Ethereum (ETH) is the most well-known altcoin in the cryptocurrency space and the second largest cryptocurrency by market capitalization. Its leading position in the programmable blockchain sector, growing institutional adoption and future upgrades and deflationary economics put Ethereum in a league of its own. However, as the cryptocurrency industry continues to mature and develop, more competing cryptocurrencies are emerging with new and improved solutions to the blockchain dilemma (scalability, security and decentralization).
As a result, it is essential that Ethereum continues to develop and tackle its weaknesses. The following article will investigate Ethereum’s roadmap and relevant upgrades along the way. The initial updates revolve around Ethereum merging with the beacon chain and transitioning from a proof-of-work (PoW) consensus to proof-of-stake (PoS). Over the next few years, further upgrades, such as sharding, will unfold.
Source - Vitalik Buterin
What Is Ethereum?
Ethereum is a Layer 1 blockchain, a type of project that represents the base network or underlying infrastructure in a blockchain-based system. Layer 1s are like the foundation of a digital building, they serve as the base for which other projects are built on top of. They can finalize and validate transactions without the help of another network, and also have their own native token, which is used to pay for transaction fees.
Ethereum, alongside Bitcoin, is at the forefront of the cryptocurrency movement. However, many people believe Ethereum could overtake Bitcoin as the dominant coin in the market in the near future, and for good reason.
Bitcoin is often referred to as a first-generation blockchain. It wasn’t created as an overly complex system, and that’s a strength in terms of security. In contrast, second-generation blockchains are capable of more. In addition to financial transactions, these platforms provide a greater degree of programmability. Ethereum was the initial second-generation blockchain and is the most prominent and decentralized one to date. Ethereum transcends Bitcoin’s aim of creating a fairer and more transparent financial system and instead aims to create an all-encompassing, new and improved digital economy.
You can think of Ethereum as a publicly shared global computer network. It doesn’t run on a single device but instead runs simultaneously on thousands of devices around the world. People around the globe contribute their computer’s computing power to secure the network and are paid in Ether (ETH) for doing so. Ether is Ethereum’s native cryptocurrency and can be interpreted as the fuel that runs the network. The main idea behind Ethereum is that developers can create and launch decentralized applications (dApps) that run across a decentralized network instead of a centralized server.
History of Ethereum
After the groundbreaking release of Bitcoin, the blockchain industry quickly sparked the imaginations of developers around the world. In 2013, this interest led a Canadian developer, Vitalik Buterin, to propose a new platform that would allow developers to create dApps and ultimately address the flaws of Bitcoin’s scripting language. The founders of Ethereum were among the first in the sector to consider the full potential of blockchain technology beyond just facilitating the secure trading of virtual currencies.
Ethereum’s mainnet launched in 2015 with the first live release known as Frontier. Shortly thereafter, Ethereum was listed on major cryptocurrency exchanges. Since then, Ethereum has undergone a series of upgrades that have improved its deflationary aspects – currently Ether’s inflation rate is around 1% after accounting for the amount of Ether burned from transactions. Ethereum is the leading blockchain in terms of total value locked (TVL) and non-fungible token (NFT) marketplace volume.
What is The Merge Ethereum Upgrade?
Sometime later this year, the most important commercial highway in cryptocurrency is about to be completely repaved and refined. Namely, Ethereum is set to make the biggest change in its near-decade history, an event that will undoubtedly ripple through the entire ecosystem of digital assets and cryptocurrencies. Ethereum’s upcoming Merge upgrade will move the Ethereum network from a PoW consensus algorithm to a PoS one where network validators can verify transactions and stake their assets.
Proof of Stake vs. Proof of Work
PoW and PoS are the most popular consensus mechanisms in cryptocurrency used to add and validate transactions on the blockchain. They work by making potential participants prove they have dedicated some resource, like energy or money, to the blockchain. This characteristic filters out those who may not be committed or genuine to the network.
PoW, most commonly used by Bitcoin, involves validators using extreme amounts of processing power to solve math problems and compete for the right to validate and create blocks. Validators in a PoW blockchain are rewarded for each new block created. Conversely, PoS is a consensus mechanism that requires participants in a network to stake some of the underlying asset to be able to participate in securing the network. In PoS, the financial interests of the validators are aligned with network. This is because bad actors are at risk of losing their stake (process is referred to as slashing), if they decide to intentionally act maliciously.
In Layman's terms, PoW can be through of as a game of million people trying to solve a puzzle simultaneously. The first person to solve the puzzle gets the reward. It's like a lottery, where the more computing power you have, the better the chance you have of winning.
PoS, on the other hand, is more like a raffle. Wherein, the more tickets you have (i.e. (token you have staked), the higher the chance you have of winning. It's a faster and more efficient way of selecting a winner, because it's based on capital investment, as opposed to computational power.
Why is Ethereum Upgrading to Proof of Stake?
The change from PoW to PoS is called The Merge because the already running beacon chain will merge with the existing Ethereum mainnet chain. This transformation preserves the history of the network and its functionality while changing the consensus mechanism.
At its core, The Merge to PoS will reduce network energy usage by at least 99.95%. Currently, the network has a carbon equivalent equal to the entire nation of Finland, and the core developers understand that the Ethereum network needs to improve. Other benefits of The Merge include:
- The system will gain long-term scalability and sustainability.
- Reduced centralization risk because PoS makes participating in the network more accessible for many users, not just large miners.
- More equal distribution of network rewards to incentivize good behavior opens up yield to more users.
- With less energy and hardware, stakers will not require as much ETH to be incentivized to participate. ETH issuance will drop from 4.3% to 0.43%. This combined with the ETH being burned since EIP-1559 should cause Ethereum’s overall coin supply to dwindle, ultimately pushing up its price.
- Robust against attacks because economic penalties for malicious activity in the form of slashing make it significantly more costly for bad actors to attempt attacks as compared to PoW.
The Merge will start the era of a more eco-friendly, sustainable Ethereum. Moreover, setting the stage for further scalability upgrades not possible under PoW, bringing Ethereum one step closer to achieving the full scale sustainability, scalability and security outlined in its Ethereum vision.
Ethereum Merge Misconceptions
- The Merge is going to significantly lower fees.
One of the biggest myths is that the high gas fee situation in Ethereum will subside after The Merge. Recently, the ETH gas fee has been trending lower. However, this trend has been primarily because of the drop in network activity this year in 2022. There will likely be no major relief until new scale networks like sharding are built directly into the mainnet during The Surge.
- The Merge will not change the economics of Ethereum.
Many investors believe that the economics of Ethereum will not be changed after The Merge. In fact, The Merge is the most significant economic event to happen to Ethereum. The Merge will reduce the emissions of newly minted ethereum by a factor of 10 from the current inflation rate.
- The Merge is not the same as Ethereum 2.0.
Ethereum 2.0 refers to the planned sequence of changes to Ethereum that intend to improve its overall performance and usability. The Merge, on the other hand, is one of the key upgrades that should take Ethereum to the next level.
How Will Ethereum Transition to PoS?
Every 12 seconds, the beacon chain will randomly select a group of validators (stakers) and designate roles. The size of the group is 1/32nd of all stakers on the network. One of the selected validators will be the block proposer. The others are called attesters, as they will attest to the blocks validity once it has been proposed by the block proposer. Every time a new block is created, a new block proposer will be appointed. If a block proposer misbehaves in any way, then they have to pay a penalty which is deducted from the users’ staked Ether. The penalty is known as slashing.
Nonetheless, stakers receive rewards for participating; however, they are also at risk of losing some or all of their stake if they do something malicious such as attesting or proposing multiple blocks for the same position in the chain. This unique design of the protocol protects itself from a hostile takeover.
Those who have staked their ETH to provide security to the network receive transaction fees generated by the network and all the block rewards. These rewards are then shared equally among the pool of stakers, irrespective of whether you are in a chosen group of participants or not.
Why is the Ethereum Merge Upgrade so Important?
As a Layer 1 blockchain, Ethereum’s biggest competitors are other Layer 1 blockchains such as Cardano and Solana. All competitors aim to solve the blockchain trilemma (scalability, security and decentralization) more effectively than Ethereum. Nonetheless, while Ethereum is the most decentralized second-generation blockchain, Ethereum is easily surpassed by competitors in terms of speed and scalability, or a combination of both. Ethereum’s key competitors include Solana, Binance Smart Chain, Cardano and Avalanche.
Nonetheless, to maintain and grow market share, Ethereum needs to address its scalability problems.
What is The Surge Ethereum Upgrade?
The Surge refers to the addition of Ethereum sharding –– a scaling solution that the Ethereum foundation claims will further enable cheap Layer 2 blockchains and make it easier for users to operate nodes that secure the network. In combination, these improvements will allow the Ethereum network to process transactions much faster.
“Ethereum today can process about 15-20 transactions a second. This Ethereum including the rollups, including the sharding … it’s going to be able to process 100,000 transactions a second,” explained Ethereum’s co-founder Vitalik Buterin.
What is Sharding?
Sharding is the process of splitting a database horizontally to spread the load –– it is a common concept in the field of computer science. Each split portion of the Ethereum network is called a shard. Each shard will contain its own independent state, meaning a unique set of smart contracts and account balances. The purpose of sharding is to reduce network congestion and increase transactions per second.
Sharding attempts to break up the blockchain into multiple parts so nodes aren’t responsible for processing every transaction broadcasted on the Ethereum network. Interestingly, sharding begs the question, does every node in the network need to process each transaction for a blockchain to be considered secure?
Within a shard, notaries are randomly picked to periodically vote on the validity of blocks. These votes are then evaluated by a committee on the main Ethereum chain and merged via what’s called a sharding manager contract. Shard blocks are referred to as collations and are chained together like blocks in a blockchain.
A simpler way to think of sharding is to imagine if Ethereum was divided into thousands of islands. Each island is independent –– it can have its own features, and everyone belonging to that island can enjoy them. However, if they want to contact other islands, they will need to use some sort of protocol to connect. Sharding facilitates this process by creating a way for each shard to store individual receipts of a transaction. Since each transaction is cryptographically secure, they can be brought back to the main chain at any time.
Features of Sharding
More network participation
Ethereum will eventually be able to be run on a personal phone or laptop thanks to sharding. In a shared Ethereum, more people will be able to participate or run clients. Increased network participation will improve decentralization and therefore security.
Everyone can run a node
Sharding is an effective way to scale in a decentralized manner. With sharding, validators no longer are required to store all the data themselves but instead can use strategies to confirm the data has been available by the network as a whole. This process significantly reduces the cost of storing data on Layer 1 by reducing hardware requirements.
What Is Danksharding?
Danksharding is a new sharding design proposed for Ethereum which introduces some significant implications compared to previous designs. Danksharding and sharding are interrelated but different in their own respects. Sharding refers to the overall design for the splitting of networks in an effort to scale Ethereum while danksharding is a step towards the realization of this goal. To learn more about danksharding click here.
Sharding and The Merge
By the time sharding is added, Ethereum’s mainnet will already be secured by the beacon chain using PoS. This addition will allow a fertile mainnet to build shard chains off of the Layer 1 and be powered by the supercharged scalability.
What is The Verge Ethereum Upgrade?
The Verge portion of the Ethereum upgrade revolves around the implementation of Verkle trees. The purpose of this technical upgrade is to reduce the data storage obligations of network validators.
What Are Verkle Trees?
Verkle trees are a type of mathematical proof. They were first introduced by John Kuszmaul in this paper from 2018; however, they are still not as widely known as many other cutting-edge cryptographic constructions.
Verkle trees serve to make a short proof (witness) of any single piece (or set of pieces) of data a lot smaller in size. Instead of needing to provide extensive proof at each level of the validation process, the prover only needs to provide the path, with a little bit of extra proof – ultimately making proof verification more efficient.
Imagine you have a large jar of jellybeans, and you want to prove to someone that all the jellybeans are there and none have been taken out. Instead of counting all the jellybeans, which is time-consuming, you could take a scoop of jellybeans and count them, and then take another scoop and count them, and so on. Each scoop represents a fingerprint of the number of jelly beans. If organised in a tree-like structure, it is possible to prove that all jellybeans are there, without having to count them all individually. This is because proof of a scoop (fingerprint), serves as evidence for the existence of a specific number of pre-calculated jellybeans.
Compared to the Merkle tree (the previous mathematical proof used), the Verkle tree has a far superior proof size and is a critical part of the Ethereum upgrade. For every 1 KB needed by the Merkle tree proof, the Verkle tree proof only needs a maximum of 150 bytes.
As a result, Verkle trees limit the amount of complex cryptography needed and present sizable opportunities to improve the scalability and efficiency of the Ethereum blockchain. In other words, Verkle trees allow Ethereum to benefit from scalability gains that previously could have only been achieved with more advanced and complex technology.
The technicalities of Verkle trees fall beyond the scope of this article; however, more information can be discovered here.
What Is The Purge Ethereum Upgrade?
The Purge will involve a purge of old network history – a nod to the 2013 horror movie where one night a year, all crime is legal. It is a cleanup phase that eliminates historical data to streamline storage and reduce network congestion.
“The Purge is trying to actually cut down the amount of space you have to have on your hard drive, trying to simplify the Ethereum protocol over time and not requiring nodes to store history,” explained Buterin.
The core benefits of The Purge include:
- Allows clients to remove code that deals exclusively with legacy transactions
- Reduces the bandwidth on the network so that clients need to sync less data
- Reduces hardware requirements for nodes
The hardware requirement reduction improves decentralization of the network by making it easier for consumer-grade equipment to run a full node. As seen with chains like Solana or Avalanche, high transaction throughput over a long period of time either leads to centralization or necessitates creative solutions.
Moreover, a lightweight sync process reduces pressure on the network and its nodes, making the protocol better at its core job of processing transactions at the forefront of the chain.
Despite the fact that separating new data and historical records is a smart decision from the perspective of future scalability and technical debt, it comes with one huge problem:
If the data isn’t on-chain, where is it? And how can it be trusted?
Ethereum’s large ecosystem of apps heavily rely on Ethereum’s historical data, whether it be bBlock explorers, on-chain analysis tools or voting protocols –– anything that isn’t only concerned with processing transactions in the present. However, how will these apps source blockchain history?
The Ethereum foundation is currently deliberating the best response to this problem. In the EIP-4444 document, the authors suggest using either torrent magnet links or InterPlanetary File System (IPFS). Other suggestions include portal networks or integration with Arweave.
What is The Splurge Ethereum Upgrade?
The Splurge consists of a combination of smaller upgrades and fine-tuning to ensure smooth network operations following the other upgrades. Most of the upgrades included in The Splurge phase are miscellaneous and beyond the scope of this article. However, The Splurge should simplify the use of Ethereum and make it more accessible to the average user.
Overall, Ethereum is the longest-standing second-generation blockchain with an unrivaled ecosystem of dApps, a respected and talented team and a booming online community. Ethereum has a significant first mover advantage from being the first blockchain of its kind, which provides Ethereum with a significant head start over other competitors.
However, despite the head start, competition is rapidly growing, with more Layer 1 blockchains taking away market share from Ethereum –– many of which are more scalable and more efficient than Ethereum. As a result, a significant determinant of Ethereum’s future will likely be the success of The Merge, along with the upgrades that follow.