Our weekly crypto derivatives analytics report delves into macro events; the current state of crypto and trading signals from spot trading volume; and futures, options and perpetual contracts.

In the past week, cryptocurrencies have surged as optimism grows that the US-China trade war may be easing. Following two days of talks, the US announced a 90-day tariff reduction on Chinese goods from 145% to 30%. ETH has been the biggest winner among the top 10 tokens, rising 40% in a week, though this has led to significant changes in implied volatility. BTC regained $100K for the first time since early February, with positive bias in OTM call skews, but its volatility market remains weak compared to ETH.

Please check out the report’s highlights.

Open interest for ETH surged by $900M over the past week, coinciding with a 40% rise in its spot price. This increase followed US-China trade negotiations, leading to a temporary 30% tariff reduction on Chinese goods. On May 12, 2025, after US Secretary of the Treasury Scott Bessent confirmed the agreement, open interest and perpetual trading volumes hit monthly highs of $9B and $23B, respectively. While open interest has stabilized, trading volumes declined after peaking during a brief pause in the crypto rally between May 11 and 12, 2025.

BTC volatility smiles suggest risk-on sentiment

Despite low short-term volatility expectations, BTC's short-tenor smiles indicate a continued risk-on sentiment, with a 5% skew toward out-of-the-money calls. Early in the week, put option volume surpassed $200M, outpacing $140M for calls, while open interest remains higher for puts than calls.

ETH has outperformed BTC for the second consecutive week, achieving a remarkable 59% return over the past month. This rally came with volatility: ETH's front-end volatility briefly doubled BTC’s 7-day tenor, leading to an inverted term structure. By Monday, ETH had pulled back some gains, causing front-end volatility to drop swiftly, a faster resolution than seen in previous inversions.

However, another rise in spot price toward $2.6K reignited volatility expectations. Open interest and options trading for ETH remain skewed toward calls, with volumes exceeding $150M on May 13, 2025, coinciding with a second price surge after a brief retreat on May 12, 2025.

Advanced

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Bybit X Block Scholes crypto derivatives analytics report (May 14, 2025): BTC volatility remains weak relative to ETH

Strategic Bitcoin reserve (SBR): Established on March 6, 2025, integrating Bitcoin into national reserves

Strategic Bitcoin reserve hopes are all the rage

On March 6, 2025, US President Donald Trump signed an executive order to establish the nation's first strategic Bitcoin reserve (SBR). This pivotal initiative positions Bitcoin alongside traditional reserves like gold and oil, signaling a significant endorsement of digital assets by the federal government. The SBR aims to centralize and manage all Bitcoin acquired through legal forfeitures, ensuring these assets serve as long-term strategic holdings rather than being sold off.

The creation of the SBR reflects Trump's broader vision of making the US a global leader in cryptocurrency. By integrating Bitcoin into national reserves, the administration seeks to harness the benefits of digital currencies while providing a hedge against economic turbulence. This strategic move has also spurred state-level policies, as seen in New Hampshire, where legislation was recently passed allowing state investments in cryptocurrencies and precious metals. Such developments indicate a growing trend of governmental adoption of digital assets, reinforcing the legitimacy of cryptocurrencies in the financial landscape.

Institutional accumulation drives down Bitcoin availability

In the private sector, institutional investors are increasingly accumulating Bitcoin. Companies like Strategy (formerly MicroStrategy) have expanded their holdings significantly, purchasing an additional 13,390 BTC for $1.34 billion, which brings their total to 568,840 BTC. Similarly, Metaplanet Inc. invested $126 million to acquire 1,241 BTC, surpassing the national Bitcoin holdings of some countries. This trend highlights a shift in Bitcoin ownership, with retail investors often taking profits during market rallies, leading to a redistribution of Bitcoin toward institutional entities.

As of May 13, 2025, over 19.86 million BTC have been mined. Wallets holding at least 100 BTC account for 60.84% of the total supply, while those with 10 or more BTC control 82.51%. With Bitcoin's price once again having surpassed $100K, it becomes evident that only about 17.5% of Bitcoin is held by wallets with less than $1 million in BTC. This concentration of ownership raises concerns about market accessibility for smaller investors.

The 10–100 BTC tier is primarily composed of small institutional investors, while wallets with over 100 BTC are predominantly held by institutions and liquidity providers. This oligarchic trend suggests that as cryptocurrency market caps rise, retail traders may feel pressured to sell during downturns, further consolidating wealth among larger holders. Notably, the increasing costs associated with 

, such as electricity and equipment, compel many miners — often retail investors — to sell portions of their holdings to cover expenses, exacerbating this trend.

Bitcoin concentration leaves smaller investors at disadvantage

The establishment of the SBR represents a critical milestone in the integration of digital assets into national financial strategies, positioning the US at the forefront of the cryptocurrency revolution. As of mid-May 2025, Bitcoin's price has fluctuated between $102K and $105K, maintaining an optimistic long-term outlook despite short-term volatility. Continued institutional interest, bolstered by supportive governmental policies, enhances the legitimacy and stability of Bitcoin as an asset class.

However, as smaller investors continue to sell during market rallies, larger wallets are increasingly accumulating supply, tightening their grip on the market. Currently, over 80% of Bitcoin's supply is held in wallets containing $1 million or more in BTC. This trend suggests that while individual portfolios may grow, retail investors could find themselves at a disadvantage in an increasingly concentrated market.

In conclusion, the strategic Bitcoin reserve and the surge in institutional investments signal a positive shift for Bitcoin's legitimacy and its role in the global financial system. However, the growing disparity in Bitcoin ownership underscores the need for retail investors to navigate the market carefully. As these dynamics evolve, awareness of trends in institutional accumulation and wealth concentration will be crucial for all participants in the cryptocurrency ecosystem.

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Bybit x Santiment social sentiment report: Bitcoin reserve hopes leave Bitcoin holdings more concentrated

The Smart Copy Mode is a simple-to-use copy trading feature on Bybit that lets you reap profits from the crypto market even without prior trading experience.

Trading cryptocurrencies can be a lucrative way to earn from the ever-volatile crypto market. However, most people shy away from it due to the intense 

Thankfully, the world of trading now has helpful tools that have simplified crypto trading and made it easier even for beginners to make money from price movements.

First launched as part of a major upgrade in early 2023, Smart Copy Mode offers a simplified way to follow experienced traders known as Master Traders and automatically mirror their strategies. Today, it's one of the easiest and most intuitive ways for anyone, even beginning traders, to tap into the expertise of top-performing traders on Bybit and earn profits.

In this article, we’ll explore how Bybit Smart Copy Mode works and how you can safely make profits as a 

Smart Copy Mode is a simple-to-use copy trading feature on Bybit that lets you reap profits from the crypto market even without prior trading experience.

 Smart Copy Mode is part of the three major upgrades to the Bybit Copy Trading platform 

As of 2025, it remains one of the simplest and safest ways for users to realize returns from automatically mimicking successful Master Traders on the platform.

The Smart Copy Mode requires only three steps to follow a 

 and start earning. All you’ll need to do is enter an investment amount (minimum 100 USDT), select a Bybit account to transfer the funds from and click the 

The entire process is optimized for ease and risk control, making it ideal for anyone looking to trade without micromanaging their positions.

Here are some key features of the Bybit Smart Copy Mode that make it easier to trade while minimizing risks:

Rather than blindly copying a Master Trader’s full position size, Smart Copy Mode calculates a ratio based on both your balance and the Master Trader’s, helping you manage exposure proportionally.

Case in point: Let’s say a Master Trader has 10 BTC in their account but they enter a long position with only 1 BTC. In typical copy trading, a Follower who has 1 BTC in their account will automatically copy the trade with the whole 1 BTC, which exposes their entire portfolio.

However, with the Smart Copy Mode, a ratio calculated based on the available balances in the Follower’s and the Master Trader’s accounts will be exposed for copy trading. In this case, if the ratio is calculated to be 10%, the Follower’s copy trade amount will be 0.1 BTC instead of their full balance of 1 BTC. 

This proportional sizing is especially useful for beginners who may not want to expose their entire portfolio to a single trade.

Another amazing feature of the Smart Copy Mode is the Bybit CopyGuard which is designed to limit losses by adding an extra layer of protection for Followers. While most Master Traders strive to consistently implement successful trading strategies, it’s not uncommon to find some trades that will incur losses.

In such instances as a copy trader, you will incur losses similar to the Master Trader. That’s where the Bybit CopyGuard feature comes in handy.

With CopyGuard turned on, all of the Follower’s trades are optimized in the sense that the entry will always be at an optimal price not worse than that of the Master Trader. If an optimal price is not attained, the trade won’t be copied. However, note that at the point of trade execution, 

 may occur, causing small price discrepancies. However, CopyGuard filters out major price differences that could lead to instant losses. 

To give Followers even greater control over their risk exposure, Bybit now offers a Trailing Stop feature within Smart Copy Mode.

This tool automatically adjusts your exit point based on your account’s highest recorded equity. You simply set a retracement percentage (e.g., 20%), and if your equity drops by that percentage from its peak, all positions will be closed, locking in profits and limiting potential losses. 

Let’s say your account equity fluctuates as follows: 500, 450, 600, 900, 800, 1,000, 800. With a 20% retracement rate, the trailing exit equity adjusts accordingly: 400, 400, 480, 720, 720, 800, 800. When your actual equity drops to 800, the trailing stop triggers and your copy trading positions are automatically closed. 

, the final equity upon exit may differ slightly from the calculated exit equity.

The Trailing Stop feature is especially useful for volatile markets, helping you secure gains without manually monitoring every trade.

Together, Bybit’s copy by ratio, CopyGuard and Trailing Stop features work together to ensure that Followers have an extra layer of protection against losses when engaging in copy trading. 

Smart Copy Mode vs. Advanced Copy Mode: Which is better?

 allow you to choose between the Smart Copy Mode or the Advanced Copy Mode. While both provide an avenue for you to successfully copy a Master Trader’s strategy, there are several differences between the two that may make you opt for one over another. They are:

From the above comparison, it’s highly recommended to go for the Smart Copy Mode if you are a beginner to crypto or copy trading since it provides you with loss-limiting features before you learn your way around the field. For advanced traders, you can go for the Bybit Advanced Copy Mode or stick to the Smart Copy Mode.

Smart Copy Mode has made it easier to realize gains from copy trading.

 Regardless of your status as a beginning or advanced trader, you can have the assurance of a safe trading experience even with margin trading as all the risks are mitigated for you through the Smart Copy Mode.

Compared to the Advanced Copy Mode, the copy by ratio, CopyGuard 

 features within Smart Copy Mode help limit losses through reduced risk exposure. The enhanced automated settings on Smart Copy Mode are sure ways to successfully copy Master Traders without fear of wiping out your account. So, 

Beginner

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Bybit Smart Copy Mode: The way to secure copy trading profits

Invest like a VC with just $20. Common Wealth (WLTH) opens access to early-stage crypto projects through a transparent, community-driven platform.

The traditional venture capitalist (VC) investing model is often elitist and out of reach for many retail investors. While this is particularly the case in the world of traditional finance (TradFi), access to promising early-stage crypto assets is also frequently reserved for larger entities, namely institutional investors and 

. When we hear about a wildly successful crypto project and its token, we often find that its early backers are well-known investment funds or cashed-up VCs. These early investors are the ones who benefit the most from the token’s meteoric rise on the market.

 chain that aims to democratize the way VC investment works in the crypto industry. By using a community-driven approach to sourcing and investing in promising projects, the Common Wealth platform reduces barriers to entry to VC activities. Smaller-scale retail investors, both casual and experienced, are the primary beneficiaries of Common Wealth's unique approach to crypto investment.

Common Wealth has partnered with a network of notable crypto investors who refer high-potential projects to the platform, where these projects are carefully evaluated and qualified to be included in the investment products available to the user community. The entire evaluation process is also driven by community governance procedures, making it transparent and secure. Thanks to Common Wealth, investing in high-potential early-stage crypto opportunities is now open to anyone — even investors who want to start with as little as $20.

 (WLTH) is a decentralized platform that allows anyone to become a crypto VC by using a vetting-based, democratized, community-driven approach to selecting promising cryptocurrency investment opportunities.

The core idea behind the project is to tear down barriers to entry for crypto investment, particularly concerning early-stage promising ventures. Common Wealth has partnered with a group of prominent, savvy crypto investors (referred to as “Oracles”) who refer high-potential crypto investment opportunities to the platform. All the referrals are based on projects or assets that at least one so-called Oracle has personally invested in. As of May 2025, the platform works with ten Oracles, all of whom are notable investors with solid track records and standing in the crypto investment world.

The platform's governance community scrutinizes each referred project via “Oracle Ask Me Anything” (AMA) sessions, proposal workshops and analytics. Community investors then vote to decide on the projects' final eligibility. Any Common Wealth user can invest in qualified projects for as little as $20.

There are two main types of investors on the platform: casual and community members. The former typically invest smaller amounts, and pay with fiat currency using credit or debit cards, greatly simplifying access to the selected projects for users without an affinity for cryptocurrency transactions. Casual investors are normally those who adopt a hands-off approach to crypto investing and tend to start with smaller investment amounts.

Members of the second group, community members, invest larger amounts, or actively participate in the decision-making process for project selection. They’re the core of the governance community on Common Wealth. These investors use cryptocurrency to invest, paying with the 

The Common Wealth project was launched in February 2024 on the Base Layer 2 chain. In May 2025, it debuted its native token, WLTH.

All investment opportunities offered on Common Wealth are in the form of funds that provide exposure to promising projects and assets. For instance, the platform’s Priceless Fund invests in 14 high-potential 

 startup projects, while the Alpha Fund is based on early-stage projects in the areas of artificial intelligence (AI), the 

 (RWAs), decentralized physical infrastructure networks (DePINs) and gaming.

Unlike traditional investment funds, Common Wealth funds are completely permissionless and noncustodial, operating through blockchain smart contracts. As such, no central entity can influence fund management, thus ensuring transparency and discouraging vested interests.

Some funds are based on contributions from the wider user community, and are typically capped funds. There are also perpetual funds, which are funded by the investor community that participates in on-platform governance.

Bundles are Common Wealth funds based on a dynamic mix of assets satisfying certain criteria, e.g., a specific crypto niche. The platform has launched three such bundled products: 

Since the bundles are dynamic, the top five assets may switch according to market sentiment. All allocations within the bundles are equally split between their five assets. For instance, if you invest $100 in a bundle, each of the five assets in it will be allocated $20 of your investment.

The Common Wealth platform charges three types of fees:

When you invest in a Common Wealth fund, you’re issued a 

 (Slice NFT) that denotes your share of capital in the fund. Slice NFTs are freely tradable on the market, investors can quickly access liquidity by selling their Slices. Since these NFTs are fractionalized, you can sell a part of your Slice or the whole of it, per your preference.

Distributed Autonomous Operating System (DAOS)

The Common Wealth Distributed Autonomous Operating System (DAOS) is based on a set of 

 that automate the entire workflow of the platform’s governance processes. Project considerations, analytics related to candidate projects, vote management and other functions related to decentralized governance are handled by the DAOS.

 (DAO) consists of a set of rules and an on-chain community, the Common Wealth DAOS is an entire permissionless system of interoperable autonomous nodes that automates and powers all the platform’s governance elements and procedures.

What is the Common Wealth crypto token (WLTH)?

 asset issued on the Base Layer 2 chain. The token has a wide range of functions on the platform. While investments in Common Wealth are based on the USDC stablecoin, all other key functionalities are enabled via WLTH. These include:

WLTH is a capped asset with a maximum supply of 1 billion. As of mid-May 2025, its total supply stands at around 984 million. The chart below shows the token's supply allocation shares and vesting periods upon its launch in May 2024.

As of May 16, 2025, the WLTH token is trading at $0.003877, which is 98.2% lower than its ATH of $0.2148 on Jul 22, 2024 and 82.8% higher than its ATL of $0.002121 on Apr 18, 2025.

Long-term price forecasts for WLTH are mostly bullish.DigitalCoinPrice 

 of $0.0129 in 2027 and $0.0192 in 2030, whileCoinCodex 

 at around $0.0042 in 2027 but rise to $0.014 in 2030.

VC investment in financial markets remains an exclusive club that isn’t easily accessible to everyday retail investors. In most cases, this applies to the crypto market as well. Common Wealth's value to the broader crypto community lies in designing a system that makes investment in promising web3 initiatives accessible to everyone. The platform's novel model creates an opportunity to involve millions of individuals in the VC game. This could lead to significant growth in overall web3-based VC funding, and positively affect the entire crypto investment landscape over the coming years. Finding a future star in the crypto market with as little as $20 has never been easier — thanks to Common Wealth and the VC tools it provides!

Intermediate

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Common Wealth (WLTH): Invest like a VC — without being one

Blockchain

Like Bitcoin, the main reason for the Ethereum scalability problem is the network protocol that each node in the network has to process each transaction.

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Like Bitcoin, the main reason for the Ethereum scalability problem is the network protocol that each node in the network has to process each transaction. Ethereum 1.x implements a slightly modified version of the proof-of-work (PoW) consensus mechanism. In 

, miners have to race to find the nonce to meet the target difficulty. Every node needs to verify that the miners’ work is valid and keep an accurate copy of the current network state. This greatly limits the transaction process capability and throughput of the Ethereum blockchain network. Currently, it can only process 12-15 

First used by Vitalik Buterin, the scalability trilemma is a concept in blockchain regarding its capability to address scalability, decentralization, and security, without compromising any of them. The trilemma claims that it is almost impossible to achieve all three properties in a blockchain system:

: This is a core tenet upon which Bitcoin and blockchain were created. Decentralization enables censorship-resistance and permits anyone to participate in a decentralized ecosystem without a central authority or intermediary.

: This refers to the integrity and immutability of the public ledger, and the ability to resist 

: This concerns the ability to handle a growing amount of transactions in the blockchain network. In order for the Ethereum blockchain to be the world computer as the inventor envisioned, it needs to match the transaction throughput of many centralized systems, like Amazon, Visa, or Mastercard.

The following diagram is an illustration of the scalability trilemma in the blockchain:

The key challenge of scalability is finding a way to achieve all three at the base layer. The design choices of Bitcoin and Ethereum favor decentralization and security, while making a sacrifice in scalability.

The Ethereum scalability solution is one of the most active topics in the Ethereum community. The following are a few areas of concern the community is trying to tackle for the 

Transaction processing and block creation time with PoW—how fast can the miners process all transactions and create a new block through mining?

Transaction finality – how soon can the decentralized network reach a consensus that a transaction has happened and can’t be reverted? Currently, it takes about six blocks with Bitcoin and 3-4 minutes with Ethereum for the network to consider a block is finalized in the main chain. Interested readers should check out Vitalik’s block for transaction settlement and block finality probability.

Solutions being implemented or proposed, fall into three categories: on-chain solution, offchain solution, and consensus mechanism protocols. There are some obvious or theoretical ones, like increasing block size or slicing one blockchain into many independent altcoin chains. Due to the nature of peer to peer, a traditional horizontal scaling approach may not work. Specific to the Ethereum network, some consideration was also given to stateful or stateless smart contracts contributing to scalability issues. We will go over high-level concepts of all those solutions, and then delve deeper into some of the promising ones.

This is similar to the vertical scaling approach. Some of the altcoins, like Bitcoin Cash, Ethereum Core, and so on, are implementing a larger block size to gain overall transaction performance. The theory behind this approach is that since PoW mining is the main bottleneck in the entire process, by increasing the block size we can have more transactions processed per mining. It may take a little bit longer to create a 

) for stash-based mining, but the average time to complete the mining may not get any worse, since most of the Ethereum clients cache the DAG anyway.

The following diagram illustrates how this technique works:

However, like vertical scaling, in general, this solution demands that network nodes have better computing capacity in order to process large-sized blocks. This may lead to a scenario where a network is concentrated into a few rich hands and, thus, may ultimately compromise decentralization and security, the main tenets of the blockchain.

However, there are a few issues with this option. One is security concerns. It is a common belief that the network is more secure if more network nodes participate in the transaction processing in the blockchain. With a wider distribution of altcoin chains, fewer nodes will operate on any given blockchain. This may make the blockchain less secure, since a smaller altcoin network may be more vulnerable to network attacks. Let us say, we have about 10,000 nodes on the larger network, it will require at least 5,001 nodes (or called 51%) to be compromised to launch an attack on the network. If we slice 10,000 nodes into 50 smaller chains, each chain comprises 200 nodes, and it only requires 101 nodes to take down any smaller chain, which is what we call a 1% attack problem. Another issue is cross-chain integration. Although there are some solutions for handling cross-blockchain integration, the overall complexity of integrating smaller chains and altcoins will increase drastically.

On-chain solutions, sometimes also called layer 1 solutions, are to look for solutions to address scalability and performance issues at the base layer of the Ethereum blockchain network. One such solution is sharding. Sharding is not a new concept as traditional RDBMS and new big data platforms have been using sharding as a way to improve scalability and performance for many years.

With the Ethereum network, the purpose of sharding is to group the network nodes, the blockchain, and global states into different shards, and each shard will reach a consensus on the shard-wide transaction state among those nodes within the group. At the conceptual level, this may not be much different from Plasma, the layer 2 side-chain approach, but the technical difficulty, implications, and network efforts are quite different.

To put it simply, Proof of Stake is one of the most popular consensus algorithms on blockchain networks. As opposed to PoW consensus, where miners are rewarded for solving cryptographic puzzles, in the PoS consensus algorithm, a pool of selected validators take turns proposing new blocks. The validator is chosen in a deterministic way, depending on its wealth, also defined as a stake. Anyone who deposits their coins as a stake can become a validator. The chance to participate may be proportional to the stakes they put in. Let’s say, Alice, Bob, Catherine, and David put in 40 Ether, 30 Ether, 20 Ether, and 10 Ether stakes to participate respectively; they will get a 40%, 30%, 20%, and 10% chance of being selected as the block creator.

The following is how it works in the PoS consensus mechanism. As shown in the following diagram, the blockchain keeps track of a set of validators, sometimes also called block creators or forgers. At any time, whenever new blocks need to be created, the blockchain randomly selects a validator. The selected validator verifies the transactions and proposes new blocks for all validators to agree on. New blocks are then voted on by all current validators. Voting power is based on the stake the validator puts in. Whoever proposes invalid transactions or blocks or votes maliciously, which means they intentionally compromise the integrity of the chain, may lose their stakes. For the creation of the block itself, the node does not receive a reward. Remuneration is paid for the transaction. Upon the new blocks being accepted, the block creator can collect the transaction fee as the reward for the work of creating new blocks. There are two basic possible node selection options:

PoS is considered more energy-efficient and environment-friendly compared with the PoW mechanism. It is also perceived as more secure too. It essentially reduces the threat of a 51% attack since malicious validators would need to accumulate more than 50% of the total stakes in order to take over the blockchain network. Such an algorithm is designed to discourage attackers from validating fake transactions because of the risk of losing a “collateral”.

Similar to PoW, total decentralization may not be fully possible in the PoS-based public blockchain. This is because a few wealthy nodes can monopolize the stakes in the network.  Those who put in more stakes can effectively control most of the voting and has more chances to generate a new block.  Both algorithms are subject to the social and economic issue that it makes the rich richer.

Similar to the rationales for an on-chain solution, the Ethereum community is also actively looking for off-chain solutions, sometimes called layer 2 solutions. One is a side-chain solution with Plasma. Instead of putting all transactions in the main chain, Plasma allows anyone to create side chains and bond side chains into the global blockchain. This is similar to the lighting network solution in Bitcoin.

Another one is a state channel solution with Raiden, similar to payment channels in Bitcoin. The hypothesis behind this approach is that many interparty transactions only need to be validated by the parties involved, and there is no need to have all transactions to be validated by the entire network.

One intuitive solution to improve scalability and throughput is to create many small chains. This may sound like a plausible solution, since it may suit business and social needs. Take ourselves for example, as customers or citizens, we buy fruit and vegetables from our local grocery, which might leverage one blockchain to ensure traceability and food safety through the entire supply chain of fresh produce.

At the end of your shopping, you may pay the grocery directly through a P2P payment blockchain. When you apply your mortgage or business loan, you might be able to get your mortgage and loan approved through the mortgage blockchain, and so on. We are more likely to meet all these vertical chains or private chains before we see a gigantic global chain.

However, it creates cross-chain integration and security enforcement issues. This is what Plasma tries to address. It was first proposed in August 2017 by Joseph Poon and Vitalik Buterin. The design idea is to offload transactions to many faster and less crowded side chains, also called Plasma chains. Similar to the state channel approach, a Plasma chain will periodically commit its transactions to the Ethereum root chain.

Security and integrity will be enforced through the root chain. If any suspicion of fraud is detected in the plasma chains, the transactions will be rolled back and Plasma users can exit the plasma chain and move out to the root chain.

The following diagram shows what a Plasma network may look like:

Each plasma chain is a blockchain on its own. They are bonded with an Ethereum root chain through a smart contract. The smart contract essentially connects an entire child chain to the root chain, acting as a bridge. Anyone can create a plasma chain, and write a smart contract binding the plasma chain to the root chain.

As the following diagram shows, at each period, the block headers of each block of the plasma chains are submitted to the root chain and recorded in the blocks of the root chain.

Transactions in the plasma chains will stay at each plasma chain. The Merkle proof in the block headers will then be used to verify data on the child chain. This allows for tens and thousands of transactions to be processed in many plasma chains in parallel, and also leaves minimal and enough Merkle header information on the root chain to enforce security:

The root chain will play an arbitrator role, somewhat similar to the federal court system in the United States, where the root chain is the supreme court and the plasma chains are the circuit courts, or the district courts. In the federal court system, once the federal district court has decided a case, the case can be appealed to the circuit court or supreme court for an arbitration.

When fraud occurs in a plasma chain, whether it is a double-spend across the chains or you cash out more than you have in all accounts, anyone can provide a fraud-proof to prove the transaction is invalid. If proven to the fraud transactions, the transaction will be rolled back.

Plasma users can exit the child plasma chain and transfer ethers back to the main chain. The original proposals introduce a single validator concept, as the operator for the plasma blockchain, to validate and add transactions to the blocks, and manage the state of the child blockchain.

The idea behind this approach is that security and integrity of the blockchain at the global level is enforced by the root chain, using either PoW or, most likely, a hybrid PoW and PoS consensus protocol. In the case where the validator of the plasma chain may hold the fund and commit fraudulent activities, anyone can provide a fraud-proof against the validator to the root chain.

Once proven to be fraudulent from the validator, the root chain will allow all accounts at the impacted plasma chain to move out to the root chain. This is called a 

scenario. In this case, individual accounts will be migrated to the root chain one by one, the invalid transaction will be rolled back, and the validator of the plasma chain will be penalized with the stake it puts in the smart contract. Depending on how many accounts need to be migrated, it may take a while to complete the mass exit.

Although it has been one of the most interesting and active topics in the Ethereum research community, there is no public release of a plasma implementation yet. Instead, a scaled-down version of the original proposal, also called a minimal viable plasma, or MVP, was proposed for a simple implementation, which includes a simplified security model and basic operations for exiting plasma chains.

One very interesting aspect of an MVP is the reintroduction of a UTXO model. One key difference in Ethereum is to move away from Bitcoin’s UTXO model to a more defined account model, where account balance is the state object maintained at the world state.

The Ethereum account model makes transaction verifications and money transfer simple, with the sacrifice of parallelism. This may not be a significant drawback, since all transactions need to be verified by all nodes. But with Plasma, as the root chain moves away from transaction processing to security enforcement and arbitration, it becomes important to be able to verify invalid transactions in parallel.

A tree structure of blockchains, hence the tree of UTXOs from all child chains, makes it easy to apply distributed parallel algorithms to verify fraud proofs and enforce security across all plasma chains.

The following diagram shows what the potential Plasma may be able to bring into the Ethereum blockchain network when a tree of Ethereum plasma child chains are bonded with the parent plasma chain, and are ultimately connected to, and secured through, the Ethereum root chain:

Massive scalability will be achieved through offloading expensive computations to the child chains and allow the root chain to provide the shared security and arbitration services to the blockchain at a global level. There are a few similar cross-chain interoperability solutions, like Cosmos network. Claimed to be the internet of blockchains, Cosmos network provides a hub-spoke integration architecture. Independent blockchains, as the zones or spokes, are attached to the main blockchain as the hub. Its purpose is to facilitate blockchain integration through the IBC (inter-blockchain communications) protocol.

Ethereum Blockchain Performance and Scalability

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Ethereum Blockchain Performance and Scalability

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