The Ethereum network is under heavy strain. A combination of increased stablecoin usage, yield farming and a resurgence of ponzi schemes have pushed Ethereum’s capacity to the absolute limit.
This limit – the “block gas limit” – states the total amount of gas (a measure of computational complexity) that can be contained within any given block on Ethereum. The limit is set by miners on the network and can be adjusted at will (albeit within some bounds).
The higher the block gas limit, the more computation that can be carried out within each block and the greater the network’s capacity.
This begs the obvious question, “why not increase the block gas limit to infinity and allow the network to scale?”
Without going into the murky depths of blockchain scaling discussion, the key takeaway is that a larger block gas limit leads to larger block sizes (in terms of kilobytes). Larger block sizes take longer to propagate around the world and storing the Ethereum blockchain (particularly for the “archive nodes” that so many dapps and individuals rely on) becomes increasingly challenging. Worse still, if blocks begin to take longer to process than the average time it takes to discover new blocks, nodes will be unable to sync to the chain.
For this reason, keeping the block gas limit as low as is reasonably possible is essential for maximizing the network’s level of decentralization – a core principle of Ethereum (and one dismissed by countless “Ethereum killers” for its unsexy nuisance).
Despite this, the block gas limit has trended upwards over the years, increasing from 3 million to 12 million since the blockchain’s launch. This increase has been critical in ensuring that Ethereum can cater to its growing utility, however it is not without serious concern.
There are multiple stakeholders that take an interest in the block gas limit with incentives that balance the system in an equilibrium that has served Ethereum well over the years.
- First there are users who want to be able to use dapps at the lowest possible cost (low transaction fees).
- Then there are the dapps themselves that want to maximize their active user count.
- And finally there are miners who want to maximize transaction fees.
As blocks begin to fill (the block gas limit is reached), users compete to have their transaction included in a block. They compete by entering an auction-style fee market, where transactions with the highest paying fees are included first.
At some point, the cost of using Ethereum becomes too prohibitive and users who would have otherwise paid fees no longer participate.
Miners then, are incentivized to find a gas limit that optimizes for transaction fees; a function of user participation and the average fee willing to be paid. At the same time, they need to avoid bloating the blockchain to a point that creates the issues described earlier.
Misaligned Incentives (What We Need To Talk About)
If you have followed Ethereum at all over the last 2 years you’ll know that miners are working on borrowed time. After the full transition to Proof of Stake, miners will not be needed. At all.
Yet still, the total hash power (mining power) of Ethereum has increased by 20% since the start of the year – hardly surprising given that daily transaction fees paid to miners have increased from $40,000 to $650,000 over the same period.
Transaction fees now account for 20% of total mining revenue (transaction fees + block rewards) and that is likely to increase if the block gas limit were to increase further.
So what’s stopping miners from increasing the block gas limit?
Nothing, really. As Proof of Stake draws near, the future expected earnings for miners on Ethereum closes in on zero. At some point, the optimal strategy for miners will be to increase the block gas limit to levels that maximize earnings without any consideration for Ethereum’s future (of which they will not be a part).
The outcome, then, has the potential to get ugly as miners increase the block gas limit to maximize profits with zero regard for the impact it has on Ethereum’s future viability. Miners will simply exit with their profits and begin mining another chain once Proof of Stake arrives.
This scenario is not being talked about enough.
Rather than close on the idea that Ethereum is on an unstoppable collision course with catastrophe, there is plenty of room to expect that this won’t play out as described.
- Layer 2 solutions are coming. These solutions will take the load off of Ethereum’s layer 1 and make block gas limit increases far less damaging.
- Increasing mining revenue by increasing the block gas limit will become sub-optimal as the network finds itself in a state of over capacity (no additional fees to mine).
- Miners may have other vested interests in Ethereum. In one particular case, the decentralized exchange, MCDEX, was launched by a team of miners as a means of diversifying ahead of Proof of Stake.
- Demand for settling on Ethereum may fall over the coming years (unfortunately/fortunately, the probability of this borders zero).
The phased approach to Proof of Stake is likely to keep miners happy for the foreseeable future, particularly as transaction fees continue to rise. However, the consequences and misaligned incentives borne from the removal of miners could be more damaging than many are expecting.
Please add your thoughts on this subject in the comments below! There are no doubt other outcomes or factors that have not been considered in this article.