codex-research/evaluations/sidechains.md

Side chains

This document looks at the economics of running the Codex marketplace contracts on an Ethereum side chain. Both existing side chains and running a dedicated sidechain for Codex are considered. Existing Ethereum rollups seem to be too expensive by about a factor of 100 for our current storage proof scheme (without proof aggregation). We'd like to find out if using a side chain could sufficiently lower the transactions costs.

Existing side chains

First we'll take a look at Polygon PoS and Gnosis chain to determine the average gas costs for submitting a storage proof on these chains. Then we'll estimate what the operational costs are of running these chains and compare that against their revenue in gas fees. This is done to see whether there is any room for reducing prices should we want to run a dedicated side chain for Codex.

Gas prices

A rough approximation of average gas costs for submitting a Codex storage proof for these chains:

Side chain	Average proof costs	Potential profit
Polygon PoS	$0.0070250250	-$18.98
Gnosis chain	$0.0050178750	-$12.81

This table was created by eyeballing the gas cost and token price graphs for each chain over the past 6 months, and calculating the USD costs for a proof from that.

Potential profit (per month per TB) is calculated by assuming operational costs of $1.40 and revenue of $4.00 per TB per month, an average slot size of 10 GB, and an average of 1 proof per slot per day.

Throughput

A rough approximation of the maximum number of transactions that a chain can handle, and the maximum size of the storage network that it might support:

Side chain	Maximum TPS	Maximum storage
Polygon PoS	255	420 PB
Gnosis chain	156	257 PB

Maximum size of the storage network is calculated assuming an average 1 proof per 24 hours per slot, average slot size 10 GB, and average erasure coding rate of 1/2.

Decentralization

Polygon PoS has substantially less validators than Gnosis chain:

Side chain	Number of validators
Polygon PoS	100
Gnosis chain	200 000

Network costs

To get an idea of the actual costs for running a chain, we estimate the hardware costs needed to keep the network running. We take the cost of running a single validator and multiply this by the number of validators. This should give us an idea how much of the gas price is used to cover operational costs, and how much is profit. These are back of the envelope calculations using data from the past 6 months to get an idea of the order of magnitude, not meant to be very accurate:

Side chain	hardware costs	network fees	cost / revenue ratio
Polygon PoS	$28 000 / month	$840 000 / month	3%
Gnosis chain	$4 000 000 / month	$15 000 / month	26667%

While Polygon PoS seem to have a healthy margin for profit, the validators of the Gnosis chain are spending about 250x more on hardware costs than is covered by the network fees. This is mostly due to the large amount of validators, and seems to be compensated for by reserving tokens and using them for paying out validator rewards. Also, Polygon PoS has a utilization of about 90%, whereas Gnosis chain has a utilization of about 25%.

A custom side chain for Codex

Next, we'll look at ways in which we could reduce gas costs by deploying a dedicated side chain for Codex.

EVM opcode pricing

Ethereum transactions consist of EVM operations. Each operation is priced in amount of gas. Some operations are more expensive than others, mainly because they require more resources (cpu, storage) than others. Gas costs are also specifically engineered to withstand DoS attacks on validators.

Tweaking the gas prices of EVM opcodes does not seem to be the most viable path to lowering transaction costs, because it only determines how expensive operations are relative to one another, they don't determine the actual price. It is also difficult to oversee the security risks.

Gas pricing

The biggest factor that determines the actual costs of transactions is the gas price. The transaction costs is determined according to the following formula as specified by EIP-1559:

fee = units of gas used * (base fee + priority fee)

The base fee is calculated based on how full the latest blocks are. If they are above the target block size of 15 million gas, then the base fee increases. If they are below the target block size, then the base fee decreases. The base fee is burned when the transaction is included. The priority fee is set by the transaction sender, and goes to the validators. It is a mechanism for validators to prioritize transactions. It also acts as an incentive for validators to not produce empty blocks.

Both priority base fee and transaction fee go up when there is more demand (submitted transactions) than there is supply (maximum transactions per second). This is the main reason why transactions are as expensive as they are:

"No transaction fee mechanism, EIP-1559 or otherwise, is likely to substantially decrease average transaction fees; persistently high transaction fees is a scalability problem, not a mechanism design problem" -- Tim Roughgarden

The scalability problem

Ultimately high transaction costs is a scalability issue. And unfortunately there are no easy solutions for increasing the amount of transactions that the chain can handle. For instance, just increasing the block size introduces several issues. Increasing block size increases the amount of resources that validators need (cpu, memory, storage, bandwidth). This means that it becomes more expensive to run a validator, which leads to a decrease in the number of validators, and an increase in centralization. It also increases block time, because there is more time needed to dissemminate the block. And this actually decreases the capacity of the network in terms of transactions per second, which counters the positive effect that you get from increasing the block size.

Conclusion

The gas prices on existing side chains that we looked are not low enough for storage providers to turn a profit, as long as we haven't implemented proof aggregation yet.

From the costs analysis of Polygon PoS it seems feasible to launch a not-for-profit dedicated side chain for Codex that reduces transaction costs by about a factor of 10. This should be enough for storage providers to start making a very modest profit if they charge $4/TB/month. Polygon PoS achieves this by keeping a relatively low amount of validators, which is something to keep in mind when deploying a side chain for Codex. Also, as soon there are more transactions than fit in the blocks, and the chain is running at capacity, then the gas price will go up.

For the short term it seems viable to start with a dedicated side chain for Codex, while there is no high demand yet. This gives us time to work on reducing the number of transactions, for instance by aggregating storage proofs. In the beginning the number of transactions won't be sufficient to cover the costs of running validators, so some sponsoring of validators will be required to bootstrap the chain.

For the medium term we can consider to have multiple side chains depending on demand. If demand is reaching capacity of the existing side chain(s) then another side chain is started. This ensures that none of the side chains runs at full capacity, keeping the prices low. Because each side chain can be bridged to main net, funds can be moved from one side chain to the other. The obvious downside of this is fragmentation of the marketplace. However, the reason to add a side chain is because demand is high, so each fragment should have a healthy marketplace. Also, the Codex peer-to-peer network would not be fragmented, only the marketplace. Meaning that there is still a single content-addressable data space.

For the long term we should probably move to a blockchain that supports a higher number of transactions at a lower cost than is currently available.