peeps (those with valuable real-world assets) I would say the ability to place your watch on the chain as an NFT. However, since I’m a broke college student and I don’t have a watch, I will not focus on this aspect. I believe these quests for the general user in said community would be digiphysical. This also makes more sense, as those who complete irl objectives that actually match NFT ethos will benefit the most. “On-chain games can add IRL quests by chipping physical products and updating its record as players engage with one another in the real world.” By being able to complete quests determined difficult in both offline and online interactions by the community it creates real value to holders and those participating in the ecosystem (bonus points for it being an on-chain video proving you did said quest). These challenges can be proven complete by issuing soul-bound tokens that are connected to the NFT. Creating challenges in both realms allows for long-form storytelling done by and for the NFT community and brings people from web2 and web3 into the project. The people today can’t do an on-chain quest and frankly don’t care to. So the best path to take to onboard them is through familiar internet and offline experiences, such as PudgyPenguin Toys. With verifiable experiences that are rewarding and exciting for the community, participants can choose which path to take. This said path, again, allows for collabs on the holder level and allows these dynamic NFTs to change based on the given circumstances.

Creating online and offline quests can create a new avenue for revenue as submitting a new quest can be priced as well as starting a quest. Members no longer need to wait for the next update from the company, they hold the direction of their art, while the project steers the ship. This can only be achieved when we capture the Jen of the digital tribe. Allowing users to decide through challenges deemed corresponding to the ethos of the project is the best of both worlds. Companies don’t worry about their IP being subject to events against their vision, because they are responsible for creating and confirming new quests. At the same time users don’t wait, and aren’t reluctant to sell when one bad decision occurs because they aren’t over reliant on their art being priced based on the project timeline.

Today’s social media platform emphasizes virality and huge audience monetization. Through curating and cultivating these communities properly, we can sustain efforts into monetizing these smaller yet more impactful groups. This will be more difficult in practice but as of this moment, the gaming model makes more sense for NFT objectives. As Baer writes, “ You start in a constrained world that facilitates the emergence of it, but it’s not constrained by its long-term”. All in all, if nfts cultivate the community properly, the community can determine the direction of the world they want to develop. Even though this sounds like a video game, it isn’t because on-chain videos, quests, nfts holding soul-bound quest nfts to change how they look can be achieved within the offline realm, generating revenue more sustainably and legit for all parties.

We are storytellers, and nfts can represent them if utilized correctly. Quest nfts are +NFTs(add-on)while characters are NFTs+(main). Many projects today have NFTs at the forefront, NFT +, while many others can achieve higher degrees of success having NFT+ and + NFT (soul-bound tokens, decentralized identity). “Dogs of BND which were nfts designed by German intelligence agency to identify solid web3 recruits for roles through making the NFT the treasure in solving their quests.’’ This benefits people through more than a financial transaction that we see in the nft marketplace today. + NFTs provide more value exchange between agents and less capital gains. It focuses on the journey of getting the nft, or having it represent yourself on chain, which is utility. Do something of value to a recruiter, creator etc., and earn a representation of that work. When applying this same concept to the NFT world we see today it represents internet locals matching your NFT vision, monetizes their passions and creates a unique value proposition to onboard users.

With this in place we create a sustainable market for the nft holder’s traders and investors.

But that will be all folks. Thank you for reading and I hope you have a wonderful day!

Sources:

https://mirror.xyz/1kx.eth/k5lbpB155Tz_pH7B-7vbtDTTRKrco3u_y5QYUX1YhZs

https://ia904708.us.archive.org/8/items/in.ernet.dli.2015.184650/2015.184650.The-Meeting-Of-East-And-West.pdf

https://www.wired.com/story/autonomous-worlds-aim-to-free-online-games-from-corporate-control/

https://miladymaker.net/

https://www.coindesk.com/web3/2023/06/28/this-free-to-mint-soulbound-nft-tracks-your-web3-work-history/

Present Ethereum (Feb 20th, 2023)

On May 19th, 2021, Transaction Fees hit an all-time high of $71.72. Imagine trying to send your friend $40, but having to pay $112 for the transaction to go through! These fees were a result of congestion on Ethereum, which we will get into further in the reading. The inability of the network to satisfy the enormous amount of users transacting and executing smart contracts led to many not being able to place their own transactions. This isn’t the first time the network has gotten clogged up from excessive use, and won’t be its last. As more projects, users, and data enter the world of Web3, how will the Ethereum network execute contracts and transactions efficiently to maintain low fees, and not overburden the network? If Ethereum is supposed to be a global state computer, how will it become global? In order to deal with congestion and therefore lower fees, they must increase network capacity (the number of transactions per block) or increase throughput (transactions per second). Ethereum must scale the network!

Increasing the number of transactions per block is an issue that has been debated by many participants, including those in the bitcoin community. Though you can increase the number of transactions held by a block by increasing the block size, this proposal can lead to centralization and security risks, as it will become more difficult over time for nodes to store the state* and history of the network. Therefore, other avenues must be found to increase transaction speed without increasing block capacity.

*state- the present moment of the value of everyone’s account balances, smart contract balances, and decentralized apps, before any new updates. The new state of the network is when blocks are added, thus the new state becomes the previous state+new blocks added.

The aforementioned problem detailed is one of the notions that deal with a concept called the blockchain trilemma. The trilemma proposes that a layer 1 blockchain can only achieve 2 out of 3 qualities at efficiency while sacrificing the impact of the other; these qualities are scalability, decentralization, and security. Let’s go more in-depth as to why one is usually* sacrificed.

*Worth keeping note, the trilemma is a proposal, not a fact set in stone.

To briefly explain the 3 concepts, first off is decentralization. Decentralization for Ethereum is the idea of many nodes around the world storing and running the EVM (Ethereum Virtual Machine) software. This results in no single point of failure as one node shutting down doesn’t result in the entire network going down. This decreases the probability of hacks, outages, and actors looking to control the entire network for self-interest. We also want to minimize the chances that the decentralized system will form communities that have a huge influence, such as in the case of Bitcoin mining pools. In other words, we don’t want actors in the network to say “if we can’t beat them [centralizing parties], join them”; we need the system to be as distributed as possible.

While decentralization focuses on the actors in the network, Security is the underlying system itself which allows for the network to run. This is where consensus models such as Proof of Work and Proof of Stake come in, as well as cryptography, gas fees, gas limits, block finality, and forking rules. Security protects the system from malicious spam attacks, forking, and 51% attacks.* Trusting in a trustless environment through verifying the data.*

Scalability is throughput i.e. increasing transactions per second. This can be achieved via each node having higher processing power (unlikely), or by the network itself being able to process more transactions than the nodes that execute transactions and preserve the state of the network. In other words, transaction throughput must be able to surpass what a node is capable of.

Maintaining all three into one-layer blockchain systems has been seen as difficult. Many blockchain systems we see today have had an issue with at least one of the 3.

Scalability is a problem for networks that prioritize security and decentralization. When there are thousands of nodes having to run and preserve the state of the network, and the security of the network is strong to prevent forks and other attacks, scalability suffers because of the amount of time it takes to verify, publish, and finalize a block. During times of congestion, the nodes within these monolithic systems cannot keep up with the demand, resulting in higher gas fees to preserve the security of the network. More on this issue will be explained later.

If a blockchain has scalability and is decentralized, it is said that the network is not secure, based on several assumptions. Assumptions include security attacks due to fast verification and consensus processes leading to forks and block reorganizations, fewer nodes needing to verify blocks to be a part of the blockchain, resulting in possible 51 percent attacks, and complications due to the difficulty for proposers and nodes to be in sync. These reasons also mean that the cost of running the network is low due to anybody being able to store the data, which can lead to attacks.

Finally, a blockchain being ***secure and scalable ***is the result of a few specialized nodes executing transactions and changing states, similar to what centralized services offer. Only a few nodes can incur the cost of running the network, increasing the chances of failure as the point of failure decreases. Because fewer nodes are running, security decreases due to the higher risk of a 51% attack.

The purpose of Ethereum is to promote decentralization while not allowing it to be compromised or attacked. As a result, decentralization and security are at the top of the trilemma’s priority list, leaving only one compromise: scalability. When transactions are happening faster than a node can verify them, gas fees increase so nodes can keep up, resulting in the outrageous fees shown earlier in 2021.

What is Gas, why is it needed and what is its relationship with Scalability?

TLDR: We need to increase transactions per second without having users pay the high cost. Nodes help maintain the network but are limited by their own computational resources; scaling goes as fast as a node can process it. During congestion, the number of transactions being done exceeds full node capabilities, so gas fees go up to make the statement equal.

The Ethereum Virtual Machine is the collective state of the smart contracts and accounts that are stored by nodes. Execution of contracts results in resources being used by the EVM as well as state changes that everyone in the network has to be in sync with. The block maker validating transactions/executions and the committee attesting that the block is valid must be compensated for. Thus, users have to pay the equivalent of the resources used and the validators, who are incentivized to run the network.

This is where gas comes in. Gas helps equate the cost of executing a contract or transaction with the expenses the virtual machine needs to run it. It is used to ensure all nodes are also being rewarded with some of the fees.* Gas fees allow all actors to participate and use it efficiently. *If gas fees ceased to exist, two things would happen to both users and nodes. A few parties could clog up the network by solely having their contracts executed, leading to centralization and scalability issues, i.e., not allowing all actors to participate. Gas mitigates this issue by paying the amount proportionally to your executions, so users are more efficient with how they use the EVM. In an odd scenario where a malicious actor has an infinite amount of money and decides to spam the EVM forever, there is a gas limit to ensure that the contract will stop execution once the gas limit is reached.

The transaction fee equals the sum of the base fee and the priority fee times the amount of gas used.

The base fee is the fee you will pay to place your transaction on a specific block. This base fee is calculated by the network based on the gas used in the previous block, which is a set standard of 15,000,000 gas. If the previous block had used less than 15,000,000 gas, then the next block's base fee will be lower. The base fee is used to estimate what should be paid to keep the network running smoothly. The priority fee is what will be paid to validators. Even though it "isn’t mandatory," the higher the priority fee, the earlier and quicker your transaction will be on a block.

*There are issues in the world of decentralized finance called "Maximum Extractable Value" that concern the relationship between transactions, priority fees, and validators. I highly recommend learning about this issue and the present/proposed solutions.

Regardless, if network scalability is low and a bunch of users transact on the network, transaction fees will increase. Base fees will increase to keep the network running, and priority fees will increase to get your transaction on a block. Increasing fees will lead to lower demand, relieving congestion on the network. Thus, as mentioned prior, because the processing power of nodes cannot keep up with the transactions, transaction fees will increase.

To recap everything so far:

Blockchains such as Eth and Bitcoin have developed strong consensus models and are decentralized, but they lack scalability as a result. They must increase the number of transactions per second without increasing block size, the computational power needed to verify, or transaction fees.

Layer 2

How do we make scalability possible such that transactions per second aren’t determined by the capability of the average full node?

One solution suggested was sharding. Sharding is the proposal of splitting a blockchain into pieces called “shards” to relieve the pressure that nodes have by storing the entire chain. Instead of storing the entire chain, each set of nodes stores part of a chain with its own set of accounts and balances. Thus, nodes will be responsible for the transactions on their shards and not all shards.

To quickly summarize, sharding conflicts with security due to the need for nodes to communicate with nodes on other shards. Ethereum validation through the execution client is fulfilled by all full nodes, but to reduce congestion, we let a few nodes validate their own shard and then read the block headers of other shards. How can other shards trust each other that the work being done is valid if they can’t see that transactional data? Also, would it be easier for possible attacks if attackers could single out a shard to disrupt, making 51% of attacks on a shard more likely? Scalability vs. Security Issue. As you can correctly conclude, it is difficult to introduce sharding into a network without compromising the security of the system.

Original sharding seems not to be the answer. However, there are other solutions. As proposed via the Ethereum rollup-centric roadmap,* Ethereum will switch from being this all-in-one blockchain to one that is really good at two things and efficient at helping layer 2s with the third (scalability)*

A layer 2 is a blockchain that is built on top of the main blockchain (layer 1). It can specialize in providing scalability and benefit from the security and decentralization of the layer 1 blockchain.

For simplicity, we will only discuss one type of layer 2 scaling solution: rollups. Particularly optimistic rollups, because their applications are already in use as opposed to zero-knowledge rollups, which are still in development. Optimistic rollups’ mission is to be really good at achieving scalability because they are solely focused on executing transactions, with the security occurring on a layer 1 chain. As Vitalik mentions, “Ethereum will help layer 2 with scaling data and non-scalable computation so layer 2 can scale computation.”

Optimistic rollups achieve scalability through bundling, processing, and executing thousands of batches of transactions as one transaction to be sent to the Ethereum layer. These transactions are completed and finalized very quickly due to the idea that all transactions are executed by a single entity and are thought to be valid until proven otherwise. Hence the name “optimistic rollups,” because all the transactions being rolled together for execution are thought to be correct.

Optimistic roll-up companies have deployed smart contracts onto the base layer for their system to work. Instead of passing through as a single transaction that requires gas on layer 1, layer 2 processes the data through the contract after sequencer execution.** **Thus, thousands of transactions can be passed through as one smart contract execution with a gas price that gets split among the thousands of transactions.

The sequencer sends the transactional data to the Ethereum blockchain via smart contract execution

Users of the Ethereum network can interact with the contract to submit ETH and therefore use the layer 2 technology, lowering gas fees for themselves. Once doing so, your account and its balance will now be part of the layer 2 virtual machine for storage instead of Ethereum’s EVM. Execution occurs via the sequencer, with a larger reduced transaction fee, as the sequencer has the processing power to easily execute transactions without increasing gas fees, and the cost is split among thousands of users. As a result, while..

Transactions per second equal the capability of the sequencer; it takes a lot more transactions for the sequencer to be overburdened.

Even so, we can see several problems that emerge. These problems listed below will be a general outline for the rest of this paper.

Why do we assume that the transactions executed are assumed to be correct?

If one powerful computer is facilitating the role of execution on the L2 blockchain, L2 state storage, and submitting the data to L1, how can we trust it?

If layer 2 blockchains have their own virtual machine for state storage, why does the transaction data need to be returned to layer 1?

Can we decrease gas fees even more?

How can nodes on L1 keep up with how fast the sequencer is creating blocks on L2?

If more data is being sent to Ethereum from layer 2, wouldn’t that make Ethereum even slower and increase storage requirements for full nodes?

All of these questions, believe it or not, are connected to one idea. Before this idea is revealed, it will make much more sense once the first question is answered.

Transactions are assumed to be correct unless proven otherwise because of fraud proofs. These proofs allow anyone to determine whether or not the sequencer was acting dishonestly because the data is posted on the L1 blockchain for anyone to view. Because all the data can be inspected, it can also be challenged if something is wrong. If someone challenges the sequencer’s work and they succeed, the sequencer gets penalized, and vice versa.

So far, so good. But there is an issue. Consider the following scenario: you are a curious child who is always asking questions about the universe, but there is only one person in town who can answer any of your questions. This knowledgeable diety is constantly asked questions by various individuals in the town and later on is elected to some higher-ranking position. They clearly know more than everyone else, so ask yourself, what is stopping them from deciding to withhold information, answer questions, or lie to the citizens for their own benefit? Who could stop them from acting in their own self-interest and doing anything they please because everyone will take exactly what he or she says as fact? How can this person be kept in check?

Bringing it back to the optimistic rollups, because the sequencer has such a powerful role in the L2 ecosystem, if they decide to withhold some of the transaction data from being sent to L1, how can nodes know when to challenge? If the sequencer inserts malicious or invalid transactions but decides not to send them to the L1, they can possibly get away with it.

The problem is as follows: how can nodes be sure that when a new block is produced, all of the data in that block was actually published to the network without having to re-download and verify all of it themselves? The dilemma is that if a block producer doesn’t release all of the data in a block, no one could detect if there was a malicious transaction hidden within that block. Fraud proofs cannot challenge the sequencer if all data isn’t available.

This is the idea that is connected to all the questions, specifically adding to the ideas in question 1, which can help answer the rest of the questions. To keep the sequencer honest, they must make all data available. This is drum roll please…….

The Data Availability problem.

To solve this problem, we want Ethereum to prove that all data is available for L2s without burdening nodes with having to download all sequencer data. Ethereum won’t interpret the data itself because that is for layer 2s to do, but it must make sure the data is full and available for optimistic fraud-proofs at all times.

We do this through data availability sampling. Sampling the data allows nodes on L1 to ensure data for L2s is made available without having each node individually attest to all the data. This is similar to original sharding, and it is, but instead of dividing node transaction work, they will divide the L2 data into shards, i.e., data sharding.

But wait, isn’t the data being sent to a smart contract on the EVM as execution on L1? If rollups are just another transaction on an Ethereum block, how will data sharding work?

This is why, instead of sending data to the smart contract, Ethereum will provide Layer 2s with their own private space to place the data called “blobs.” This will allow for data sharding and even lower transaction fees on L2s. For all rollups, 99% of the gas cost came from smart contract execution. This is the answer to question 4. By not having rollups compete with users to be placed on the L1 blockchain, the cost of fees for L2 users drops even lower!

The data sampling process will go for layer 1 transaction data when the proposer-builder separation gets implemented, as well as for rollup data. The roll-up data sampling will go as follows: The sequencer will post the data. This data will be split into a certain number of kilobytes for blobs to hold (16Mb/64 blobs = 256kb of data per blob). A committee will be randomly chosen by the network for each blob, say 100 validators per blob. Each validator in their group will attest to the blob being made available by downloading it.

This is now to be propagated to the entire network. All nodes will now have to verify the block of L1 transactions and the data blobs. While the blocks are verified on the execution layer, the data blobs are verified on the consensus layer. Remember, Ethereum wants to provide the availability of data for L2s, not execute it for them — that’s what the sequencer is for. The full nodes will now randomly choose data within each of these blobs as a check. If 50% of the data in the blob they check is valid, they can prove that all the data in the blob is available. In the cases where 99% of the data is in the blob, i.e., 1% isn’t made available, thus making it more difficult for nodes to tell if it is full, we use math magic called erasure coding. Erasure coding allows nodes to reconstruct the entire blob while only having at least 50% of the data. There will be “KZG commitments” to properly erasure code the data blobs, which I honestly don’t understand. As Jon Charbonneau in “The Hitchhikers’ Guide to Ethereum” puts it, ‘KZG commitments prove to us that the original data was extended properly and commit to all of it.’

And that’s it! The Ethereum layer will be able to make data available for the sequencer to be challenged properly and decrease fees even further. One last thing to mention though….

Full nodes will now have higher storage requirements because they are storing both blocks and blobs. Those participating want to get paid, thus a new fee market for data blobs will also appear. However, because blobs will be used to challenge L2, after a certain time we can safely assume that the blobs won’t be needed. Thus, blob data that has to be stored on all nodes will expire after 30+ days. During that time, there can be challenges.

The idea of a separation between builders and validators is one that will be implemented on the L1 scale as well. Block production, therefore, will also be centralized on L1. Believe it or not, this is not a big deal. Centralizing a specific role in a network doesn’t make a big difference if the network actors in it are a massively decentralized community. The goal of having a highly decentralized validation system is to ensure that the centralized acts honestly will achieve the best of all worlds. Just like optimistic rollups, block builders on L1 will scale transactions, relieving pressure on nodes to store data, while the nodes keep a check on the builders by validating that the data sent is full and correct. We need to make sure that this centralized entity is checked in a way that doesn’t require downloading all transaction data and executing it, as this would be very unsustainable.

***Remember ***that Ethereum and Bitcoin are secure but not scalable because every full node has to redownload and verify every single transaction in the block before it gets added. Thus, scalability can go as far as a full node’s processing power. Well, the way to solve scalability and thus the trilemma can be summarized here:

If block production is centralized and block validation is decentralized, it is a win-win. Throughput exceeds full node capabilities because they aren’t required to download and re-execute transactions.

Ethereum is working on specialized block builders that will allow for L1 scalability to go up. By having block builders do all the work and all nodes verify it without raising storage requirements through the beauty of math, the trilemma can be solved.

With this being the case, Ethereum in the endgame can possibly process 100,000 transactions and smart contracts per second, making it a global state computer.

And with that, I’m out. Thank you so much for reading if you’ve made it this far, and please comment on what you think! Check out the resources used if you want to learn more.