The Future of Ethereum The Ethereum blockchain is undoubtedly the most powerful smart contract platform. Of the 100 tokens with the highest market capitalization, 96% are based on Ethereum. Of the 1,000 best tokens, 89% are on Ethereum.
Vitalik Buterin conceived the Ethereum blockchain in 2013. Other founders of Ethereum include Gavin Wood, Charles Hoskinson, Joseph Lubin and Anthony Di Iorio. In 2014, development started with crowdfunding, and the network went live on the 30th of July 2015.
Two major developments could take the process of Ether to new heights. Firstly, the introduction of a new algorithm called Proof of Stake. The second is the development of DeFi.
First, investors are very fond of Ethereum 2.0, which has reached TOP30 in terms of capitalization. On November 4, crypto investors had set aside 1.7 million ETH in deposit contracts opened byVitalik Buterin. By 2022, when Ethereum moves from the current proof-of-work protocol to the Proof-of-Stake protocol, its scalability, security, and sustainability will be greatly improved. According to the Coin Price Forecast, the value of Ethereum will rise in the first half of 2022, and the cost of ETH will almost reach $9,000. The average price of crypto currencies might reach $11,850 by the end of 2023 based on a number of public analyst targets.
Second, the development of DeFi, which stands for decentralized finance. DeFi is a service provider that provides loan services on Ethereum. For example, export only requires smart contracts. People can make high profits from similar services. When DeFi grows into an independent industry, not only the industry itself, but also the companies that hold ETHas collateral will grow. Its value could rise for the foreseeable future.
In this article, I mainly analyze the future development potential of Ethereum from the various technical improvements involved in Ethereum 2.0.
Technology in Progress
Many major changes are profoundly affecting the future landscape of Ethereum, including the aspects of L1 layer (EIP-1559, etc), L2 layer (Rollups) and the aspects of applications (DeFi、NFTs、DAOs, etc.). Therefore, I would like to analyze the future of Ethereum from the following factors.
Over the past years, in addition to BTC’s continued hold on the throne, DeFi has been a hot spot throughout the year. DeFi’s value growth for ETH has also made its network increasingly congested and transaction costs more “unaffordable” for Ethereum’s ecology. How to reduce ETHers has become an urgent issue. Except for solutions such as Layer 2, EIP-1559 has also attracted industry attention.
EIP-1559 is mainly used to solve the problem raised by Vitalik in 2019: In the current revenue structure of Ethereum miners, transaction fee revenue is close to half of the block reward, which may threaten the security of Ethereum. For now, EIP 1559 aims to improve the efficiency of the Ethereum fee market, handle surges more efficiently, and reduce high gas fees.
● Details of EIP-1559 and changes might bring
In the past, due to the impact of the first-price auction system of blockchain platforms such as Bitcoin, cost estimation became a problem, and bidders often paid a lot more. Furthermore, in response, the method adopted by EIP-1559 is to modify the auction system to a market exchange rate pricing system, that is, the fluctuation of the fee is linked to the block capacity.
In the face of surging transaction demand, EIP-1559 implements an elastic block size limiting mechanism that can help equalize the use of block space and make the gas fee increase between blocks more stable in the short term.
Under the previous gas fee pricing mechanism, miners were more likely to choose expensive transactions, resulting in transaction creators having to raise gas fees, forming a vicious circle. To this end, EIP-1559 attempts to split transaction fees into Base Fee and Priority Fee, incentivizing miners with Priority Fee, and destroying gas fees, which helps shift the dominance of transaction confirmation from miners to transaction creators, increasing the likelihood of cyber security to some extent.
Past models allowed users to pay transaction fees using any token, which could have affected the native token reserve status and currency premium. Thus, EIP-1559 stipulates that transactions must consume a specific amount of ETH, increasing the difficulty of economic abstraction.
● Reflections on EIP-1559
Ostensibly, as Ethereum trading volume surges, the destruction of the base fee reduces the liquidity of ETH, thereby increasing the value of a single ETH.
However, in the long run, EIP-1559 may be difficult to radically reduce the average fee, because the continuous high fee is essentially a problem of scalability rather than mechanism design.
Specifically, while the EIP-1559 proposal allows blocks to be appropriately increased to stabilize gas prices in the event of a surge in transaction demand, it does not inherently improve Ethereum’s scalability, since gas price fluctuations depend on transaction demand and available block supply, gas prices will still rise once transactions are overcrowded. Therefore, it cannot cure the problem of excessive gas fees.
Therefore, in essence, scaling is the way out for Ethereum.
The Merge Progress
The transition period from PoW to PoS is approaching. The consolidation of many significant
improvements to the agreement can bring the following benefits.
● Block time:
Merge can shorten the average block time of Ethereum. Under the current PoWmechanism, a block is produced on average every 13 seconds, and the actual block time varies considerably, under the PoS mechanism, a block is produced exactly every 12 seconds, unless a slot is missed due to the validator being offline or they do not commit the block instantly. In fact, this currently happens in less than 1% of slots. This means that the average block time on the network reduces by 1 second. A smart contract that assumes a specific average block time in the calculation will need to take this into account.
● Chain safety:
Once the merge upgrade goes live, the chain becomes more secure. This is because the Merge significantly inhibits validator chain reorganization – i.e. validators reorganize blocks or their internal transactions. This process is guaranteed by the following designs.
■ A safe head is a block that we would expect to be included in the chain of authority under normal network conditions. Assuming the network latency is less than 4 seconds, most validators are honest and there are no attacks on forked selections, and the safe head block will never have a single block. After merging, the execution layer’s APIs, such
as JSON RPC, will return the safe head by default when asking for the latest block. Under normal network conditions, the safe head and the real chain head are equivalent to each other (the safe head is only a few seconds behind). Therefore, the safe headis less likely to be restructured than the latest block of the PoW today.
■ A finalized block means that it is accepted as part of the chain of authority by more than 2/3 of the validators. If an attacker wants to create a conflicting block, it must burn at least 1/3 of the total pledge amount.
■ If you want to expose the true chain head of the PoS chain. There will be an unsafe (unsafe) tag added to the JSON RPC.
|Type of block||Consensusmechanism||JSONRPC||Conditions of reorganization|
|Head (block head) Proof||of Work||1atest||The likelihood is high; Must be used with caution|
|Proof of Stake||unsafe||The likelihood is high; Must be used with caution|
|Safe head||Proof of Stake||1atest||Possible but requires severe network latency or cyber attacks|
|Confirmed block||Proof of Work||N/A||Unlikely since it will take most of the hashpowerto dig a competition chain deeper than the confirmed block|
|Finalized block||Proof of Stake||finalized||Highly unlikely since it requires more than 2/3 of the validators to finalize a competition chainan at least 1/3 of the validators will be penalized|
● Lower energy consumption:
PoS eliminates the huge energy consumption and hardware waste associated with PoW. Ethereum’s energy use may be able to achieve a significant reduction. A small set of conventional commodity hardware will replace ASICs and GPUs that currently run Ethereum Consensus. These two effects will lead to a more energy-efficient, diverse, geographically distributed, and vulnerable pool of consensus participants.
● Pave the way for sharding:
Ethereum PoS lays the foundation for sharding, an equally important protocol change that will divide the chain into many concurrent threads. Sharding enhances L2 scaling efforts by increasing the block space available for data availability and settlement.
3. Layer 2 adoption — Solutions to Ethereum’s pressing needs In the face of increasingly high transaction volumes, we cannot sacrifice decentralization – the original intention of blockchain to expand capacity. Therefore, layer2 technology becomes the future of Ethereum.
Often referred to as an “off-chain” solution, Layer 2 technology’s primary purpose is to extend the performance of blockchains while retaining the decentralized benefits of distributed protocols. Inorder to build a good blockchain ecosystem, we need to do something in the architecture to balance the need for security, decentralization, and scalability. The Layer 2 platformand protocol process data in a way that reduces the burden on the base layer (root chain), enhancing the scalability of the entire blockchain network by shifting part of the data processing of the mainchain to Layer 2.
According to the consensus of developers, the Rollups design is the direction that Ethereum should strive for.
● Analysis of Rollups
There are currently two Rollups with different security models:
ZK Rollups run calculations off-chain and submit validity proof to the main chain.
By leveraging ZK Rollups, there is no delay when it is necessary to transfer funds to the mainchain, as the proof of validity has already verified the funds. Moreover, ZK Roll Ups are effective in preventing the impact of economic attacks.
But at the same time, ZK Roll Ups also have some drawbacks. Furthermore, limited to simple transfers and isn’t compatible with EVM (Ethereum Virtual Machine). Due to the computational intensity of the proven effectiveness of the technique, it is not worth adopting for some applications with less on-chain trading activity.
Transactions are assumed to be valid by default, and calculations are run through fraud-proof only when challenges are encountered.
On Optimistic Rollups, we can do anything we can on the Ethereum Layer 1 because Optimistic Roll Ups is compatible with EVM and Solidity. In addition, Optimistic Rollups is secure and decentralized because all transaction data is stored on the Layer 1 chain, but it’s worth mentioning that due to potentially fraudulent challenges, a long wait time for transaction confirmations is required on Optimistic Rollups.
However, regardless of the more or less flaws in these technologies, we should acknowledge that Vertical Scaling of Layer 2 is an effective means of solving the Ethereum dilemma. Most importantly, through the expansion of Layer 2, Ethereum is still able to embrace the spirit of centralization and build a community without rulers, but extremely effective and dynamic.
What does Layer 2 mean for the ETH? To quote Ethereum founder Vitalik Buterin in the AMA, “If we get 100x from shards and 100x from Plasma, both of these can basically provide 10,000x scalability gains.” This means that blockchains will be robust enough to handle most of the applications that people are trying to process. ”
The application of sharding technology to the blockchain is equivalent to decomposing all the pending tasks in the blockchain network (such as confirming transactions, running DApps, etc.). The nodes of the whole network are also grouped. And each group processes a decomposed taskat the same time. So that it is realized from the original single node to process all the tasks of the whole network to multiple groups of nodes processing in parallel at the same time.
But sharding technology is also flawed.
The first is that after shardingg. The development of communication mechanisms between different blocks will increase the complexity and difficulty of the blockchain. Secondly, after sharding, the hash rate of each block will decrease. As a result, making it easier to attack and reduce the network security of the blockchain.
However, what couldn’t be denied is the importance of data sharding. Data sharding could enhance Rollups that require large amounts of data, giving Rollups greater scalability (dYdX, Immutable X, Arbitrum, Optimism). Through data sharding technology, Ethereum is able to provide additional capacity for L2s. Graphically, Ethereum is not only capable of building enough high-rise buildings (L2 capacity) to accommodate 10,000 people, but also more tall buildings to accommodate millions of people.
At present, even if there are individual public chains that are more prominent than Ethereum in some aspects. Such as being cheaper and faster than L2, they cannot gain an advantage. Because there are also considerations for security and Ethereum’s ecological convenience and network effects. Currently, Ethereum is in an advantageous position in the competition. However, this does not mean that Ethereum has the privilege to sit back and relax on the throne of success. Since only when the technology of transaction speed, transaction fee, security, network effect and other aspects achieve a real breakthrough. In addition significant liquidity with a locked asset volume. Lastly, the number of transactions and users, ecological applications and other aspects truly lead the industry continuously. Let’s wait and see.
The Future of Ethereum
Written by Wanjing Zhang
Edited by Alexander Fleiss
References For The Future of Ethereum
https://newsletter.banklesshq.com/p/the-best-comparison-on-zkrollups? https://thedailygwei.substack.com/p/the-golden-age-of-ethereum-the-daily https://thedailygwei.substack.com/p/creating-a-symbiotic-relationship https://filecoin.io/zh-cn/blog/posts/filecoin-eip-1559/