Bitcoin mining farm. After Ethereum’s Merge, mining was replaced by Proof of Stake, which reduced … [+]
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But despite the milestone, Ethereum’s share of total crypto market capitalization has completely stalled at 20%. With the “web3” narrative hitting a wall, growing Eth’s $230 billion valuation will depend on its grand plan to improve scalability by 100x – a research intensive effort that could compete with the likes of Visa but may also prove complicated for users and gamble with Ethereum’s biggest advantage, its widespread adoption.
Despite Ethereum’s dominance as the second-largest cryptocurrency, and its apparent immunity from the Securities and Exchange Commission, awareness about its next stages remain low. In the eight years since developers first launched Ethereum, Vitalik Buterin and the rest of the Ethereum community have struggled to scale the network, and finally landed on what Vitalik calls the rollup centric roadmap.
This plan diverges sharply from the past. Rather than make any attempt to increase Ethereum’s transaction capacity, the researchers investigating scalability now want third party software (rollups) to process transactions. Similar to how banks settle thousands of payments at once, these rollup providers batch numerous transactions in one giant transaction on-chain, using Ethereum as the single source of truth. Around eight venture-backed rollup companies – including Optimism
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The Rollup Flippening Is Already Here
According to core developer Tim Beiko, who coordinates protocol development for the Ethereum Foundation, the first part of this upgrade would reduce the cost of a rollup transaction by 90%.
“That would take us from hypothetically, 25 cents per rollup transaction to a few pennies,” Beiko told me in an interview, an improvement he believes can be easily realized within 6-12 months.
This stage of the plan the EF calls ‘proto-danksharding,’ a misnomer as no ‘sharding’ is involved. Instead of splitting up Ethereum’s data, as in Vitalik’s original plan and how a Big Tech company like Facebook scales, proto-danksharding enables the rollups to process Ethereum transactions elsewhere in large batches. With fees being slashed as Beiko describes, users of apps like Uniswap
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But rollups pose a riddle.
As scalability moves to the “Layer 2” of rollups, Ethereum will gradually relinquish control over its ecosystem. Software developer Ben Edgington, currently employed by Ethereum co-founder Joe Lubin and a key player in the network transition last summer called the Merge, noted in an interview that “Layer 1 [Ethereum] will fade into the background. Eventually, it’ll be only whales and protocols.” By 2025, most retail users may never transact directly on the Ethereum blockchain at all.
Rather than seem alarmed, the core teams involved with Ethereum development, from Butrin’s nonprofit foundation to Lubin’s conglomerate ConsenSys (my former employer) see this as a positive step. Advocates for the continued pivot to rollups see it as an opportunity to further decentralize the ecosystem. Edgington says this is far superior to the status quo, where high transaction costs often limit Ethereum’s accessibility for users without significant income or assets during periods of high demand.
Ironically, although the EF prizes decentralization, its next phase now depends on several for-profit companies backed by venture capital. Leaving the decision of which rollups prevail to VCs looking for returns could pose a philosophical conflict for Ethereum, as similar tie-ups have led to the downfall of other chains. Still, the EF doesn’t play favorites, Edgington noted.
But as this battle heats up, the rollup startups are staking their territory. Leaders like Polygon and Matter Labs have so far built incompatible solutions, pushing rival claims to be the standard and accusing others of misleading the public. This rivalry could scare developers away, leaving transaction costs to remain prohibitively high for future growth. A worse outcome would be to splinter Ethereum’s ecosystem, and its biggest advantage of “millions of developers” dissipating if the community fractured into sub-domains. New technologies, such as zero-knowledge Ethereum Virtual Machines, called zkEVMs, have launched to fanfare but to attract users apps are giving away millions of dollars in airdrops and yield, an expensive growth strategy.
To take advantage of this cheaper, faster Ethereum for mere pennies, end users also have to rely on “bridges,” such as the Polygon zkEVM bridge. This method of moving funds has so far proven costly and insecure, including several massive hacks.
The results, so far, appear promising. Numbers from L2BEAT, a data service tracking crypto transaction volumes, demonstrate four times as many transactions on “Layer 2” rollups as on “Layer 1” Ethereum. That number has grown steadily over the last year, showing the “flippening” of Layer 2 over Layer 1 is more than a blip, and may soon move into the rearview.
Danksharding: The Steady March From Base to Summit
The roadmap after proto-danksharding is also ripe for new research.
Beiko notes that longer-term scalability solutions could further decrease costs by another factor of ten, although they might be five years away. When asked for a timeline, Edgington simply laughed. He noted projections were difficult given the intricate and entangled remaining problems for researchers, but the core developers believe rollups will unlock a positive flywheel effect, building momentum for future phases.
That slow but steady hand worked before, gradually growing interest in staking ahead of the Merge to a volume of over $12 billion, reflecting confidence from exchanges like Coinbase and institutional investors like Bryn Talkington of Requisite Capital Management.
Despite the work ahead, the Ethereum community’s ability to navigate choppy waters has only increased confidence in its long term viability, even as it perpetually moves slower than rivals. The journey from ragtag hobbyists in non-stop quarrels into a well-oiled machine coordinating a dozen teams working in R&D and production software has paid off, in more ways than one. Edgington notes the EF now has an established blueprint for large upgrades, starting with years of careful research, followed by a collective “specification freeze” where the community agrees to a final technical design, months of rigorous testing, and eventual rollout. Those years of careful debate and tinkering have bred a deep familiarity among the teams.
Few could have imagined back in 2015 that the Ethereum ecosystem would become a multi-billion dollar economy impacting millions of users around the world – in under a decade. As regulatory issues threaten to cut off growth in crypto, Ethereum’s diverse core of professional researchers and developers offer hope in troubled times for the industry.
