March 17, 2021
Ethereum + SKALE: Mutual Value Capture
SKALE and Ethereum create a powerful synergy and the success of the SKALE Network also means success for the Ethereum Network. In this post, I am going to dive into the technical relationship between the networks and tie together how this impacts fees, functionality, and value capture between networks.
The SKALE Network is built on both Ethereum and SKALE Nodes. A large portion of the SKALE Network operations, management, and administration happens via smart contracts that run on the Ethereum Mainnet. These contracts in turn manage and control the virtualized SKALE nodes and subnodes that facilitate the app-specific chains that make up SKALE’s elastic blockchain network. Additionally the SKL token is an ERC-777 and all staking, chain fees, slashing, and governance happens on the Ethereum Mainnet. This allows the SKALE Network to focus on supporting the scalability of Ethereum dApps. You could say that the SKALE Network is an Ethereum Orchestrated Blockchain Network.
Due to this intertwined dynamic, the two networks are able to mutually benefit not just at a feature level, but also from a decentralized fee generation and value capture perspective. When the Ethereum mainnet does work to support SKALE, Ethereum captures value in terms of fee generation. This interaction is unique not only as a new model of partnership but also as an innovative model of decentralized revenue sharing. Decentralized operators in one network are paid autonomously by devs, users, and decentralized operators of another network (very cool!).
SKALE helps Ethereum capture value and Ethereum clearly helps SKALE, not to mention the many integrations and points of synergy that are not obvious. In this post, I’ll describe the interaction model between the networks in terms of specific functions and then take a look at what this means in regards to network fees.
Four Ways Ethereum Captures Value from the SKALE Network
The SKALE network is closely tied into the Ethereum network – operating as an execution layer. Developers use the SKALE Network to run their own application specific Ethereum–compatible blockchain (SKALE Chain) – that is decentralized, fast, and low cost without compromising safety and security. SKALE does this by using a pooled validator model in conjunction with random selection and frequent rotation of virtualized subnodes, along with a security model that is deeply rooted in the Ethereum Network.
Here are four different ways SKALE creates new value capture for Ethereum and the resulting benefits to SKALE.
SKALE Chain Creation
When an application sets up a SKALE chain they send a request through the SKALE Manager smart contracts on the Ethereum Mainnet. The Ethereum mainnet works in conjunction with SKALE Nodes to randomly select a subset of nodes in the SKALE Network and then assign those resources to an application. When this happens, the chain sponsor – typically an application developer – has to pay the Ethereum Mainnet to securely perform the computation and maintain a record of the data. This generates fees for Etherum for each SKALE Chain created and also provides the SKALE Network with best in class security when setting up these chains.
You can view the SKALE Manager contracts that are live on Ethereum here.
SKL Token Functionality
The SKL token is a utility token that is used by the SKALE Network to provision and pay for SKALE Chains. The token is also used to reward validators for operating and maintaining the nodes that power the network and as the basis by which validators secure the nodes (by way of staking a certain number of tokens per node). Rewards for the validators occur as part of the monthly epoch and include an inflation amount that is calculated and included in the bounty that is paid out to validators (and to any delegators in turn). Delegation takes place in the form of delegators providing SKL tokens to validators in return for a portion of the validator rewards. The nodes also monitor each other’s operations and report on node performance. Slashing of token stakes can take place for poor or non-performance of nodes as well as for any malicious behavior. Lastly, SKL tokens will be used for on-chain voting, which will control all economic parameters of the SKALE Network.
All of these operations involving the SKL token have some connection and/or custodial relationship with the Ethereum mainnet. Validator, delegator, and sponsor stakes are all directly staked into Ethereum mainnet. These staking operations incur Ethereum fees, as many people have found out when staking / unstaking (fee reduction/gas optimization is in process!). Monthly inflation and validator reward calculations and payouts take place within SKALE smart contracts running on the mainnet – generating Ethereum fees. Delegator operations take place on the mainnet, as does slashing and other governance operations. In short, almost all token operations and staking take place within the Ethereum mainnet – secured by its integrity as a Layer 1. Further, it’s import to note that, these token operations support Ethereum by requiring a payment in the form of gas fees.
Node Rotation Within SKALE Chains
The SKALE Network uses a pooled set of validators in conjunction with random node selection and frequent node rotation as the basis for its Proof of Stake model that secures each SKALE Chain. This unique approach, in combination with significant validator staking and Ethereum-managed operation, forms the core of SKALE’s security model. Node rotation is supported by the validators and paid out of the rewards that validators receive from the network. As with the operations above, node rotation is initiated by SKALE smart contracts on the mainnet and the fees from the validators fund these ETH-based operations.
As a side note, node rotation is a complex task. There is more detail in the two-part blog series on virtualization and containerization (which can be here and here). SKALE does it using Linux snapshots, but because chains are still running and creating new blocks, some catchup steps are needed to fully sync the nodes. One way to look at it is similar to the way hockey players are substituted within a hockey game. Instead of timeouts, players are substituted on the fly with one player skating off and another skating on. The difference here, though, is that each new subnode is an exact clone of the subnode it is replacing.With each rotation a gas fee is required.
Interchain Messaging and Token Transfer
Another touchpoint between Ethereum and SKALE is moving assets between networks. Fees are incurred each time currency or assets are moved into a SKALE Chain from Ethereum and vice versa. These fees go to the mainnet (contracts on the mainnet use a form of deposit box or lockbox to manage this transfer). This provides a constant stream of “decentralized revenue” – revenue that accrues to miners and/or validators of the mainnet.
Using SKALE as an execution layer is a huge benefit for developers, end users, and Ethereum mainnet operators. Developers get access to their own decentralized Ethereum compatible blockchain with sub second finality and no gas fees once in the SKALE Network. Users get faster and cheaper interactions – on applications and protocols that might not be possible on the mainnet. Mainnet operations get increased capacity for Ethereum, while still benefiting from the fees incurred in operating the SKALE Network. More users and developers on SKALE mean more users and developers – and fees – on Ethereum.
There are clearly many ways the success of SKALE will increase the success of Ethereum. These are just a few we wanted to highlight.
SKALE as an Execution Layer vs as a Layer 1
Many people ask, given the considerable amount of Ethereum fees involved, why is SKALE building on Ethereum rather than building a separate Layer 1 blockchain. The response is relatively straight-forward and has three components.
- First, the SKALE core team and community is committed to the success of the Ethereum Ecosystem. We are part of the Ethereum community and are working hard to bring success and growth to Ethereum.
- Second, we think this is the absolute best business strategy as the Ethereum ecosystem is booming and the number of developers far outstrips any competing network. I believe that the future of Blockchain will be primarily in the arena of Ethereum compatibility and interoperability. It is a smart decision now, and in the years to come, to build in this ecosystem and commit to the success of Ethereum.
- Lastly, the SKALE Network is far better due to the tools, code, protocols, and standards in the Ethereum ecosystem. SKALE is truly standing on the shoulders of giants and are able to benefit from – and pay into – an amazing ecosystem. More on this below...
More SKALE + Ethereum Synergy
- SKALE’s execution model is fully compatible with the Ethereum Virtual Machine (EVM) making it so that smart contracts that run on the Ethereum mainnet can also run on the SKALE Network. Also, developers are spared learning a new contract language since the SKALE Network uses Solidity.
- Support for Ethereum developer tools extends beyond EVM and solidity. Developers are able to use the same tools they use when working on the Ethereum mainnet. These include connecting to the network via web3.js and web3.py, as well as use of Truffle and Remix. The SKALE Network supports all major Ethereum token standards including ETH, ERC20, ERC721, ERC777, Dai, and more. Interchain messaging, as well as deposit boxes and token clones, ensures the integrity and fidelity of token operations with the SKALE Network.
- Major crypto wallets, auth providers, and browser plugins are also supported including: Fortmatic, Metamask, Portis, and Torus. These interface components are well-regarded in the community and used by thousands of developers.
As should be apparent SKALE gains much by its close ties and compatibility with Ethereum, all in service of providing high throughput Web3-based transaction processing for far-reaching and innovative dapps and protocols. Ultimately the goal of the SKALE Network is to help bring Ethereum to billions of users.
We truly believe there is an amazing synergy between SKALE and Ethereum. Helping developers and growing the community of users and applications is a foremost goal and benefit of ETH + SKALE. We are also excited about the decentralized fee share model that enables operators and users of both networks to transact and be remunerated for value in a fully autonomous and decentralized manner.
2021 is going to be the breakout year for growth and traction of decentralized applications and smart contracts. The SKALE community is working hard to catalyze and power this growth. Let’s goooo!