Quick and dirty analysis on viability of codex side chain

analysis/sidechain.md

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+Codex side chain
+================
+
+This document looks at the economic viability of running an Ethereum side chain
+that is specifically tailored for the Codex marketplace. Existing Ethereum
+[rollups][1] and side chains 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 running our own side chain could sufficiently lower the transactions
+costs.
+
+[1]: ../evaluations/rollups.md
+
+EVM opcode pricing
+------------------
+
+Ethereum transactions consist of EVM operations. Each operation is priced in
+amount of gas. Some operations [are more expensive than others][2], 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.
+
+[2]: https://notes.ethereum.org/@poemm/evm384-update5#Background-on-EVM-Gas-Costs
+
+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][3] as specified by [EIP-1559][4]:
+
+`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][5]
+
+[3]: https://ethereum.org/en/developers/docs/gas/#how-are-gas-fees-calculated
+[4]: https://eips.ethereum.org/EIPS/eip-1559
+[5]: http://timroughgarden.org/papers/eip1559.pdf
+
+
+The scalability problem
+-----------------------
+
+Ultimately high transaction costs is a scalability issue. And unfortunately
+there are [no easy solutions][6] 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.
+
+[6]: https://cryptonews.com/news/contrary-to-musk-s-idea-you-can-t-just-increase-block-size-s-10426.htm
+
+Validator costs
+---------------
+
+To get an idea of the actual costs for running a chain, we estimate the hardware
+costs associated with executing one gas. This should give us an idea of the
+lowest price at which it is still economically viable to run validators.
+
+Back of envelope calculations
+
+Pylogon PoS:
+- has about 100 validators
+- requires [amazon m5d.4xlarge][8]
+- which costs [$285][9] per month
+- gas limit is `30 000 0000`
+- in a month there are approximately `1 100 000 000` blocks
+- which means costs per gas are `100 * $285 / (30 000 0000 * 1 100 000 000) = $ 0.0000000000008`
+- while average gas price is `$0.00000002` (a factor of 25000 higher than the cost)
+
+Ethereum:
+- has about 1 000 000 validators
+- validator costs: [$20 / month][7]
+- gas limit is 15 000 0000 on average
+- in a month there are approximately 215 000 blocks
+- which means costs per gas are 1 000 000 * $20 / (15 000 000 * 215 000) = $ 0.000006
+- while current gas price is $0.000035 (a factor of 6 higher than the cost)
+
+TODO: check calculations
+
+It seems that Ethereum gas price is about 1 order of magnitude higher than the
+the actual costs for the resources required.
+
+The Polygon PoS gas price is about 4 orders of magnitude higher than the actual
+costs for the resources needed.
+
+[7]: https://www.launchnodes.com/ln_products/ethereum-validator-node-prysmatic-client/
+[8]: https://docs.polygon.technology/pos/how-to/validator/validator-system-requirements/#recommended-system-requirements
+[9]: https://instances.vantage.sh/aws/ec2/m5d.4xlarge
+
+Conclusion
+----------
+
+The main reason why transactions are too expensive on existing chains and
+rollups is because they are utilized to their capacity. This creates a higher
+demand than there is supply, increasing prices. The actual costs of running a
+chain seem to be ok for running the Codex marketplace, but we need to either
+increase capacity or limit the amount of transactions to ensure that transaction
+prices do not become too high.
+
+So it seem to be viable to start with a side chain for Codex, while there is no
+high demand yet. This gives us time to work on reducing the number of
+transactions (by aggregating proofs for instance), and increasing the
+transactions per second (by sharding for instance) as the Codex network becomes
+more popular.