Blockspace Dynamics: The Macro and the Micro Views - TOKEN2049 Singapore 2023

also before before we start talking about crypto um so have you guys had coffee yet yeah so so imagine if uh the Starbucks doesn't have coffee being Hedges right they don't they don't hedge against the fluctuation of coffee being priced and when you when you get a latte from uh it it was five dollars and five minutes later it refreshes to seven dollars and you know afternoon goes to three dollars it's just back to twenty dollars again and imagine if you're on your uh way to Singapore you you look at airline tickets and the airline industry doesn't have a few Hedges and the ticket goes from 500 to the next hour to seven hundred dollars and it's just all these these fluctuations are passed on to the end users to you and this is this is the experience of using gas on crypto today and every second every minute the cost changes so why why is this relevant for for commodities for commodity Hedges and this is because block space is the most important is the commodity that's produced by these decentralized networks and the valid errors the miners or proof of whatever they spend resources to produce these blocks and every interactions on crypto uh doesn't matter how complex doesn't matter how far away they're from L1 ultimately has to consume block space to settle on chain so if if crypto it were to become a serious settlement layer for Global Commerce this is going to be the core commodity it is to be the core economic relations that people are going to think about so this Dynamic has been codified into the blockchain since the Genesis block of of Bitcoin right it used to be a very simple relationship where uh users submit transactions with a transaction fee attached miners go into the mempool grab a bunch of transactions grab them and try to append them to the blockchain so over time as uh more applications develop as more behaviors developed as more conferences happen the way that people produce blog space and through the way people consume blocks that evolve over time there are more specialized roles uh in involved in the production process of of block space they're the process become more segmented different roles start taking on different responsibilities and how people consume block space also has changed over time so some people interact lock space via centralized Solutions some people interact through L2 and some people are going to use much minimum people are going to interact with crypto through smart contract wallets through Paint Masters that handles the gas in our experiences on behalf of the end users so this is a very very uh important oh sorry I didn't uh anyways so this is a very very important trying to study because uh it has a profound like Rippling effect on the entire entire industry right it affects everyone um and these Trends on how these uh behaviors evolve we can identify the macro Trend and the micro Trend so the micro trend is determined by how how exactly is block space being allocated how transactions get through and what is the order of the transaction and who gets to determine that um and the macro Trend concerns with the overall supply and demand of log space so um it's important to know that not all block space are created equal right so when they're they're over the past few years there are tons of uh extremely over funded l1s that are just completely ghost out instead nobody use and when demand surges that people tend to use the same block space um so um these these and I think the previous panel has has uh brought up some very interesting points very good points on okay how the um the overall supply of the specific block space they're seeking uh a factor experiences when the demand searches so let's take a closer look at the the micro Trends on how um the the block space production process has changed over time and this is uh it used to be a very simple process so if it's just a first price auction and over over time and this this uh introduction of different specialized roles was much Catalyst by uh by Mev well so Mev has has been around for has existed for a very long time but the awareness didn't really developed until uh Phil's paper on uh PGA priority gas auction which led to a flash boss led to uh nav gas to Med boost to math shares uh and all the solver filler roles that uh in involved in the intent-based architecture so um this is uh the in the future there's going to be more specialized role getting introduced uh and this is going to be one of the most interesting part that involves uh how the block block building process is going to uh uh evolve so the direct consequence of that is um so every block the amount of moving the amount of priority gas priority fee paid is the and plus the block rewards these are the sum of the economic activities accrued on block space so with these different specialized role each responsible for a different uh different functions the economic split the the claim to to um to the total economic occurs on block space Also evolve over time so eigenfai did a very interesting study that showed about uh still 80 of the uh the active the economics is still captured by the proposal which makes sense because they're still ultimately the determinant of what's going to happen so um in the future with more uh application specific Searchers uh with um more like specialized uh connections between relays and and Builders uh with Sorcerer And Builder become even further concentrated integrated uh these these economics let's split are going to change as well and the split have a profound impact on the sort of the topology of the of the industry like how who's going to get more concentrated and um which part of the stack is going to get eaten alive so there are a lot of interesting study on this and a lot of very interesting proposals and I personally think this is the part where uh most of the most interesting brand Shares are happening so there's also a group called SMG uh has been actively researching like ways to make this economic split more uh equal more fair which is uh very interesting to to to study as well so um with these specialized roles involved in a block production process they create all these like sub markets right to guess so Builders they have their own bidding process they have their own sort of Market patterns involved so uh there's the the a very preliminary uh notion of a builder gas and so I guess as a single sort of concept to to income Encompass everything that's happening on block spaces is already obsolete notion right so uh with 4844 it introduces the the concept blob space which is priced differently and uh is aimed at reducing the the L1 cost for for Roll-Ups um and also a fact that's been known for a very long time is that okay so it's having gas as a single unit of account to price all the different resources uh on the the node consumes uh these are the compute bandwidth storage it's just not very efficient so the concept of a multi-dimensional 1559 has been proposed for a very long time although people haven't quite figured out what the ux is going to look like Solana has tried something like this but it's a very interesting paper uh tarun wrote uh several a couple years ago about how exactly um by pricing all these different sources separately is going to improve the gas efficiency of inclusion and another very interesting trend for gas and gas variance is that with the rise of pay masters services like Visa like Circle they're able to or even just like variants of depths they're able to support end users to pay gas with Native tokens um it is important to note that these gas is not going to go away and it's never going to be free right gasless transaction is not really free uh if you're not paying gas or paying through you know some other means like worse execution Etc so um now zooming out a little bit to look at the macro Trend the macro trend is much more straightforward is that okay uh there is finite amount of block space at each given time and people want it right people want it and that's why historically the the pattern of gas prices generally mean reverting with uh sporadic uh spikes and these spikes are generally not predictable because they're completely exogenous factors like oh uh nft summer D5 whatever and uh uh or like people try to get out of the position uh when when Lumina crashes so um this is a very typical pattern of uh of of a commodity Market um so what's interesting is that during these times of high gas fees at the previous pedal also talked had brought up very interesting points on okay how that gas experience how these congestions affect the different decisions of these apps to build on which part of the uh the stack and how they decide to pass this uh experiences to end users so um generally when fee is high people uh are just rushed to scale uh uh blockchain right so this is an internal topic since God like many many years ago um and there's always a mismatch between when demand surges versus the availability of amount of block space at the time and this is because demand they come fast they come fast and go fast but scaling scaling block space is incredibly slow so every time you know ethereum L1 gas is high uh the VCS they would invest tons of money into okay alternative l1s um and we've seen plenty of examples of uh of this uh and and this this mismatching speed is generally because of um the cyclic pattern of uh of applications and infrastructure right infrastructure takes a much longer time to build um so uh Union Square Venture wrote a pretty interesting article about three four or five years ago five out five years ago on the cycle between the application and infrastructure where the applications attracts more users and Spurs the need to build more scaling infrastructure which in turn is able to support more applications but surely as a result by the time that a lot of the middleware scaling solutions they catch up uh the the demand has already gone all right so so until very recently um uh the ethereums wrote math to scale from uh sharding to now roll ups is the anointed path to to to to scale um how and we see some like pretty interesting patterns on how Roll-Ups pass on the the gas experiences from L1 to what they pay on L1 to the end users on L2 through various means of like estimations so right now the rollouts pay collectively about uh 10 to 15 million a month on on L1 and uh um so a lot of a lot of Roll-Ups are looking at okay potential you know market-based Solutions or just various ways to or da layer to help reduce the operation costs of of uh of interacting with uh without one so um and what's what's interesting about about this path of scaling is that we're seeing more tools and more ability to scale to spin out roll-offs customize Roll-Ups or just like roll up as the services uh these helps the the the problem that we mentioned earlier about oh scaling blockchain um we respond to demand search is slow so if we go down this path we expect to see or that the mismatching timing will close uh over time as well and these these behaviors these these patterns have a very direct consequence on the economics of the production of block space production so for uh validators for proposers they spend resources to produce these blocks and it's getting more and more competitive uh each day um so even though previously we mentioned that about 80 of the Mev they go to uh these proposers but the cost of the of proposing block is not entirely correlated to the revenue that they get right so you have to spend uh Hardware costs you have to spend nodes you have to maintain good internet um not to mention that it's very difficult to differentiate one node operating company to the other so a lot of expenses are spent on marketing on business developments and it's the the business model is very similar to like a typical asset management firm where uh you spend you know uh all the uh manpower to try to get as as many people as many whales to come stake with you um so uh as more you know staking active is grows as more people are comfortable with like holding liquid sticking tokens rather than ethereum directly we see the general like per units per unit yield of staking uh going down which leads to um like uh protocols or or companies that have greater power or greater ability to achieve Network effects to concentrate and this is a known uh thing or we expect that for for quite some time so back to the coffee being and uh the the airline ticket example um so in in every major commodity Market in in that that matter in in Civilization there's a very robust hedging Market it's very very robust financial instruments for the producers of uh of these Commodities and the consumer of the Commodities so um I think sorry we think that uh block space is also a critical commodity for for uh if we were to build the future of uh of financial system on top of crypto right so what would a perfect hedging solution look like for the producers they would want to exchange their future Syrian Revenue they earn from staking into something fixed um and for the consumers which is anyone who's consuming gas uh to have a fixed gas experiences uh and to cancel out the floating risk so um I mean imagine if you uh use any depth and they just tell you oh we can just charge you three dollars per transaction for the rest of the month uh and that doesn't change until the next time they uh go through these uh hedging hedging markets so for uh for producers uh the the block uh proposing process is getting commoditizing very fast there's very little ability for one no operator to differentiate from another so uh this type of instrument that gives them predictability over their cash flow over the course of let's say a month or three months can help these companies uh better manage their expenses plan for expansion or firing people or um or decide okay which business line is uh working well for the time being what what is not and for end users uh for consumer of gas a hedging solution that fixed the gas price this this can be useful for exchanges uh this can be used for for pay masters that we mentioned to hedge against their exposure uh and imagine if there's a crazy NF team and and you're and you just have to be on chain at a time uh you're able to offset some of the gas costs by putting these hedging Solutions uh ahead of time and also for Roll-Ups uh the the high the crazy amount of the cost that they post on on L1 is able to partially offset using this type of instrument so this is what we're building and uh we're currently in beta with several uh Roll-Ups trading firms select Partners uh if this is uh interesting to you uh let me know thank you