Ethereum – Where is it heading?
Ethereum has the second highest market cap of all the cryptocurrencies after Bitcoin, and has been around since 2015.
Ethereum is decentralised, open source and was founded by Vitalik Buterin. It is the world’s most actively used blockchain.
Unlike Bitcoin, which is mainly used as a store of value, the Ethereum blockchain benefits from a scripting language which may be developed for applications to run on the top of it.
The primary scripting language currently used with Ethereum is called Solidity.
This is useful for creating smart contracts and attaching real world assets such as stocks and property to the blockchain.
One of the issues with Ethereum is that it has an infinite supply, which is not attractive to asset holders. Another major issue with Ethereum is the gas price for sending or completing transactions, which as of 2021 has become extremely expensive.
The future of Ethereum
Currently in 2021, Ethereum is in a transition period from transactions being validated by a system called proof of work (POW) to being validated by a proof of stake mechanism (PoS).
However, proof of stake presents some technical challenges that first need to be resolved and hasn’t been thoroughly tested in the real world. Verification of transactions on a proof of stake blockchain require holders to stake their tokens for which they receive a reward.
Benefits of proof of stake
- It is a lot easier to set up a node and doesn’t require vast sums of money.
- Staking requires 32 ETH, but you can join a pool if you don’t have that much ETH.
- Staking is more decentralized
- It requires much less energy
Proof of work (PoW)
The proof of work mechanism is currently adopted by the Ethereum blockchain, for reaching a consensus or agreement of account balances. It is used to prevent double spending and secures the integrity of the blockchain.
PoW requires dedicated mining machines, which consume a lot of energy to validate transactions by finding a hash which meets the set difficulty level, and thus create a valid block.
The difficulty is set by adjusting the Nonce – number only used once.
Future Ethereum Developments
Due to the high gas fees currently on the Ethereum network (Jan 2021), a temporary improvement proposal has been set in motion according to Eric Conner, a core Ethereum developer. The proposal is EIP 1559 – Ethereum Improvement Proposal
EIP 1559 addresses two important issues:
- Establishes the market rate for block inclusion
- Burns the majority of the ETH in the transaction fee
A deflationary mechanism is introduced by burning most of the ETH in the transaction fee, which benefits ETH holders by creating more scarcity. This benefits all ETH holders, not just the miners.
The EIP 1559 BASEFEE mechanism will assess the congestion on the Ethereum network and automatically adjust the gas price across the network for all users. The BASEFEE is then burnt or removed from the network. Nobody will receive the BASEFEE as payment.
The gas adjustment options currently available in wallets will be replaced with an option to tip if a user desires, to jump the queue and send through a faster payment. This “tip” will be paid to validators under the proof of stake system.
By burning the BASEFEE, the transaction fee ETH is removed from the network, which has a deflationary effect for the ETH in circulation ie creates scarcity.
Ethereum is transitioning to a Proof of Stake validation system from a Proof of Work system, but a temporary fix to address the high fees would be the implementation of EIP 1559.
Ethereum2 (Proof of Stake) has already been launched on a blockchain called Beacon Chain, which is effectively a test net.
Ethereum2, which will simply be known as Ethereum may be a year or two away, but in the meantime the implementation of EIP 1559 would address the high gas fees.