Ethereum’s Major Problem: Fragmentation

From CoinShares Research Blog by Max Shannon

How did fragmentation come about why it is a hindrance to Ethereum today

Ethereum’s scalability was to be initially achieved through 64 shards, or mini blockchains, which would execute, store and process 1/64th of the blockchains transactions. However, the rollup-centric roadmap, formalised in  October 2020  by Vitalik Buterin, redefined Ethereum’s approach. This newer strategy prioritises rollups for scaling, with end-user transactions occurring on rollups rather than directly on Ethereum. These Layer 2 (L2) rollups are smart contracts that sit off Ethereum’s base-layer, executing and bundling transactions into a block that gets posted to the Layer 1 (L1) for security guarantees. Validators need to keep up-to-date with state changes on L2 rollups for the rollup-centric roadmap to work. Consequently, Ethereum’s focus has shifted to consensus and data availability, thus addressing scalability challenges by outsourcing execution to cheaper and faster chains. These developments have unintendedly fragmented liquidity and composability; hence, reducing the overall application, developer and user experience.

The Modular Landscape

The crypto landscape showcases varying approaches to addressing fragmentation, primarily concerning the consolidation or distribution of functions within blockchains — monolithic vs modular. CoinShares has written a more indepth blog on this  here , regarding the monolithic vs modular debate. But in essence, Solana serves as a prime example of a monolithic blockchain, where all functionalities are encapsulated within a single consensus layer. Ethereum, while also monolithic, adopts a more modular approach specifically in its rollup-centric roadmap.

Below we briefly and partly expand on how the major players are positioned currently in the Ethereum and L2 modular approach:

Fragmentation Problems with Modular Scaling

The L2s available today have asynchronous and proprietary sequencing. This means that the sequencer for each L2 processes and orders transactions in blocks in a centralised manner for their own asynchronous asset ledgers and smart contracts. This modular design leads to a fragmented global state, negatively affecting liquidity. Hence, liquidity has aggregated mostly on Ethereum’s base layer.

Social coordination is also significantly harder and less likely between teams not aligned in the same direction. This is evident in different standards, tokens and visions often resulting in various winner-takes-all developmental decisions. Block times and computational throughput, risk parameters and developer tooling, front ends and abstraction all differ, therefore, slowing down development to overcome these issues. Interoperability is still a problem, mainly fragmentation of liquidity and social coordination.

Different Solutions to Fix Fragmentation on L1 and L2

Benefits of Fixing Fragmentation

Addressing fragmentation promises shared liquidity, gas efficiency, bridge-less bridging, seamless app upgrades, and easier L2 bootstrapping and development. Enhanced user experiences and competition further drive the benefits, fostering network effects and resource optimisation.

Conclusion

The shift from a shard-based approach to a rollup-centric roadmap, spearheaded by Vitalik Buterin in 2020, marked a pivotal moment in Ethereum’s scalability solutions. This evolution, while innovative, introduced liquidity and composability fragmentation, impacting the user, developer, and application experiences within the Ethereum ecosystem.

The landscape of modular scaling solutions — ranging from Starkware’s fractal scaling to Arbitrum’s Orbit chains, Polygon’s Aggregation Layer, and the OP Superchain — highlights diverse strategies aimed at addressing these issues. Yet, these solutions, with their asynchronous sequencing and zero-sum proprietary technology stacks, exacerbate fragmentation, posing significant challenges to liquidity, interoperability, and social coordination.

The introduction of Based rollups and Shared Sequencers represent promising strides towards mitigating these challenges, offering a blueprint for a more cohesive, aligned and unified scaling landscape. By leveraging Ethereum’s economic security and network effects, these innovations aim to improve the developer and user experience, offering a glimpse into a future where the crypto landscape is characterised by enhanced interoperability and reduced complexity.

Addressing fragmentation is not merely a technical challenge but a step towards fostering a more integrated, efficient, and user-friendly crypto ecosystem. As the community continues to innovate and collaborate, the path forward lies in embracing these solutions, refining them, and ultimately, knitting together a blockchain landscape that is both powerful and accessible to all. This concerted effort will not only elevate Ethereum’s position as a leading blockchain platform but also catalyse the broader adoption and evolution of blockchain technology, paving the way for a more interconnected and resilient digital future.