Encryption Scale Law - Where is the hard cap of Decentralized Finance?

With the fervent push of massive capital, the scaling law in the field of large models completes its lifecycle faster than Moore's Law for chips.

If software, hardware, and even human lifespan, as well as cities and countries, have their upper limits on economies of scale, then the blockchain field must also have its own rules. As SVM L2 enters the token issuance cycle and Ethereum returns to the L1 battlefield, I attempt to mimic the law of scale and provide an encryption version.

## Ethereum soft cap, Solana's hard cap

We start from the scale of full node data.

Full nodes represent a complete "backup" of the public chain. Owning BTC/ETH/SOL does not equate to owning the corresponding blockchain. Only by downloading the full node data and participating in the block generation process can we say "I own the Bitcoin ledger." Correspondingly, Bitcoin has also added a decentralized node.

Solana's scale of 1500 nodes struggles to maintain a balance between decentralization and consensus efficiency, corresponding to a full node data scale of 400T, leading among a variety of public chains/L2.

Image description: The data scale of full nodes on public chains

Without comparing to Bitcoin, Ethereum has been excellent in controlling data volume. Since the genesis block was born on July 30, 2015, the data volume of Ethereum full nodes is only about 13 TB, far less than its "killer" Solana's 400 TB, while Bitcoin's 643.2 GB can be considered a work of art.

In the initial design, Satoshi Nakamoto strictly considered the growth curve of Moore's Law, allowing the data growth of Bitcoin to be strictly confined within the expansion curve of hardware. It must be said that the later supporters of large Bitcoin blocks could not stand firm, as Moore's Law has already reached the edge of marginal effects.

Image description: Comparison of Bitcoin node growth and Moore's Law
Image source: Bitcoin White Paper

In the CPU domain, Intel's 14 nm++ can be considered a family heirloom. In the GPU domain, Nvidia's 50 series has not "significantly surpassed" the 40 series, while advancements in the storage sector, under the Xtacking architecture of Yangtze Memory Technologies, indicate that the 3D NAND stacking scale has gradually reached its peak, with Samsung's 400 layers being the current expected high point in engineering.

In one sentence, the scale law means that there will no longer be significant advancements in the underlying hardware of public blockchains; it can even be said that this is not a short-term technical limitation, but rather that the current state will be maintained for a considerable amount of time.

In the face of difficulties, Ethereum is devoted to ecological optimization and reconstruction. Trillions of RWA assets are its battleground. Whether it is imitating Sony's self-built L2 or fully accelerating to embrace the Risc-V architecture, it is not about "finding the most extreme hardware-software synergy," but rather about sticking to its own advantages.

Solana chooses to pursue the ultimate speed, and beyond the current Firedancer and AlpenGlow, the extremely large node scale has effectively excluded individual participants. A 13 TB hard drive can still be assembled, while 400 TB is already a pipe dream. Theoretically, 600 GB of Bitcoin can also be satisfied under the daily emergency response conditions at Samsung, LG, and SK Hynix factories.

The only question is, where are the lower and upper limits of on-chain scalability?

## The Limits of the Token Economic System

AI has not embraced Crypto as expected, but this does not hinder the price surge of Virtuals. In fact, the combination of blockchain in one hand and AI in the other has become a companion of the current US government’s MAGA initiative. 5G and the metaverse are now outdated; the figures of the moment are still Sun Ge and stablecoins.

Let's briefly discuss the various extreme indicators of the token economic system. Bitcoin has a market value of 2 trillion dollars without any actual use, Ethereum is at 300 billion dollars, and Solana at 80 billion dollars. Taking Ethereum as the standard value, the extreme for the public chain economic system is 300 billion dollars.

This does not mean that Bitcoin is overvalued, nor does it imply that a new public chain cannot surpass this value. Rather, it is highly likely that the market performance of a public chain is the current optimal solution, that is, "we believe the current market performance is the most reasonable existence." Therefore, directly selecting this value is more effective than complicated calculations; if unnecessary, do not add entities.

We introduce two concepts from the book "Scale":

1. "Superlinear scaling" refers to a situation where the output or benefits do not increase proportionally as the scale of the system expands, but rather grow at a faster rate.
2. Sublinear scaling refers to the phenomenon where certain indicators (such as costs, resource consumption, maintenance requirements, etc.) grow at a rate lower than linear proportion when the system scale expands.

📷Image description: Ethereum price trend
Image source: BTC123

Understanding the two is not complicated. For example, Ethereum grew from 1 dollar (2015) to 200 dollars (2017), which belongs to super-linear scaling, taking about half the time compared to its growth from 200 to ATH (2021), the latter belonging to classic sub-linear scaling.

Everything has its limits; otherwise, blue whales, elephants, and North American redwoods would surpass themselves, but the Earth's gravity is a hard cap, difficult to surpass.

Continued drilling, has DeFi reached its limits?

The scale limit of #Decentralized Finance can be contained by Ethereum, turning to examine yield, which is also the core proposition of Decentralized Finance. The driving force of entropy increase lies in the extreme pursuit of yield. We provide three standards: UST's 20% APY, DAI's 150% over-collateralization ratio, and the current 90D MA APY of Ethena's sUSDe at 5.51%.

We can assume that the yield capture ability of Decentralized Finance has fallen from 1.5 times to 5%, and even when calculated at 20% of UST, Decentralized Finance has already reached its hard cap.

It is important to note that the trillion RWA assets on-chain will only reduce the average yield of Decentralized Finance and will not increase it. This is in line with the sub-linear scaling law, where extreme expansion of system scale does not lead to extreme increases in capital efficiency.

Please note that the 150% over-collateralization ratio of DAI has a market incentive: I can earn additional profits beyond the 150% collateralization ratio. Therefore, assuming it as a market benchmark, this is my personal opinion and may not necessarily be correct.

We can be a bit blunt; currently, the on-chain economic system, based on the token economy model, has an actual scale limit of 300 billion dollars, with a yield of around 5%. That said, this is not about the total market value or the upper or lower limits of a single token, but rather that the overall tradable scale is just this large.

In fact, you cannot sell 20 trillion Bitcoin; even U.S. Treasuries cannot handle such a large scale of sell-off.

## Conclusion

Looking at the history of blockchain development since Bitcoin, the discrete trend among public chains has not been bridged, Bitcoin is increasingly decoupled from the on-chain ecosystem, and the failures of on-chain reputation systems and identity systems have led to the over-collateralization model becoming mainstream.

Whether it's stablecoins or RWA, they are both leveraged on-chain representations of off-chain assets. Off-chain assets naturally have higher credibility. Under the current on-chain scaling laws, we may also be reaching the limits of scaling law or Moore's Law. Since DeFi Summer, it has only been 5 years, and since the birth of Ethereum, it has only been 10 years.