A Deep Dive into the Ethereum Gas Limit Project (EGL)

Last week, we announced the EGL Genesis on CoinList where eligible users can stake ETH, get their pro rata share of 750M EGL tokens, and earn bonus EGL by voting their desired Gas Limit. EGL is a coordination token that holders use to vote on Ethereum's gas limit (“blocksize”) and incentivize mining pools to follow their collective decision.

This week, we sat down with Uri Klarman and Eleni Steinman from the EGL team to learn more about what they are building, use cases, traction, and their thoughts on the Ethereum ecosystem more broadly.

Let’s dive in:

1. To begin, what is the Ethereum Gas Limit Project and what problem does it solve?

Uri: The 2020 DeFi boom brought in significantly more users and attention into the Ethereum ecosystem. More users inevitably meant more transactions competing to be mined, and higher gas fees. Accompanying this congestion, was a resurface of the long-standing debate over what the “right” gas limit is — how big ETH blocks should be. This debate is about striking the ideal balance between:

• Lower gas limit, so anyone can run a node
• Higher gas limit, so anyone can afford transaction fees

Why should anyone care about the gas limit? Because it has significant implications for DeFi and ETH. Higher gas allows for more ETH-based trades, more LP fees, more lending interest - more usage. This may translate to revenue of hundreds of millions of USD per year for traders, LPs, and DAOs, without even accounting for the effect on user transaction fees. On the other hand, the security of ETH depends on its decentralization, and the ability for anyone to run a node.

The Ethereum Gas Limit (EGL) project proposes a solution that (i) helps reveal the “optimal” gas limit using a market, and (ii) a mechanism to actually affect the limit.

Before explaining how EGL works, it's important to understand who actually sets the gas limit. You see, unlike BTC where the blocksize is set in-protocol, in Ethereum it is the miners (mining pools, really) who set the gas limit with every block they mine - adjusting it slightly higher or lower than the previous block.

Miners setting the block size isn’t working out well because their incentives are not aligned with the community’s desires. Furthermore, mining pools find it very hard to gauge what the ETH community considers to be the “right” limit, with different opinions held by different core devs, and lack of any coordination.

EGL solves both of these problems in a unique and novel way. EGL is an on-chain coordination token that allows the ETH ecosystem to signal its collaborative desire and incentivizes mining pools to listen to the community. It does this by allowing EGL holders to vote on their desired gas limit, and if mining pools follow the vote, they can earn EGLs - providing the necessary incentive to listen to the community and gradually adjust the gas limit.

2. What is the Ethereum block gas limit, who controls it, and how is it determined?

Eleni: Short answer:

• Block gas limit: the maximum amount of gas that can be in a block. Every transaction uses up gas, so the gas limit limits how many transactions can be in a block
• Who controls it: Miners! Specifically mining pools. [It’s NOT the core devs or the community]
• How is it determined: The protocol defines that each block must be +/- 0.1% from the previous block

Long answer:

Ethereum doesn’t have a concept of block size like Bitcoin. Instead of limiting the number of transactions that can be included in a block based on size - or bytes - like BTC, ETH focuses on a concept called “gas” which reflects how computationally difficult a transaction is - the more complex, the more gas required. It might make more sense now why ETH is sometimes called the “world’s computer".

Miners put a bunch of transactions into a block and the maximum amount of “gas” that all these transactions can sum up to is that “gas limit”. So, you could say the block gas limit determines how many transactions Ethereum can process, and in turn, how expensive it is to get your transaction included in the next block (transaction fees).

Miners decide the gas limit with each block they mine. The protocol specifies in Ethereum’s yellow paper that a valid block is one that has a gas limit 0.1% higher or lower than the previous block. So every time a miner builds a block she essentially “votes” on the gas limit she wants.

Now here’s an often overlooked but very important nuance, it’s not really miners - all the 100,000s of people running servers - that builds the block and does this work. It’s the mining pools. It’s the Ethermine, SparkPool, BeePool, F2Pools of the world. They are the ones building the next block and just 4 pools control >60% of the hashpower. Put another way, just 4 people are determining the gas limit at the moment.

3. Different chains have taken different approaches to governing the amount of block space. Bitcoin gives control at the protocol level while Ethereum gives control to the miners. What are the pros and cons of these approaches, and what philosophical factors are at play here?

Eleni: Here’s some fun blockchain history.

The original Bitcoin whitepaper says nothing about block size. Satoshi added the infamous 1MB limit in secret (based on Hal Finney's feedback) to avoid "poisonous blocks" - extremely large blocks that intentionally congest the network. He further commented that this limit should be gradually increased in later versions - effectively giving the control over the blocksize to the core developers.

In 2014 - 2017 there was actually a huge fight over the blocksize. Some in the community thought the block size should stay at 1MB, while others thought it should be increased to its safest possible level - at the time 32MB. This fight got so contentious that the chain spilt: those that wanted 1MB implemented a contentious EIP and stayed with what we all know as BTC, and those that wanted bigger blocks departed and forked to what essentially become BCH or Bitcoin Cash. The debate over the block size caused the first major fork in Bitcoin! That should tell you how important this parameter is.

It should also tell you that this was all about philosophy. It wasn’t a question of “could” bitcoin handle 32MB, it was “should” it. And the community was divided, so it split.

Ethereum said “hey well if it's going to cause a fight, let’s give it to the miners.” And miners have, for the most part, done a good job of managing the gas limit. But as DeFi has expanded and blocks are increasingly full, the incentives that originally made miners good stewards of the gas limit have broken down. Congestion can be good for them! It means more fees today. EIP 1559 burns their base fees and exacerbates the congestion incentives problem. ETH2.0 means miners are out of a job, so why be long term focused? And ETH2.0 doesn’t solve the fact that block producers pick the gas size and they don’t have to listen to the community.

Core devs watch the protocol and are perhaps in the best position to decide what’s the optimal safe level. But what we saw in BTC is that core devs disagree (and we’re seeing the same in ETH) on what that right number is and there currently isn’t a good mechanism to discover that answer. Conversely, miners took up this important role and did a good job for a while - but as ETH has evolved, incentives have gotten messed up and now the community and the miners are at odds.

EGLs seeks to take the best of both worlds - allow core devs to signal what they think the right answer is, and re-align incentives for miners to listen to the community through decentralized voting.

4. Is there consensus in the Ethereum community on what the “right” gas limit should be? Why don’t the miners just listen to the community?

Uri: Core devs, dapps, client teams - everyone has a different opinion on what the “right” gas limit is and there’s no insight into what each core dev thinks. Those that rant loudest on Twitter don’t necessarily even reflect the majority opinion. Because there is no singular community answer, it's impossible for mining pools to listen to the community.

Additionally, users have their own opinions, taking into consideration their real world needs. Worst of all - there's no discussion, since it’s a moot point - the decision is made by the pools. One of EGL’s main goals is to encourage discussion in the community, because now it actually matters. This project has really kicked off excitement and created an economic incentive to research and stake what your desired gas limit is.

5. What is the inherent utility and use case of the EGL token?

Uri: EGL’s purpose stems from its usage in influencing the gas limit. And there is immense utility in such influence. As mentioned prior, the gas limit control’s ETH’s throughput and gas prices. All DAOs rely on a healthy layer-1 that allows users to seamlessly transact. If ETH is unusable, so too are the DAOs that rely on it. This is best seen with an example.  

During the month of June 2021, Uniswap did an average of $570 Million per day in trading volume. At a 0.3% fee for swapping, that’s $1.72M/day. Vitalik has mentioned that he thinks the gas limit could increase ~3x, meaning ETH could safely handle a gas limit of 45M. With that, Uniswap could do: ~1.71B in trading volume (.57B x 3) and $5.13M/day in fees (1.72 * 3).

Over the course of a year, that’s $1.872B in fees if the gas limit increased 3x.

Thus, affecting the gas limit could be worth ~$416B/year (~1.14M/day) to LP providers, and in turn, UNI holders. All that extra value would be passed back to the Ethereum community, as it should be. And that’s just one DAO in one day.

6. Are miners penalized if they choose not to go with a suggested gas limit?

Uri: Nope! This is a carrot only system. Miners never have to listen to EGL, but can choose to, in order to earn EGL rewards. If users are voting for an unsafe level, I wouldn’t expect miners to listen. And miners not listening is the signal to the community that the vote was not optimal.

7. How will you draw the attention and participation of the various stakeholders in the Ethereum community?

Uri: That’s a bit of a solved problem at this point.

The major stakeholders are:

1. Miners. We have strong ties with the mining community, pools, and even ETH2 staking pools, and have got buy-in to the idea months ago, to ensure they understand how to maximize their participation by following the EGL vote.
2. Core devs. At this point the most core devs are aware of EGL, and many of them have decided to participate, to *signal* what they think the gas limit should be, and help guide the ETH community.
3. Large capital stakeholders (decentralized like Uniswap LPs, or centralized like Pantera). The Ethereum Gas Limit has significant economic ramifications - we estimate the increase from 10M (2020) to 15M (2021) gas creates profits of $100M to $300M per year in additional DeFi trades, LP fees, loans origination and liquidations, not to mention saved fees. Large capital stakeholders have billions of dollars betting on the success of ETH and tokens on top of ETH, and therefore have a vested interest in setting the gas limit to the maximal *safe* level. We have already made many of these stakeholders (both centralized and decentralized) aware of EGL, and we expect news of the EGL launch to reach the remainder.
   

8. The boom in DeFi and NFTs has contributed to high gas fees that often makes transacting on Ethereum prohibitively expensive for many users. Some projects are choosing to sidestep Ethereum from the get-go and instead work with platforms built by Solana, Algorand, NEAR, and others. In 2020, for example, Compound moved to create its own chain and FTX chose Solana for Serum. How do you see this trend playing out in 2022, and what impact will ETH 2.0 have on addressing some of these issues?

Eleni: This is my personal opinion - Ethereum has a problem! It has a super strong community, lots of technical tooling, a brand name, but it might lose out to others that are eating away at its market share because fees make it unusable for the average user. In my opinion there is no silver bullet solution - we’re going to have to throw everything we have at scalability. Which should be a good thing! It’s a sign that this crazy idea of a world computer is working.

But to have layer-2s, side chains, and interoperability with other chains, Ethereum MUST have a healthy layer-1 that can act as a source of truth. If Ethereum can do this, then I can see the trend of users moving away from ETH slowing down. I don’t think people want to move, but will if ETH can’t meet their basic needs of processing transactions.

In terms of ETH2.0, it doesn’t solve this problem. PoS changes who produces a block, but it doesn’t change the fact that blocks are congested and layer-2s depend on a healthy layer-1 for them to work (they use layer-1 for their fraud proofs). And sharding creates “duplicate layer-1s” that can have their own throughputs but they still depend on a Beacon Chain that isn’t congested.

9. Given that ETH 2.0 will transition the network to a proof-of-stake model where miners cease to be a thing, how will EGL stay relevant? Would your model work the same with validators as it does with miners?

Uri: “The Merge” is the first step in transitioning ETH to PoS, confirming ETH blocks in the ETH2 consensus. This is huge for ETH, but does not mitigate the gas limit issue. Validators will now increase/decrease the gas limit, just like miners are currently doing. Furthermore, the burden to figure out the “right” gas limit will now shift from the centralized mining pools to (hopefully) more decentralized validator operators, increasing the need for a coordination tool such as EGL. Thus, ETH 2.0 does not solve this problem, it just moves it to a different set of block producers (validators).

10. What is the best way for the community to get involved with EGL?

Eleni: Join the Genesis to claim EGLs and vote! We also have an active Discord and Forum where folks can discuss their optimal gas limit, propose technical changes, manage the DAO, and more. EGL must be community-led to succeed and the core team is extremely focused on building and then releasing this project to the community on Day 1. It’s fully functional and its success will never depend on us. EGL will work if people use it and that’s up to EGL holders to go out and vote.

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