If Ethereum implements Danksharding, who will be the ultimate winner?

Original Title: 《If Ethereum's New Model Danksharding is Implemented, Which Projects Will Take Off?》

Written by: Vaish Puri

Translated by: Deep Tide TechFlow

It's time to discuss this new model Danksharding that could become Ethereum's savior.

The name Danksharding comes from its creator and Ethereum researcher: Dankrad Feist. The name change aims to signify a paradigm shift from traditional sharding systems to this one. We refer to Danksharding as the "scalability killer."

Has Ethereum Taken a Wrong Turn?

This is not to say that Vitalik and his team are wrong; the fact is: most L1s today tend to rapidly increase their level of centralization (which is the wrong way). This is a result of a deep flaw in the system known as miner extractable value (MEV). In fact, just last year, experts warned that it could potentially kill the entire network.

The existence of MEV is due to inefficiencies that allow DEX arbitrage bots to run ahead of users. By selling valuable block space through Priority-Gas-Auction, miners can profit by charging excessively high transaction fees. Miners can also reorder or censor transactions to profit from on-chain liquidations or arbitrage for themselves. This high fee for priority transactions poses a systemic risk to the entire Ethereum security infrastructure, and various solutions have been theorized, but most are off-chain solutions, which inevitably lead to more centralization. If you're wondering, maybe the PoS update will help? No. In fact, many believe it only exacerbated the problem, bringing more centralization.

But fear not! It is always darkest before the dawn, and I truly believe Ethereum has a better scalability roadmap. This all thanks to Danksharding, so let's dive deeper.

Solutions

Before understanding Danksharding, it's best to grasp the latest on traditional sharding. The design of Danksharding aims to circumvent MEV while maximizing decentralization and security. This is achieved through proposer-builder separation (PBS) and crList.

As mentioned earlier, in traditional blockchains, block proposers (i.e., miners) can pick which transactions to include in a block by looking at which transactions pay the highest fees. The PBS proposal solves this issue by splitting block proposers into two roles: builders and proposers. Builders represent a brand new category of roles, receiving a list of transactions from proposers, known as crList, which specifies which transactions builders must include. Builders can reorder transactions to maximize MEV without needing to censor anything, thanks to crList (making everything faster). This essentially optimizes the MEV incentive structure for miners while eliminating MEV barriers for users.

From the image above, we see that due to Danksharding, execution blocks and shard blocks are now built together, resulting in all validation data being completed by Rollup. This means shard block confirmations have no delays, data replication does not occur, and shard block confirmations do not need to be tracked; L1 can see the data immediately. With no separate transaction shards, the Ethereum mainnet itself becomes a unified settlement and data availability layer, potentially increasing throughput by about 6400 times (Gas fees will also decrease).

But wait: Danksharding will lead to a closer integration between execution chains and shards, allowing for simpler Rollup designs (which is good for developers). Now ZK-Rollup and L1 can synchronize (e.g., confirmed in the same block), opening up many possibilities, such as: the Ethereum execution layer can first implement Optimistic Rollup and then implement ZK-Rollup.

Who Will Ultimately Win

If Danksharding is indeed a major revolution like Rollups (I believe its significance will even surpass that of Rollups), then let's examine which projects will benefit from it.

In general, Rollup-centric projects will benefit the most from the implementation of Danksharding, with fees potentially decreasing by about 1000 times. For brevity, I will examine Arbitrum (plus Optimism), Chainlink, and a newcomer: LayerZero.

Arbitrum, Optimism & Chainlink

Arbitrum is an L2 Optimistic Rollup solution, currently with a TVL slightly above $2 billion, leading the Rollup sector. With Ethereum's future implementation of Danksharding, they may experience exponential growth. In fact, Uniswap originally intended to launch on Optimism, but delays in Optimism's launch led the community to turn to Arbitrum.

Notably, just as Arbitrum's TVL began to rise steadily, their GitHub development submission volume noticeably declined, while Optimism remained stable. This is strange; one would expect that as interest in a project grows, development volume would increase as well, but that does not seem to be the case for Arbitrum.

In early 2020, Ed Felten, co-founder of Offchain Labs, announced that Arbitrum planned to integrate with Chainlink's decentralized oracle network to reduce Gas costs (by 270 times) and increase throughput.

Additionally, the Chainlink-Arbitrum integration outsourced valuation to Chainlink nodes and allowed developers to feed Chainlink price information back into their dApps without rewriting any smart contracts. As Danksharding tightens the connection between execution layers and shards, we expect to see a surge in demand (especially in Rollup-centric environments).

Since Chainlink has already become the leader in the top oracle market and established partnerships with many projects, it can be said that they will see a significant spike in transaction volume/market cap by the end of this year. One major issue with Chainlink is that it is not truly decentralized (strictly speaking, in terms of governance), although this does not seem to affect the overall health of the system.

LayerZero

LayerZero is a "full-chain" interoperability protocol, with a mission to provide a "future-proof" immutable infrastructure where developers never have to change interfaces in their smart contracts.

They introduced "ultra-light nodes" (ULN), claiming to have all the security of light nodes along with the cost-effectiveness of intermediate chains. This is achieved by transmitting block headers on demand to oracles instead of sequentially.

At a high level, LayerZero is simply an on-chain endpoint using ULN. Data is transmitted between on-chain endpoints using oracles and relayers. LayerZero leverages the security features of oracles like Chainlink and adds another layer of security through the relayer system. The design of LayerZero endpoints is also lightweight enough to run on various L1s without passing most of the costs onto users.

While cross-chain transfers are not the only issue LayerZero solves, it indeed enables cross-chain lending, swapping, governance, and state sharing. With LayerZero, there is no longer a need to deal with protocols like SushiSwap that exist on 12 different chains. Instead, SushiSwap will have a codebase for all cross-chain pairs. LayerZero's full bridge Stargate creates conditions for a fully composable liquidity transfer protocol.

In short, LayerZero seamlessly connects all chains, whether EVM or non-EVM. Essentially, it creates a communication protocol between blockchains, but it is ubiquitous.

With the implementation of Danksharding, Ethereum's traffic and throughput are expected to rebound rapidly. Currently, the TVL of all cross-chain bridges exceeds $22 billion, with Avalanche leading the way.

The high demand brought by Ethereum's rapid global adoption will make the work of these cross-chain bridges quite cumbersome, which will hurt the speed of entering the blockchain. Inter-chain communication will be in high demand, and LayerZero's Stargate will directly fill this need.

Although LayerZero's development is still in relatively early stages, their progress is quite impressive. As we enter this new world of scalability, I look forward to seeing what the future holds for LayerZero.

Conclusion

Danksharding is not only a redesign of classic sharding but also a game-changing proposal that, once implemented, will mark a new era for blockchain. Danksharding will invigorate Rollup ecosystems like Arbitrum and oracles like Chainlink while creating an environment that fosters innovative projects like LayerZero. Although there is still much work to be done, the speed at which developers from Ethereum, Arbitrum, and LayerZero are showing progress makes me believe that we are not far from this great endpoint.