The Ethereum network has come a long way in recent years. Everything from the development of Decentralized Finance (DeFi) to the recent renovation in London has made the Internet the most urgent attempt to create a “world computer,” but there is still work to be done.
Global use as the backbone of Web 3.0 will require the benefits that the Eth 2.0 update promises to deliver. However, scaling up to the next wave of decentralized applications (DApps) will take longer, and it looks like second-level solutions may be the only solution.
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Eth 2.0 . Promises
There was a major Ethereum spy update in London in August. This hard fork marks the first stop on the Ethereum 2.0 path, and it has implemented several important network updates to prepare it for the transition. It arrived in London as Ethereum continued to struggle under the weight of recent spikes in both the Defi market and the intangible tokens (NFT) market. Transaction speed and costs have sometimes made many DApps completely unsustainable, undermining the benefits that decentralized systems were designed for.
One of the most notable features implemented in London is the EIP-1559, which aims to reduce inflation as well as stabilize network transaction fees. To do this, it implements a system in which core transaction fees are burned rather than paid to miners. Miners still receive block rewards and users can voluntarily add “hints” to their transactions to incentivize priority, but now, for each block, a certain amount of Ether (ETH) will be permanently removed from the network.
Unlike Bitcoin, Ethereum does not have a hard drive, so its total increases with each block. This has a lot of people worried about long-term inflation due to open growth. While the EIP-1559 does not reduce the value of Ethereum, it certainly determines how quickly the supply can expand.
When it comes to scaling Ethereum, London was just the tip of the iceberg.
Most of the operational issues with Ethereum stem from the fact that the network’s original transaction speeds have been tightened due to its inherent lack of scalability. For comparison: Currently, the Ethereum network can process about 30 transactions per second (tx/s). By comparison, a traditional payment system like Visa is designed to process 1,700 transactions per second.
Ethereum needs to catch up, and that is the whole point of Ethereum 2.0. First, the network will switch from Proof of Work (PoW) to Proof of Stake (PoS), which means moving from competing computers to solve complex math problems to where nodes invest assets to validate blocks. While PoS is more efficient than PoW and increases network speed to about 50 transactions per second, this is far from what a global payment system requires.
This is where another important development in Ethereum 2.0 comes in: hashing. Sharing is a process that takes each block and splits it into 64 “fragments” that can be processed in parallel. Essentially this means we can estimate 50 transactions per second and multiply by 64, which gives us just over 3,000 transactions per second – far more than Visa and more than enough to run it as a competing payment network.
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It is not enough to beat Visa
While hashing will allow Ethereum to match or even override legacy payment infrastructure, that may not be enough. Traditional payment systems mostly handle relatively simple transactions. This has been fine for years, but the Internet, and now DeFi, is farther than we could possibly imagine.
We are now looking at 24/7 decentralized exchanges, NFT marketplaces, NFT-based virtual worlds, and blockchain games. All of this inherently requires a much higher frequency of complex transactions than most traditional payment systems can handle. For example, a single player in a blockchain game may make multiple transactions every minute, and stopping the game to wait for each transaction to complete will not work. Combine this with DeFi’s ambitious vision to disrupt the traditional financial sector, and you’ll begin to understand just how important the Ethereum network is.
The point is that even 3000 transactions per second will not be able to satisfy these services if you can reach the level of universal acceptance.
By integrating multiple scaling solutions such as “bulk updates” and “side chain,” Ethereum can reach 100,000 transactions per second. This will make it very much in line with the application.