Still not fast, but already centralized: what has become of Ethereum (ETH)?
Ethereum has been the second after Bitcoin and the leading blockchain in the DeFi environment for many years. The number of Ethereum blockchain blockchain assets (TVL) in the protocols reaches $22.39 billion — more than 50% of the TVL of the entire DeFi market.
What is Ethereum?
Ethereum was the first blockchain protocol developed in 2013 using smart contracts — it is a programme for performing bilateral transactions between users, such as exchanges (swaps) or transfers between networks. The ETH cryptocurrency serves as the "fuel" for any transactions on the Ethereum network, including those passing through smart contracts.
The first tipping point for Ethereum was the hack of the decentralized protocol The DAO in 2015. The incident, which caused more than $150 million in losses, split the community into two camps: some wanted to leave things as they were, while others demanded that the network be rolled back to its pre-incident state. The community failed to reach a consensus, and the Ethereum network was hardforked, resulting in two blockchains — Ethereum and Ethereum Classic. Not everyone knows, but Ethereum Classic is the "original Ethereum".
The second turning point in Ethereum's history was the Paris update, also known as The Merge, released on 15 September 2022, which marked the blockchain's transition from a Proof-of-Work algorithm to Proof-of-Stake. This meant miners had to switch to mining other cryptocurrencies, and the Ethereum network began to be served by validators who only needed to run a node and stack 32 ETH (~$71,800 at the exchange rate at the time of writing).
The minimum threshold for staking precluded the participation of many users who did not possess such an amount, as the Ethereum blockchain lacks a delegation mechanism, unlike many other POS networks such as Cosmos, Cardano or Solana. However, blockchain developers found a solution: after the launch of The Merge update, so-called liquid steaking was introduced.
This type of staking allowed users to delegate ETH cryptocurrency, earn income from it and access liquidity at any time. Liquidity-stacking launched the trend for LSDFi, a new DeFi trend that has already been picked up by well-known protocols such as Cosmos and Solana.
Another major update to the Ethereum network is introducing the new EIP-4337 standard, which includes Account Abstraction (AA), which allows ordinary non-custodial wallets to be turned into smart contracts. AA is part of Social Recovery's solution to address the loss of secret wallet keys. Account abstractions allow for unsigned transactions and storing seed phrases from wallets into smart contracts and provide other features, such as paying for gas with any tokens. However, this update also brings new opportunities as well as risks.
Many believe that account abstraction will make it easier for users to interact with wallets and thus accelerate the mass adoption of cryptocurrencies. The Ethereum team has stated that they aim to make using crypto wallets as easy as email.
Current challenges, solutions and prospects
The move to PoS consensus was necessary to address the scalability and low bandwidth issues of the Ethereum network, which led to slow and expensive transactions. It would seem that the Ethereum network needed to become more performant and more secure, as the number of active validators exceeds 100,000.
The basis of the Ethereum 2.0 solution (this was the name the updated network originally received) was sharding — the ability to segment the network into dozens of blockchains working in parallel.
However, at the moment, the update has not only failed to deliver the expected results but has made the situation even worse. Firstly, transactions have continued to remain slow and expensive: as of 11 December 2023, the average cost of gas was:
- For a normal transaction (transfer) — $1.18;
- For a swap through the DEX exchange — $19.99;
- For an NFT sale — $33.79.
At the same time, the average transaction speed was about 3 minutes.
However, as analysts point out, the bigger problem with the revamped Ethereum network has been centralisation. Here are a couple of facts that have alarmed the crypto community:
- According to Dune, nearly half of all staked ETH is owned by just two validators — liquid staking protocol Lido (31.9%) and Coinbase (14.4%);
- Over 65% of the 5900+ active nodes in the network run through centralized Amazon Web Services (59.7%) and Google Cloud (6.1%).
The use of MEV bots compromises not only decentralization but also network security. For example, while selling its ETH reserves, the Ethereum Foundation was subjected to a sandwich attack by an MEV bot, resulting in a loss of $4000.
The Ethereum Foundation said decentralization will not be implemented until validators run their nodes on low-cost hardware. This step is already planned in the project's roadmap in the Statelessness phase, which is still in the research phase and will not be released until "several years from now." The project's co-founder, Vitalik Buterin, admitted that the "perfect solution" may only appear in 10-20 years.
The next stage of Ethereum blockchain development will be proto-danksharding, which is included in the Dencun update and adds a new type of transaction. The update will take place on two levels at once: consensus (Deneb) and execution (Cancun), where it gets its name.
Dencun was initially scheduled to launch in late 2023, but the developers eventually pushed it back to 2024. In addition to the new transaction type, the update aims to reduce the cost of on-chain data storage fees and increase the efficiency of bridges and staking pools.
