The Ethbull: A Guide to Ethereum’s Near Future
A detailed roadmap of what's to come in 2021 and Beyond
Hey DEFI TIMES community,
On Saturday, we had Alex von Frankenberg on the podcast, where we talked about the Bull Case for Bitcoin. It's a must-listen!
We covered the fundamentals of Bitcoin investing:
Why Bitcoin saw such a significant price increase after the March Crash
Why FIAT money is set to vanish
Gold vs. Bitcoin - which one is more sound?
Bitcoin is still by far the most established cryptocurrency. Today, we don't want to focus on Bitcoin but rather on his little brother: Ethereum!
Today is all about the bull case for ETH. In stark contrast to Bitcoin, Ethereum has a number of updates in the pipeline you definitely want to know about - trust me!
Are you an investor in ETH? If yes, you have to know where we are heading. In two years… ETH will be unrecognizable from its current state!
Now, let's go through each update to find out how the Ethereum ecosystem will change in the coming months and years!
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The Ethbull: The Bull Case for Ethereum
EIP-1599: Burning More ETH
Launch Date: 14 July (London hardfork)
Impact short term: Moderate
Impact long term: High
EIP-1559 is one of the most anticipated and most discussed Ethereum upgrades in 2021 - for good reasons! We will go through the core concepts quickly but if you want to read a more detailed description, check out our Ultimate Guide to EIP-1559!
Fee Mechanism Change: EIP-1559 will change the way we calculate transaction fees. A typical transaction fee will look like this: Fee = BASEFEE + Tip. The BASEFEE will greatly improve the Ethereum UX because users will always know THE EXACT transaction fee that is needed for the transaction to be included in the next block. That means if you make a transaction and pay the BASEFEE, your transaction is guaranteed to go through within seconds. Today, the fees are calculated based on an auction mechanism, which means that users make certain bids, and the highest bid will be included in the next block. The auction mechanism is totally inefficient and leads to many users overpaying. The tip in EIP-1559 is not really needed at first, but it becomes important when the network is too congested. Regular users will only need to pay the tip in times of high volatility.
Fee Burning: Under EIP-1559, the network will burn the BASEFEE. Every time someone sends a transaction and pays the BASEFEE, the fee will not go to miners, but it will be burned - ultimately benefiting the Ethereum community as a whole. By burning the BASEFEE, Ethereum can keep inflating ETH for security reasons without sacrificing the currency's scarcity. As long as the burned BASEFEE is equal to the amount of issuance, there is no inflation. If the burned BASEFEES are even greater than the issued ETH, we could even see a negative issuance, turning ETH into the hardest money on earth. The BASEFEE can also only be paid in ETH, strengthening ETH's status as money. Whenever you make a transaction, you need to hold ETH.
Doubling the Block Gas Limit: EIP-1559 will effectively double the block gas limit, where each block is targeted to be 50% full. If there is a sudden increase in transaction volume, a single block will be filled with more than 50% block space. After that, the BASEFEE will be increased. That's how we can achieve predictable gas fees.
Optimistic (Optimism) about Ethereum's Future
Launch Date: July (estimated)
Impact short term: Moderate
Impact long term: High
Next up is an upgrade that isn't worked on by Ethereum core developers but by an external team called Optimism. It's more like a "side project" smart developers have come up with. Optimism is working on "Optimistic Rollups," which we talked about a lot in this newsletter.
Optimistic Rollups (or rollups in general) are a core part of the Ethereum long-term roadmap. Vitalik Buterin suggested a Rollup Centric Ethereum Roadmap in the Ethereum Magicians Forum, where described the importance of rollups in the short and long run.
Vitalik claims that we could theoretically achieve 100,000 tx/s if we combine rollups with sharding:
[...] a rollup-centric roadmap could also imply a re-envisioning of eth2's long-term future: as a single high-security execution shard that everyone processes, plus a scalable data availability layer.
To see why this is the case, consider the following:
Today, Ethereum has ~15 TPS.
If everyone moves to rollups, we will soon have ~3000 TPS.
Once phase 1 comes along and rollups move to eth2 sharded chains for their data storage, we go up to a theoretical max of ~100000 TPS.
Eventually, phase 2 will come along, bringing eth2 sharded chains with native computations, which give us… ~1000-5000 TPS.
Vitalik proposes that we could only need one execution layer after sharding is implemented; all other shards would provide data storage.
Therefore, rollups should be crucial to achieving Ethereum's long-term vision - we strongly depend on them to ship.
I do believe that rollups will not lower gas fees in the immediate short term. Just after the launch in July, adoption will be slow at first. Most people overestimate the impact in the short term but underestimate rollup's effect on the Ethereum ecosystem in the long term.
One of the most prominent rollup implementations is Uniswap, which just launched its third version of the protocol (Uniswap v3). In addition to their launch on Ethereum, Uniswap v3 will also launch on Optimism fairly soon. Uniswap's network effect is one of the strongest in the industry, and we can expect it to bring many new users to Optimism. However, don't expect rollups to scale Ethereum immediately: People will need time to get used to it. Most users won't immediately migrate liquidity from Ethereum to the rollup.
Even though rollups launch in July, we can only expect them to positively impact the Ethereum ecosystem several months after. However, in the long run, they will be an essential part of Ethereum.
Launch Date: Q4 2021 - Q1 2022 (estimated)
Impact short term: Low
Impact long term: High
The Merger happens when the Ethereum PoW main chain will finally merge with the Beacon chain. It's the point when PoW will finally be history and Ethereum switches to PoS. A few months ago, Ethereum developers decided to solely focus on building the Merger to launch in 2021.
When it became clear that EIP-1559 would be implemented in July, miners were against it. They struck and didn't want to let EIP-1559 go through - that's when the Ethereum community realized that miners were a bug, not a feature.
After PoS successfully goes live, miners will be replaced by validators. Block validators will not rely on electricity to validate a block. Instead, validators lock up ETH in a smart contract, which will be slashed when they misbehave. We need a way to keep validators honest. They should be financially incentivized to secure the network. PoW keeps miners honest because when they misbehave, they lose their invested energy, which is expensive. Validators, on the other hand, are at risk of losing their funds. Both concepts work just as fine; however, PoS can establish instant finality, which PoW can never provide.
Also, by abolishing the need for electricity to mine blocks, Ethereum becomes completely environmentally neutral, whereas Bitcoin energy consumption rises every year.
Launch Date: Q3 2022 - Q4 2022 (estimated)
Impact short term: High
Impact long term: High
Sharding is one of the last pieces of the puzzle. It's the process of splitting the Ethereum blockchain into 64 different chains, also called shards. In computer science, sharding is the process of splitting a database horizontally in order to spread the load.
Sharding will make Ethereum scalable for the masses. It will make the network less congested and significantly increase the transactions per second.
However, even this upgrade doesn't get rolled out all at once. Sharding will require two steps:
Data Availability: At first, shard chains will just provide more data to the network. They won't process any transactions or smart contracts. However, when you combine shard chains with rollups, more data storage will be enough for the network to run as usual. Even though the shards will not handle code execution at first, rollups will do all the computation.
Code Execution: Code execution is the second step of this upgrade, which will allow shards to store and execute smart contracts and handle accounts. This step is still in the discussion because many Ethereum pioneers, including Vitalik Buterin, think that data storage could be sufficient to scale Ethereum for the masses. We expect rollups to reach mainstream adoption by this point. When everyone is transacting on rollups, why should they go back on the Ethereum main chain?
For more information on whether we need code execution, check out this insightful interview by Bankless with Vitalik Buterin:
Sharding will also have positive side effects. For example, everyone will be able to run a node on their smartphone. On the official Ethereum website, it says:
Sharding is a good way to scale if you want to keep things decentralized as the alternative is to scale by increasing the size of the existing database. This would make Ethereum less accessible for network validators because they'd need powerful and expensive computers. With shard chains, validators only need to store/run data for the shard they're validating, not the entire network (like what happens today). This speeds things up and drastically reduces hardware requirements.
Therefore, validators only have to store the data they really need. They can decide which parts of the network they want to secure. In my opinion, this is the key to true decentralization; it's the reason why Ethereum will be the most decentralized blockchain soon. Everyone will be able to run a node on a small computer - mind-blowing!
You all know it, but I'm going to say it anyway: Ethereum isn't only here to stay… it's here to completely CRUSH IT!
If you combine: EIP-1559, the Merger, sharding, and Optimistic Rollups, you get the best version of Ethereum. ETH 2.0 will be the first blockchain to successfully solve the blockchain trilemma.
It will be scalable, secure, and decentralized… Let that sink in!
Even though we cannot wait for this future to come, we need to be a little more patient.
However, already by next year… our daydreams could become a reality!
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.