Encryption Scale Law: Exploring the Rise Limits of Decentralized Finance

Once again, I am amazed by the excellent design concept of Bitcoin.

The scale law in the field of large models has completed its lifecycle faster than Moore's Law for chips, driven by massive capital. If there are upper limits to scale effects in software and hardware, human lifespan, and even city-states, then the blockchain field must also have its specific rules. As a certain L2 enters the token issuance cycle, and Ethereum returns to the L1 competitive stage, we attempt to mimic the scale law and propose a version of encryption.

The Soft Power of Ethereum and the Hard Constraints of a Certain Platform

Starting with the analysis of the full node data scale. A full node represents a complete "backup" of the public chain. Owning cryptocurrency does not equate to owning the corresponding blockchain; only by downloading full node data and participating in the block generation process can one truly "own" the ledger of that encryption currency, while also adding a decentralized node to its network.

A certain platform's 1,500 nodes struggle to balance between decentralization and consensus efficiency, with its 400T full node data scale leading other public chains and L2s. In contrast, Ethereum excels in controlling data volume. Since the genesis block was born on July 30, 2015, the data volume of Ethereum full nodes has been only about 13 TB, far lower than its competitor's 400 TB. Bitcoin's data volume of 643.2 GB is indeed a work of art.

Satoshi Nakamoto strictly considered the rise curve of Moore's Law in the initial design, limiting the growth of Bitcoin data strictly below the hardware expansion curve. It has been proven that the argument for supporting large blocks of Bitcoin is difficult to establish, as Moore's Law is approaching the limits of its marginal effect.

Technological advancements in CPU, GPU, and storage fields are showing signs of slowing down. The law of scalability suggests that there may not be significant breakthroughs in the underlying hardware of public chains for a considerable period of time.

In the face of this challenge, Ethereum focuses on ecological optimization and reconstruction, viewing trillions of physical assets as a battleground. Whether it is imitating a certain technology company's self-built L2 or fully embracing a new architecture, it is not about pursuing "more extreme synergy between software and hardware", but about consolidating its own advantages.

A certain platform chooses to pursue extreme performance, and its ultra-large-scale nodes have in fact excluded individual participants. A 13 TB hard drive is still feasible, 400 TB is already a fanciful idea, while a 600 GB Bitcoin node can barely be satisfied with the efforts of storage manufacturers.

The key question is: what are the lower and upper limits of on-chain scale?

The Limits of the Token Economic System

Artificial intelligence has not yet combined with encryption currencies as expected, but this does not hinder the rise in the prices of certain project tokens. Blockchain and AI have become the focus of current U.S. government policy, while 5G and the metaverse are gradually declining.

When discussing the extreme indicators of the token economic system, we take Ethereum as the standard, considering that the limit of the public chain economic system is about 300 billion USD. This does not mean that Bitcoin is overvalued or that new public chains cannot surpass this value, but rather that the current market performance may be the most reasonable existence.

Introducing two concepts from the book "Scale":

1. Superlinear scale scaling: As the system scale expands, its output or benefits rise at a faster rate.

2. Sub-linear scale scaling: As the system scale expands, the growth rate of certain indicators is lower than linear proportion.

The price of Ethereum rose from $1 (2015) to $200 (2017), which is considered superlinear scaling, while the rise from $200 to the historical peak (2021) is typical sublinear scaling.

Everything has its limits; otherwise, the giant creatures in nature would rise infinitely, but the gravity of the Earth is a hard limit that is difficult to surpass.

Has DeFi reached its limit?

The scale limit of DeFi can be summarized using Ethereum. When examining yield, which is a core proposition of DeFi, we refer to three standards: a certain stablecoin's 20% APY, a certain stablecoin's 150% over-collateralization ratio, and a certain emerging project's 90-day moving average APY of 5.51%.

Assuming the yield capture capability of Decentralized Finance drops from 1.5 times to 5%, even with a calculation of 20%, Decentralized Finance may be close to its upper limit. It is worth noting that a large number of physical assets on-chain will only reduce the average yield of Decentralized Finance, in accordance with the sub-linear scaling law.

Currently, the on-chain economic system is based on a token economy model, with an actual scale limit of about $300 billion and a yield of around 5%. This does not represent the total market value or the upper and lower limits of a single token, but refers to the overall tradable scale.

In fact, it is impossible to sell 20 trillion dollars' worth of Bitcoin in one go, as even the US Treasury market could not withstand such a large-scale sell-off.

Conclusion

Looking at the history of blockchain development since Bitcoin, the differences between public chains have not yet been eliminated. Bitcoin has gradually separated from the on-chain ecosystem, and the failure of on-chain reputation and identity systems has led to the over-collateralization model becoming mainstream.

Whether it is stablecoins or tokenization of physical assets, they are both leveraged on-chain representations of off-chain assets, reflecting the higher credibility of off-chain assets. Under the current on-chain scale law, we may have reached the limits of the scale law or Moore's Law. In just 5 years since the explosion of Decentralized Finance and only 10 years since the birth of Ethereum, the development speed of this field is astonishing.