The Power of Ethereum: A Blockchain Created by a Blockchain

The first SKALE Chain following the SKALE Network Denali upgrade is now live in production. This chain represents the first instance to our knowledge of a blockchain being created by another blockchain.

The SKALE Network is Ethereum Native, meaning certain critical network functions live on Ethereum. One of those functions is SKALE Chain creation, which is how the Ethereum Network actually created a blockchain on the SKALE Network. This is another testament to the power and functionality of Ethereum and solidity.

More simply put, the Ethereum mainnet can be coded to perform a number of operations. DeFi projects use solidity and Ethereum to code together financial products. For example a large group of users can contribute tokens to a pool which provides liquidity for exchange functionality. Thereby removing the need for a middle man or market makers to run an exchange. SKALE rather than removing a middle man for exchange functionality removes the middleman for blockchain management and provides pooled security, performance guarantees, and decentralized node management all in an automated fashion on Ethereum.

This process combines the strengths of the Ethereum Network with the strengths of the SKALE Network. Chain creation is an incredibly important function with huge security implications, that does not happen frequently. Chain creation happens once per dApp and then rotation of nodes happens monthly. This is a perfect use case where it makes sense to pay high gas fees to Ethereum. Once a chain is created the end users of the application have fast transactions with no fees on the SKALE Chain.

Let’s dive deeper into how this works. The first SKALE Chain was created and put into operation by a series of smart contracts on the Ethereum mainnet. It is a Proof of Stake chain that makes use of 12 nodes from the SKALE 149-node validator pool and provides developers with a high-throughput Ethereum-native scalability solution. The best part is that nodes and chains in the SKALE Network are operated and orchestrated by contracts running on Ethereum.

To some, this may seem like no mean feat but looking at it through the right lens demonstrates that it represents a huge milestone in Ethereum and Web3. The rapid evolution of tooling and the pace of automation are huge markers in how quickly technology can grow. The fact that smart contracts on Ethereum can orchestrate the creation and management of chains within a closely connected EVM-compatible network shows the level of complexity that Ethereum is capable of and why calling Ethereum the “world computer” starts to make sense.

This Ethereum-based orchestration also points out how scalability solutions like the SKALE Network can build even more value on top of the security properties and guarantees of Ethereum, which is one of the largest and most transacted blockchain networks in existence. The SKALE Network is built on both Ethereum blockchain 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 decentralized applications while tying its security model and orchestration into the Ethereum mainnet. (More on the deep connections between Ethereum and SKALE can be found in this post.)

Mechanistic Use of Ethereum

The low volume of transactions in the Ethereum network is often compared in a negative way to the vast amount of transactions that Visa manages. But technological progressions are typically not linear, they are exponential. Moore’s Law is an example which predicted that transistor count would double every 2 years due to shrinking transistor dimensions and other improvements. This same evolution is clear here as the Ethereum network is being used to manage its own scaling.

This mechanistic use of Ethereum shows what can be done with a series of interlinked contracts. Unlike other Layer 1 networks or so-called ETH-killers, the SKALE Network has much of its security and operational model tied to the Ethereum mainnet. Also, unlike Layer 1 competitors to Ethereum, the incentives of the SKALE Network are aligned with Ethereum. The Ethereum Network is paid in some capacity for almost every major SKALE Network function.

Over 25 SKALE smart contracts run on the Ethereum mainnet, controlling core network functions such as chain creation, validator registration, node selection, node rotation, staking, bounty payment, slashing, and more. This Ethereum-orchestrated control means that not only are actions and operations of the network completely transparent, they are also secured by Ethereum – one of the most active and tested decentralized networks in operation. As of the time of this writing there is over $2Billion of USD equivalent value staked into the SKALE security pool.

How it works

When an application sets up a SKALE chain they send a request through the SKALE smart contracts on the Ethereum Mainnet. (This set of SKALE contracts is called the SKALE Manager.) 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 – an application developer or DAO for a protocol, for example – has to pay the Ethereum mainnet to securely perform the computation and maintain a record of the data. This process means that Ethereum is used for each SKALE chain created which in turn 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.

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 SKALE Network. As with the operations above, node rotation is initiated by SKALE smart contracts on the Ethereum mainnet and the fees from the validators fund these Ethereum-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.

Next steps

We’ll see the first dApp go live on the Denali upgrade very soon. There will be a short period of testing and final performance and security quality assurance. Soon after we’ll start seeing more applications in Web 3, DeFi, NFT, gaming, and more start using the SKALE Network+Ethereum. Then we are off to the races. Web3 is right around the corner.