The Long Route to Ethereum 2.0

To many, the Ethereum blockchain is the innovation that changed the way we viewed cryptocurrency and its underlying technology. The introduction of this blockchain infrastructure led to numerous developments and continues to shape the way we interact with blockchain components to execute transactions and perform specific tasks. Now more than ever, it is vital to assess the current state of the Ethereum ecosystem, how much it has achieved in the last five years, the modalities of the looming Ethereum 2.0, and what to expect in the coming future.

The Ups and Downs of Ethereum 1.0

When Ethereum launched five years ago, it introduced new paradigms that have since evolved the crypto narrative. A technology once perceived to be limited to merely implementing virtual money has suddenly expanded its scope to provide developers with new ways to capitalize on the concept of decentralization. It is worth noting that the innovative nature of this project and the mass hysteria that followed were one of the main factors that birthed the ICO era and pumped the prices of crypto assets to all-time highs in 2017.

However, as fairy-like as this narrative is, Ethereum has had its fair share of criticisms and drawbacks. Issues ranging from security to cost inefficiency has at one time, or the other, plagued the ecosystem. Some critics have even gone as far as to instigate that the creators of this unique blockchain infrastructure have bitten off more than they can chew. They argue that the team and their supporters continue to market Ethereum as the ultimate solution, even though the project keeps struggling to resolve a majority of issues plaguing its viability.

On the one hand, scalability problems limit the number of transactions the network can execute to a meager 30 transactions per second. Although this figure dwarfs the capacity of Bitcoin, it does not come close to the minimum requirement for a platform, which facilitates the operations of over 2000 applications.

According to Will Martino, the former lead engineer for JPMorgan’s Juno, this limitation has somewhat restricted the involvement of corporations and institutions in the blockchain terrain. He stated:

“If JPMorgan, one of the biggest companies ever, can’t drive adoption, even when they have a great internal use case, you have to ask yourself ‘why’? And my answer to that is the technology is just fundamentally limited. And if you go and talk to other large system integrators, large consultancies, you’ll hear very, very similar things. So long as you don’t have someone who holds a lot of the Ethereum tokens as the head of Blockchain for the company, you’re going to find that people say: ‘We have tried using Ethereum, it just doesn’t work’.”

Nonetheless, I believe that it is ridiculous to focus on the flaws of this project and refuse to acknowledge its many contributions to the crypto narrative. Let us not forget that Ethereum remains the obvious choice for developers regardless of the emergence of other scalable alternatives like EOS and Tron. The flexible nature of this ecosystem and its apparent compatibility with complex blockchain applications have fueled the explosion of decentralized solutions poised to take on legacy systems. We see the latest of this boom in the fast-rising DeFi landscape. Unsurprisingly, the Ethereum community has played a large role in this development and propelled stakeholders to find new and improved ways to interact with the financial sector.

Recently, Vitalik Buterin, the co-founder of Ethereum, in response to one of the many jabs thrown at Ethereum, argued that the ecosystem shows promise irrespective of past troubles. He tweeted:

“Reciting tired old propaganda is becoming less and less effective every day. Ethereum is rising, proof of stake and sharding are rising, and rollups are here, all through a large distributed ecosystem working in parallel. The tides of history will not be favorable to maximalism.”

Likewise, Samantha Yap also documented the contributions of Ethereum to the mainstream successes of cryptocurrency in an article published on Cointelegraph. In it, she wrote:

“It’s clear: The wave of innovation that rose in 2017 challenged and led many journalists who were covering technology or finance to start looking into how the Ethereum blockchain and its smart-contract offering enabled innovative applications and projects to be built on top of it. Ethereum played a big role in turning blockchain into a buzzword that year, and people began to experiment with putting anything from energy and property to data and our identities on the blockchain. It was at this time that cryptocurrency and blockchain journalists began to emerge at notable financial publications such as Bloomberg, CNBC, Business Insider and the Financial Times.”

Hence, it is safe to say that the success of the ever-evolving Ethereum blockchain is paramount not just to its participants but also to all proponents of crypto technology. Nevertheless, for this project to achieve the lofty goals it sets for itself, Ethereum must undergo a complete revamp. The team must upgrade its protocols and features to meet the current and future demands of users. This is why the teams responsible for introducing and implementing changes on the Ethereum blockchain have embarked on a long and cumbersome journey to revamp the infrastructure.

Say Hello to Ethereum 2.0

According to Ethereum’s roadmap, the upgrade, named Ethereum 2.0, consists of three critical updates that look to fix recurring security and scalability issues. At the moment, we are expecting the first phase of this upgrade to go live later this year. With this update, the team looks to implement the beacon chain, which kicks off the transition from Proof of Work to Proof of Stake. If successful, the Ethereum ecosystem will begin to support staking. In other words, interested network members can become transaction validators and create new blocks by staking Ethereum.

It is general knowledge that this mode of validation is more scalable and cost-effective than the current mining process utilized on the network. Therefore, I expect these changes to help Ethereum accommodate more transactions and cope with the added pressure from the high demand for DeFI products. Praneeth Srikanti, the investment principal at ConsenSys Ventures, echoed this thought in a recent interview:

“Proof-of-stake comes with a number of improvements, including energy efficiency, lower barriers to entry, stronger crypto-economic incentives and greater reward-generating capabilities for a broader set of users. We also believe that there would be increased demand for ETH, as users would start to gain opportunities to find new staking reward-based-yields and contribute to the security of the chain and will present some interesting dynamics with the current utilization via locking up ETH assets in DeFi protocols.”

What Does This Mean for DeFi?

There is no doubt that DeFi application developers and users stand to gain the most from these series of upgrades. You will agree that decentralized finance has emerged as one of the most potent components of blockchain technology. The CEO of OKEx, Jay Hao, stated that it is imperative to understand the benefits of DeFi and develop progressive systems designed to financially empower us irrespective of location, race, religion, or class. He wrote:

“And it’s not just the promise of banking the unbanked or, rather, servicing the unbanked. The current financial system with its near-negative yield on people’s savings and the troublesome prospect of eroding their purchasing power doesn’t possess what DeFi could offer to everyone — the chance to earn real, meaningful interest on their savings. At last, people have access to the tools that the ultra-rich have had for centuries. They can make their money work for them and not the other way around. Through collaboration, innovation and persistence, we really can achieve the goal of #FinanceAll.”

In the last few months, the demand for DeFi has put more strain on the Ethereum blockchain even as transactions and activities continue to rise. Consequently, it takes more time and money to verify transactions executed on the blockchain. Both issues are clear indications that as long as DeFi booms, congestions will continue to occur on the network.

Hence, the switch to PoS could not have come at a better time. The possibility of doing away with the headaches that come with network congestion projects a promising future for not only the Ethereum market but also the entire DeFi landscape. However, there are concerns that this upgrade may result in one or more hiccups. Some argue that new systems always undergo a period of uncertainty. Hence, they believe that Ethereum 2.0 will come with early infrastructural deficiencies before the dev team fully grasp unforeseen complications.

Eliézer Ndinga, a research associate at investment company 21Shares, warned that one of the potential problems is the complexities involved in staking on the Ethereum 2.0 blockchain.

“The transition from the current Ethereum blockchain to Ethereum 2.0 requires users to transfer their ETH between blockchains, which could create risks for users who try to do this themselves, though exchanges and other custodians are likely to assist in this process.”

Another expert, Konstantin Kladko, argued that there are flaws in the system, and this could have detrimental effects on the overall performance of Ethereum. He tweeted:

“Unfortunately, there are fatal flaws in the way ETH2 staking ended up [being] implemented. When staking starts it is going to be a huge embarrassment, because there may be not enough money to start the network.”

Conversely, some believe that it is not the flaws highlighted here that will cripple the efficacy of Ethereum but the failure of the dev team to launch Ethereum 2.0 as at when due. Lanre Ige, a research associate at 21Shares, reiterated this sentiment in a conversation with Cointelegraph:

“It’s unlikely that the Ethereum core developer team, or ecosystem, will altogether fail to upgrade the network given that the fundamental technological problems for the initial rollout (‘Phase 0’) seem to be solved. Rather, the latest risk is failure to deliver the network upgrade in a timely manner.”

And for some, it is the security implications that pose a significant threat to the Ethereum and DeFi ecosystems.

Will Ethereum 2.0 Expose Dapps To Attacks?

Unsurprisingly, decentralized applications focusing on one or more aspects of finance have replaced crypto exchanges as the number one target for hackers. It does not seem farfetched to predict that the introduction of Ethereum 2.0 will further cause vulnerabilities and expose these infrastructures to attacks. Jay Hao made this known while discussing with Cointelegraph on the possible implications of the anticipated upgrade on security and scalability. He explained:

“ETH 2.0 is being designed with the highest level of security in mind. Therefore, it could take some years before ETH 1.0 is fully integrated, as a two-way bridge between the two chains may cause vulnerabilities and make the chains easier to hack. ETH 2.0 will have at least 64 times the capacity of ETH 1.0 to start with, and this will continue to increase and increase over time.”

Besides, MolochDao analysts confirmed that the transition to ETH 2.0 could take a toll on the security of DeFi applications. However, they added that, in the long run, Proof of Staking mechanisms would make it easier to scale attacks. Away from security and scalability, another bone of contention is interoperability. Developers will continue to identify means for established blockchains to share resources seamlessly. Beni Hakak, CEO of LiquidApps, highlighted this inevitability:

“The future is multi-chain, giving developers the opportunity to blend together the advantages of various chains, allowing them to optimize their dApps for performance and cost-efficiency in a way that best fits their end-users. Developers can choose the base layer based on their specific use case, and interoperability will give them the freedom to migrate to a different chain.”

However, the goal is to achieve these without stripping away decentralization away from the Ethereum blockchain.

Final Thoughts

I cannot help but think predicting the outcome of this upgrade is futile. We are on the verge of witnessing an enormous alteration of the working of Ethereum. This upgrade is long overdue and critical to the future of the crypto industry. As explained by Hao, let not the risks relegate the importance of this development:

“Given the current economic crisis and the very well-exposed flaws of the traditional financial system, cryptocurrency and DeFi have never been more relevant than today. Yet, if the space continues to be non-user-friendly and blockchains can become clogged up with more transactions, it will be impossible to onboard the masses. What Ethereum is going with ETH 2.0 is necessary. So, risks or no, it is a vital step.”