As the title suggests this is a question that I have been looking to have answered for some time. Following the current state of Ethereum fees, and the proposed suite of solutions — I am wondering if someone can paint me a picture of how this all goes for Ethereum in the coming 2–3 years?
This is where I want to start from: An Honest Look At What Is Actually Happening
Sure everyone tells me that ETH 2.0 is coming out in the next couple of months to years, and the scalability issues currently affecting the network will be a problem of the past.
But in the next 5 steps I want to outline what I see right now. And as far as I understand it — which granted could be missing many things — I don’t see how this ends well for Ethereum.
Step 1: Let’s start at the very beginning, with what we all know and with what has been a longstanding and accepted problem for some time: Ethereum gas fees are extremely expensive to the point that solutions cannot be used in cost-effective manner and transactions can take significant amounts of time to process.
At the time of writing the average transaction fee on Ethereum is $21.83. That’s expensive and makes quick, cheap transactions impossible. Onboarding the developing world to Crypto? Impossible. Okay, so we can agree Ethereum has a gas fee problem.
Step 2: The normal go-to solution is to say that Ethereum 2.0 will come out and implement sharding and Ethereum can scale. Great. Sounds like a solid plan. What does that actually entail?
Thankfully, Vitalik has written about this at length in a blog-post titled A Rollup Centric Ethereum Roadmap. I am going to summarize it briefly:
- Base-layer scalability for applications on Ethereum only comes as the last major phase of ETH 2.
- That is not sustainable for the short to medium term future, and as a result, Ethereum needs to come to peace with the fact that it is going to go all-in on Rollups or related L2 solutions (i.e. Plasma).
“These facts taken together lead to a particular conclusion: the Ethereum ecosystem is likely to be all-in on rollups (plus some plasma and channels) as a scaling strategy for the near and mid-term future.”
- This need changes the way ETH 2.0 should actually be understood: By the time sharding chains are available no one will care.
“It seems very plausible to me that when phase 2 finally comes, essentially no one will care about it. Everyone will have already adapted to a rollup-centric world whether we like it or not, and by that point it will be easier to continue down that path than to try to bring everyone back to the base chain for no clear benefit and a 20–100x reduction in scalability.”
Main Takeaway from Step 2: If I understand it correctly, ETH 2.0 is not what people think it is. Sharding on Ethereum may happen, but by the time it happens, most solutions will already be rolled up and it won’t really matter. Note: Rollups have the potential of reaching up to 3000 TPS if everyone moves to rollups (Credit Cards can process 5000 TPS and up to 65,000 when demand requires it).
Step 3: Okay, so we are all-in on rollups. Now let’s take a step back and look at the whole landscape and ask what that actually means for Ethereum as a whole:
- We are expecting every native Ethereum application to choose between multiple different rollup solutions that currently do not communicate with one another.
- We are expecting infrastructure, tooling, wallets, block explorers, and bridges to also choose between one or many roll up solutions that cannot communicate with one another (yet).
- We are expecting the funding for this migration to be handled in large part by the L2s themselves.
“It’s an inescapable fact that a crypto project must be financially sustainable, and in 2020 this means millions or even tens of millions of dollars of funding. Some of this can be covered by common public-good-funding entities such as Gitcoin Grants or the Ethereum Foundation, but the scale of these mechanisms is just not sufficient to cover this level of funding. However, layer 2 projects launching their own token is sufficient — provided, of course, that the token is backed by genuine economic value (ie. prediction of future fees captured by the L2).”
So you are telling me, that the future of Ethereum and the scalability of the platform that will usurp existing global financial infrastructure and invert it to a world of open finance, creator economy, yada yada is predicated upon each solution deciding on it’s own which L2 it wants to roll-up onto — and then building out the infrastructure to connect all of the different L2s with one another?
Step 4: There are a lot of existing solutions to scaling Ethereum on Ethereum. The most popular (and one of the best funded) is Optimism. Optimism recently had to delay their release and this is the explanation they gave for it:
“Today we are announcing that we are delaying official public mainnet in favor of a more coordinated community launch. Our goal is to make sure that foundational projects, infrastructure providers, block explorers, wallets, and token bridges have time to integrate, audit and test.”
What I gather from this is that it’s a lot more work than originally expected to scale the forest, instead of just a tree. That is to say, ‘rolling-up’ is not just a project specific task: It involves synchronizing infrastructure providers, block explorers, wallets, and token bridges — not even to start mentioning communication with other L2 solutions.
Here are some other worries along the same thread from Messari Research. I am going to summarize, but I would recommend subscribing to them and reading the full article yourself:
- ‘Rolling-up’ or moving to an L2 presupposes “significant changes in user behavior, wallets, oracles and DApps.”
- Developers will have to deal with cross-Layer 2 states.
- Developers will have to deal with new security models on side-chains.
- Developers will have to deal with liquidity routing in State Channel Networks.
- If developers opt for ZK-Rollups, they will have to deal with running computations off-chain.
- Currently L2 Projects do not communicate well with one another. Messari claims this means that “L2 transfers aren’t seamless or that sidechains needs to be bridged.”
This is what Vitalik said the need will be:
- ENS needs to support names being registered and transferred on L2.
- Layer 2 protocols should be built into the wallet.
- We need more work on cross-L2 transfers (to be as close to instantaneous as possible).
This is what Souptacular commented upon Vitalik’s Post:
- “Most of it comes down to how to implement much of this Layer 2 future while still keeping it simple enough for users and beginner devs of the system to not”
- “It’s already pretty complicated for an average person to use Ethereum in the first place, let alone use it consistently without falling for scams. Incorporating different layers with different security guarantees and different requirements will put a lot of pressure on multiple areas of the ecosystem, especially user adoption and usability.”
Main Takeaway: If rollups are the plan, rollups will require a coordinated effort across Ethereum in order to synchronize and integrate: Existing L2 infrastructure with each other, existing L1 Infrastructure into a specific L2 solution, and existing tooling such as Wallets and Explorers. We move from talking about scaling Ethereum, to talking about keeping Ethereum in touch with its different parts.
All of this would be fine if all of Ethereum could agree on a single L2 solution to use. But that is not what is happening. Right now there are MANY different L2 solutions, each which will have to bridge with one another, be listed in wallets, and support the ENS naming system. A brief list includes (Thanks Messari):
- Optimism Rollups.
- ZK-Rollups
- Polygon (L2 Aggregator)
- OMG Network
- POA Network
- Liquid Network
- xDAI
- Gazelle
- Gluon
- Leap DAO
- Raiden Network
- Celer
Step 5: So let’s put it all together now. If I understand this correctly, Ethereum is going to solve its gas fee problem and eventually scale by indefinitely rolling up to different L2s, massively migrating all Dapps onto an L2 of sorts, integrating bridges and communication protocols between L2s, embedding L2 solutions directly into Ethereum Wallets, updating and synchronizing block explorers, and expecting Users, Oracles, and dApps to follow along the whole way? And all of this is going to happen in a manner that keeps Ethereum friendly and accessible to new developers entering crypto?
As a reminder, most L2 solutions have not even launched yet. They are still working towards main-net. Yet, those who are bullish on ETH 2.0 want us to believe that this is a bright future for crypto — that this is the future of the financial revolution and the new creator economy?
This sounds to me a lot like death by a million cuts. And I came to this conclusion by just looking at what the best case scenario is, and what the teams working on the solution can tell us right now. I’m not talking about short term staking rewards for when Ethereum becomes PoS — I am talking about long-term scalability of the Ethereum Network over the next 2–5 years. I am not trying to say Ethereum is going to die either. But I am trying to get someone to honestly and reasonably explain what they think a reasonable future for Ethereum is, based on the proposed suite of solutions available.
The gap between expectations and euphoric belief in the rise of Ethereum on the one hand, and the actual reality of ETH 2.0 on the other is disconcerting to me. How does Ethereum have a future?
This wraps up part 1 of this blog. Part 2 is focusing on the question of bridging to other L1s including Polkadot, Cosmos, and NEAR. As a reminder none of this is investing or tax advise. This is my opinion and analysis on the current state of the space.
