Blockspace: The First Ordinal Commodity

Transcript

Good morning everyone. Um, so I'm Kobe. I'm the CEO and co-founder of a company called Gatka. We specialize in building high performance, low latency block production, block space allocation infrastructure. And today I would like to talk about blockspace. Um, a very new kind of commodity. And before we get into any of the specifics, um I would just like to paint a picture. So think about um Ethereum um some sort of DeFi pool and some arbitrage opportunity popping up and then two traders going for the exact same

opportunity. Um, trader one lands position one, trader two lands position two, and first trader captures $1 million, and second trader captures nothing. Opportunity is gone. Let's just keep that in mind. So, let's talk about block space. From my perspective, the simplest definition is something like um consensus verified compute capacity. And it's basically this raw resource that every transaction that gets executed on any kind of blockchain basically consumes. And um so anything that you can think about whether it's a

swap or a transfer or some sort of smart contract deployment, everything essentially consumes block space. Um and then also when you think about Ethereum you you kind of have this like 12 second slot times and that is um like a like a discrete production window of this resource every 12 seconds essentially. And then another thing that I like to think about as well is um depending on the core properties of the protocol that also very much determines um like what I call the grade of block space. Um so then just drawing some analogies with um traditional type of commodities you have

[snorts] um fungeible units. So in Ethereum that would be gas. So every piece of block space you consume depending how much you consume you consume a certain amount of gas. Then um you also again have this scheduled production window which I said before in Ethereum is 12 seconds. Um you have this sort of supply demand type of pricing right? So if you think about the base fee which is algorithmic depending on usage um across the blocks that fluctuates accordingly and then lastly um as I said as as well you have this idea of grades which is very much dependent on the core protocol properties. So thinking about Ethereum you know we pride ourselves in being the

most decentralized blockchain which sort of gives us a lot of um favorable properties. So for example, censorship resistance, fair access, livveness and so on so forth. And um I would actually claim that Ethereum is the or produces the highest grade of block space on a planet today just based on those specific properties. Um but then let's draw these analogies um to some of uh the traditional commodities. Um thinking about for example a barrel of oil when you have a production window and let's say you have um like a shipment of oil

being delivered whether you are the first barrel or the second barrel in the shipment that that doesn't really matter like the value as long as it's the same grade of oil you're paying the same thing uh no matter how much you consume right um but when you think about block space um like thinking back to the trader analogy the position can actually massively make a difference, right? And so I think this is just um very unique fundamental property that is that makes this new type of commod commodity very different.

Um so with that in mind I would claim that block space is the first and I will coin it here ordinal commodity. So a type of commodity where the value is not just determined by how much of that commodity you consume but also what's your position in the or what you consume in that specific production window. Um so you kind of have like these two dimensions so to speak. You have this cardinal dimension which is um how much you consume and then you have this ordinal dimension which is what position in that specific production window you consume.

Um and then where does this why does this matter or where does this ordinal component come from and essentially comes from the fact that you have this shared ledger or this shared state and everyone then interacts with this shared stage uh state um modifies it or reads from this shared state. So as an example you can have multiple transactions say interfacing with a unis swap pool. So position one might see a certain price which uh in this example is $100, right?

But then if you interact and modify that state, the next transaction might see a different price which would be $98 and so on and so forth. And so you just have this sort of evolving state that happens depending on what the interaction um with that state is. Um so now when you consume block space you're essentially not just paying or buying compute. Um what you're doing is you're buying compute and with that the right to uh execute across a specific type of reality or specific state of reality that might only exist at this specific point in time.

And um again this ordinal component comes really just from the fact that there's the shared m mutable state and this is not just specific to Ethereum this is generally specific to any stateful blockchain and um there might be different models that are not even EVM specific. So um let's say UTXO based models or object based models where there might be a separation of states and so there's less of an overlap but um whenever you access uh shared state and there's contention for a specific uh state then this type of ordinality just always emerges.

Um and then with that in mind you basically always have two markets as a result when you are pricing this commodity. So on one side you have this inclusion market and then on the other side you have this uh ordinal positioning market right and um as I said before the inclusion market is really like how much do I consume and then the positional ordinal market is like what type of state am I accessing and how much do I pay for that specific piece of state and then how how does that get implemented across various different types of blockchains. So on the Ethereum L1 this is almost very explicit. So you kind of have the base fee which is um

how much compute you consume and then you have priority fee/builder auctions and me auctions which determines what the price is for accessing specific type of state. Then you have roll-ups for example and um some roll-ups are very similar. For example, on base you have similar types of separations and markets. But then you also have something like arbitum for example where you have um this priority access lane and actually a specific different kind of mechanism which is ahead of time auction um which then determines how you access let's say priority feebased or priority block space and then even if you go further to things like base

rollup you actually start inheriting some of the the market structure that the L1 offers. Um then another thing I wanted to point out is that um there is generally also a bit of a gap where the protocol basically determines or causes this specific nature of um these type of markets being in every sort of um determining how much you pay for the for accessing block space. But then if you think about the core protocol, most core protocols don't have a really efficient way of pricing the ordinal component. In general, we would say probably pricing the cardinal component is somewhat

effective but not so much um the ordinal component. And this is also like specifically on Ethereum where like an entire industry has formed, right? If you think about PBS and the blocks production supply chain um so what are some of the implications of this so this has been talked about before but MEV is a structural thing it's not just this bug that can be solved right and there are different types of me and we all agree that some are toxic and we should find a way of making sure that those type that type of me is minimized but just because this notion or this concept of having this

shared layer of state that needs to be accessed and that there's going to be contention that just means fundamentally there will always be me and so it's something that has to be embraced versus saying hey how can we get rid of it then um the other thing I would u posit is that not necessarily block building only but there needs to be some specific um mechanism of how you resolve [snorts] contention and allocate block space um efficiently in order to price access to state efficiently. And so no matter what you do um as as soon as the market structure becomes more sophisticated and mature which is generally a function of

how much demand for block space there is which then professionalize things. um there needs to be more specific thought on um how do we actually design um the pricing mechanism for state access specifically and um then the third thing I wanted to say is that um in general when we when we have these realizations that there are analogies with other market structures so for example let's say there is a reason why blockspace is a type of commodity and so let's look at commodity markets and see how commodity gets priced and allocated and settled and cleared and let's just apply the same type of market structures to let's

say block space specifically. Um that doesn't really work because there is actually this fundamental property that's just different and hasn't really existed anywhere else. Um and so the systems and how we design a market structure needs to be purposebuilt and really needs to be thought about from the fundamentals itself. Um now one thing I wanted to say was um if you look ahead um obviously the reason why we are all in the room is because we believe that the demand for block space is going to increase significantly and um with deepening defy markets with the increase of payments via stable coins

real world assets all of the things that we all know um that just means that there's going to be more activity on chain which means that there are going to be specific type of applications that ideally also shares data access because um being composable is what creates like these really beautiful network effects. Um and so with that and with more activity then obviously there's going to be more contention right and so when we think about not just the problems that we have today we should also start thinking about if there is um going to be more activity and new types of use cases that are going to be um be on chain then when we are designing these market structures we actually have to

really keep this in mind as well. Um and then the other interesting thing that we should think about is um today when you think about inclusion of transaction or uh another way to frame it is um if a consumer of block space uh wants to use this new type of commodity uh most of the of the risk is basically put on the user. So if you are a user, you're swapping something on metam mask, right? You're like, okay, this recommendation is like x amount of gray and the likelihood that I'll land in the block is this percentage, right? There are all these recommendations. Then you

pick your gas fee or your priority fee, right? And then you might land in the block or not. And maybe you overpay or you underpay and you you create this like um not great user experience. And when you think about traditional markets, you you kind of want to outsource these kinds of complexities to more sophisticated parties, right? And so that just creates much better UX. And in the sequencing world, um we have talked about concepts like um like pre-confirmations for example. And there are a lot of nuances and there are some difficulties on how to [snorts] um actually implement them because again it is a form of blockbased futures and

commodity futures have existed for a long time but again because of this ordinal component you can't just really apply the same types of market structures that exist right so some possible way forwards could be having synthetic contracts for example for inclusion exposure because Again inclusion is mostly funible based on how much gas you consume but then some side of um physically settled contract for positioning itself for example. But again these are sort of I think very open questions and I think one mistake had always been that people have looked at it from a speculative perspective.

Hey, if we create these derivatives and these futures, this is actually something that is just going to create like a big like speculative market on top of this um this uh physically settled commodity. But actually, if we think about it from the perspective of lowering the risk and creating better UX, maybe that's a much better motivation actually to think about this. Um so I think the main point I guess I just wanted to leave everyone else uh with was that um when thinking about block space yes it is a new type of resource it's a new kind of commodity but it's not just that it's like a new kind of commodity as well. So it's the

first ordinal commodity where it's not just the amount of how much you consume that determines value but very much also the the order or the the the part of the production window that you access that determines value. Um thank you. [applause] So um I have a bit of time for questions just in case someone has [clears throat] any. Yeah. >> Yeah. Thanks, Kobe. Um, I [clears throat] was wondering if you have a view on if I'm later in the kind of in the order, if I have a later

position, do you think this is strictly worse than being in earlier positions or is there some kind of option value attached to it as the state kind of moves on? >> Yeah, that's a great question. So I think the the naive way of reasoning about it was always that um the first position is naturally the best. Um but that really depends on what the first position is doing, right? So if you access a specific piece of state that no one else has accessed, you might as well do it in the last position in the block and it will be equal to being the first as long as no one else touched it, right? But

obviously if you are the first position you kind of have dips on the entirety of state right and so that's generally why people think about the most cover coveted position but um there already today for example as a block builder we work with certain counterparties that um let's say have gated access let's say a pool that you can only swap through once unlocked right so for example we can easily give them first block access because generally they'll only access with their piece of like real estate on a blockchain that is um subject to them without really affecting everyone else.

Right. So to answer your your question, I think it depends on like what you're accessing really. Andrew. >> Yeah, I find it very um interesting and and uh a very good framework to think about the value of block building because in my mind um you know the if you think uh the days uh of uh priority gas auctions, okay, where um essentially the protocol had a way to price um uh order. So the may the more you pay the higher you are in the block. Uh but it was very crude. Uh and in particular

um the semantic was very limited. So if you were not where you wanted to be, you were going to be later and still waste gas because you try to revert. So uh I think another way to essentially kind of say the same here is that um the semantics of the participants preferences with respect to where they want to land in the block um are way you know as a the current system allows for a more nuanced uh yeah people to express preferences in a more nuanced way. For example either I'm top of the block or just don't put my transactions. Um and in this sense is the value of block buildings. Meaning it allows to to to um have those more complex preferences

account for them and build a block uh keeping that into account uh more than the crude PGA type of thing. >> Yeah. >> Yeah. >> So sorry more of a comment than a question I guess. >> Yeah. Absolutely agree. way more expressive and which is why I also think that um the I think the core protocol will never be able to just price it as effectively because it's not just um like access accessing the a position but accessing state and reasoning about it more holistically is quite complex. Yeah.

>> Yeah. That's it. Thank you. Thank [applause] you very much.