Ethereum
Note: Data in this section last updated August 26th, 2022
The most notable “Ethereum Killer” might be Ethereum itself.
The protocol has been working on its ETH 2.0 upgrade for some time now, and although the final version may not be released for years, Vitalik hopes that the eventual launch will solve the scalability trilemma once and for all.
(It’s worth noting that one of the most critical updates on the path to Ethereum 2.0 – known as the “The Merge” – is expected to be completed on September 15th, 2022)
The team at Bankless provides a great overview of Ethereum 2.0 in its article Ultra Scalable Ethereum, but I’ll attempt to summarize below.
As discussed above, smart contract platforms perform three basic functions:
Execution: Run programs via smart contracts
Data: Store important data such as account balances
Security: Provide consensus protocols secure the network
Ethereum currently has a “monolithic” architecture, meaning that a single chain must perform all of these functions. As one can imagine, this can be unwieldy and slow.
Ethereum 2.0, on the other hand, aims to transition to a “modular” structure to divide the execution of these functions into three separate parts – the Beacon Chain, Shards and Rollups.
Ethereum 2.0 Architecture
Rollups (Execution Layer)
Execution on ETH 2.0 will be handled by rollups – tools that move transactions off-chain, perform the necessary computations, and then plug the results back into the chain.
The most promising candidates for rollups are the two solutions we discussed above:
Optimistic rollups
Zero knowledge (zk) rollups
The Ethereum community is extremely bullish on rollups, and many believe that they will increase transaction speeds by up to 100x.
Shards (Data Layer)
Instead of living solely on the Ethereum Mainnet, ETH 2.0 plans to split its existing data layer into 64 smaller blockchains known as shards. This will make the entire network more efficient as:
Each validator only has to store one shard of the network instead of the whole blockchain
Shards can be processed in parallel
To combat the security risks faced by other multi-chain systems, ETH 2.0 plans to use random sampling to select validators.
Beacon Chain (Security Layer)
All shards will connect directly to the “Beacon Chain” – a “Master Chain” that will maintain security and facilitate communication between the shards.
Unlike the Ethereum Mainnet of today, the Beacon Chain is only used for consensus and can’t handle account data or execute smart contracts.
Potential Problems with ETH 2.0
While proponents believe that ETH 2.0 can achieve speeds in excess of 100K TPS without sacrificing decentralization or security, it’s important to remember that the project is far from complete and, at this point, largely unproven.
Some of the biggest questions at this time are:
Will it be composable? One benefit to Ethereum’s current monochain structure is that it’s “composable”. In other words, it’s very easy for dapps living on the same chain to communicate and “stack” together to create new products. For example, you could use an exchange dapp, lending dapp and insurance dapp all in the same transaction. As Ethereum moves to a modular model, critics worry that some or all of this composability will be lost.
Will it be secure? Vitalik himself points out the multi-chain architectures may be less secure as it’s easier for an attacker to expose a weak link. While Ethereum 2.0 hopes that its random validator selection process will avoid this, it’s still unproven.
Will it actually be faster? While Ethereum 2.0 will almost certainly be faster than its predecessor, it’s not clear how much faster, as the dynamics of interchain communication are largely untested. Furthermore, the long wait times of proposed rollup solutions such as optimistic rollups may present a problem.
The Ethereum dApp Ecosystem
Should ETH 2.0 be successful, it would only deepen the moat of the smart contract platform that powers most (if not all) of crypto’s “blue chip” dApps. Indeed, Ethereum ecosystem today accounts for over 60% of the total value locked in DeFi, over 80% of NFT sales and includes such notable projects as:
Indeed, despite losing some market share, Ethereum is still the dominant smart contract platform. It commands the largest position in DeFi and NFTs, the largest social communities, the most brand awareness, has the best security score, is the most decentralized and – perhaps ironically – is one of the most undervalued on a fully-diluted market cap to TVL ratio.
Should the migration to ETH 2.0 go as planned, it would almost certainly help solidify this position for years to come.
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