Scaling trade-offs

One thing that Cardano is criticised about is that it has lower transactions per second compared with other blockchains like Solana.

I just listened to this RealVisionCrypto video between Raoul Pal and Anatoly Yakovenko. At the 24 min mark there is this exchange:

Raoul:

How much activity does this create on chain at the protocol layer?

Anatoly:

Humans create very little activity. You can’t even tell.

Raoul:

I mean, if you are issuing a million NFTs, is it creating a lot of demand for Solana itself?

Anatoly:

So Solana does around 30 million transactions per day from applications alone. 90% of them come from oracle updates and market makers. So these are machine driven market making on order books. Adding 1 more million issuance per day is just around 1% or 2% more growth.

The amount of activity generated by humans is always going to be much lower than the machine driven robot activity where they are basically trying to extract value out of 1 penny transactions and stuff like that through arbitraging these markets.

So I really suspect that the scale that is being added to all of these chains for parallel processing for handling vast amounts of transactions across many different parts of state is mostly going to be eaten up by effectively machine driven automated arbitrage and that kind of thing. That doesn’t mean that the chain is going to be expensive or congested. It just means that there is going to be some lower bound floor price fee now that all these machines will take advantage of. Right now on Solana the fee for a transaction I think is 1/1000th of a penny. You as a person can pay 1/100th of a penny and not even care and you will be prioritised 10x more than any machine.

I found that discussion interesting because it is a clear admission from Anatoly that Solana has gone after the high frequency trading market and they have designed their business model with this in mind.

I believe that this is the wrong direction. We shouldn’t be trying to replicate the high frequency trading market from TradFi. That is a blight on the industry and it would be better to design systems so such HFT is not achievable, or profitable. This is one reason to argue for meaningful transaction fees even if the chain has enormous spare capacity. I don’t want HFT robots trading against me. Everyone hates them in TradFi too. Design them out!

I can see ways to do that with blockchain smart contracts. Meaningful fees is just a start. Smart contract trading transactions can also be forced in two steps so that you commit first with a hash and then reveal the transaction subsequently. This can prevent front-running. Also there can be time-locks placed before you can pull your transaction.

The point is that there are ways to design out these bad features that infest TradFi. We should be designing them out. Not trying to replicate the bad features of TradFi.

Lastly, I think it is really important for people to realise what they are trading off when they buy into the Solana argument of “faster and cheaper” transactions.

They are trading off “inclusive accountability” so that high frequency trading robots can trade against them to extract maximum value. Solana’s blockchain is going to be filled with meaningless 1 penny HFT transactions and will be so large that nobody will be able to run their own validator to check the ledger.

That is a very stupid trade-off in my mind!

With the Voltaire era upon us, let’s ensure we continue the careful, thoughtful, design method that IOG has followed.