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Ethereum 2.0

Even with Ethereum 2.0 underway, L2 scaling is still key to DeFi’s future

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The Ethereum network has come a long way over the last few years. Everything from the rise of decentralized finance (DeFi) to the recent London upgrade has made the network the most compelling attempt to instill a ‘world computer,’ but there’s still work to be done. 

For global adoption to be the backbone of Web 3.0, the network will need the benefits that the Eth 2.0 upgrade promises to offer. However, to scale for a new wave of decentralized applications (DApps), it’s going to take a lot more, and it’s looking like layer-two solutions may be the only answer.

The promises of Eth 2.0

In August, Ethereum saw the implementation of its highly touted London upgrade. This hard fork represents the first stop on the road to Ethereum 2.0, and it implemented multiple important updates to the network to prepare it for the transition. London arrived as Ethereum continued to struggle under the weight of the recent booms in both the DeFi and nonfungible token (NFT) markets. Transaction speeds and costs have, at times, made many DApps completely prohibitive, undermining the benefits that decentralized systems were made to address.

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One of the more notable features implemented by London is EIP-1559, which aims to improve inflation rates as well as stabilize transaction fees on the network. To do this, it is implementing a system where base fees on transactions are burned instead of being paid to miners. Miners still receive block rewards, and users can voluntarily add “tips” to their transactions to incentivize priority, but now every block will see a certain amount of Ether (ETH) removed from the network forever.

Unlike Bitcoin, Ethereum doesn’t have a hard cap, so its overall supply increases with every block. This has had many concerned about long-term inflation due to the open-ended growth. While EIP-1559 doesn’t make Ethereum deflationary, it certainly controls how fast the supply can expand.

While a critical first step, London was just the tip of the iceberg when it comes to scaling Ethereum.

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The call for 2.0

The majority of Ethereum’s operational issues stem from the fact that the network’s native transaction speeds are throttled by its inherent lack of scalability. To put things into perspective, the Ethereum network can currently process somewhere around 30 transactions per second (tx/s). By comparison, a traditional payment system like Visa is designed to handle 1,700 tx/s.

Ethereum needs to catch up, and that’s what Ethereum 2.0 is all about. For one thing, the network will switch from proof-of-work (PoW) to proof-of-stake (PoS), which means a change from computers competing to solve complex math problems to one where nodes stake assets to validate blocks. While PoS is much more efficient than PoW, improving network speeds to around 50 tx/s, it’s far from what’s required of a global payments system.

This is where another important development of Ethereum 2.0 comes in: sharding. Sharding is a process that takes each block and divides it up into 64 “shards” that can be processed in parallel. In essence, this means that we can take the 50 tx/s estimate and multiply it by 64, which would give us a little over 3,000 tx/s — well ahead of Visa and more than enough to serve as a competing payment network.

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Beating Visa isn’t enough

While sharding would enable Ethereum to match or even beat the legacy payment infrastructure, that still might not be good enough. The traditional payment systems are largely concerned with relatively simple transactions. This has been fine for many years, but the internet, and now DeFi, is pushing things beyond what we ever imagined.

Now, we’re looking at 24/7 decentralized exchanges, NFT markets, NFT-powered virtual worlds and blockchain gaming. All of these inherently require a much higher frequency of complex transactions than most traditional payment systems could address. For example, a single player in a blockchain game may be making multiple transactions every minute, and halting gameplay to wait for each transaction to finalize simply won’t work. Couple that with DeFi’s ambitious vision of subverting the traditional finance sector, and you start to understand just how much weight the Ethereum network may have to carry.

The point is that even 3,000 tx/s wouldn’t be able to accommodate these services if they managed to reach global adoption numbers.

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However, by incorporating additional scaling solutions — such as “rollups” and “sidechains,” — Ethereum has the potential to reach as many as 100,000 transactions per second. This would very much bring it in line with the high-throughput applications that DeFi promises to offer, but what do these answers look like?

Scaling for tomorrow

First off, there are rollups. These come in a variety of forms, including Optimistic, Validium, Plasma, and ZK. Rollups are a scaling solution that shoulder transaction loads by executing them off-chain and writing a cryptographic proof of validity to the chain when complete. This frees up resources on the main chain and can increase overall speed.

Next, there are sidechains, sometimes called “second layer” solutions. These are essentially parallel secondary blockchains that interface with the main chain. These can be deployed multiple times and handle different processes, again, taking considerable pressure off the base layer. The added benefit of sidechains is that they also act as interoperable “bridges” across multiple base networks, providing added liquidity, throughput and cross-compatibility for connected chains.

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Imagine a cryptocurrency future where there is an entire ecosystem of primary chains, such as Ethereum, all interacting with each other through a series of side chains. Different networks could be deployed for their specific solutions, but cryptographic techniques would keep data verifiably secure wherever it goes. This may finally provide the level of speed required at sufficiently low cost to finally implement the true vision of DeFi, a financial system that is accessible and affordable for anyone.

Ethereum 2.0

Developer shares insights on ETH 2.0 and why he’s ‘feeling good about Ethereum right now’

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Ethereum’s market cap dropped below $500 billion at press time. Needless to say that Ethereum’s short-term weakness doesn’t really bother its long-term investors as it still holds over $166 billion in TVL.

What’s coming?

Well, the network is gearing up for ETH 2.0, its biggest upgrade since 2015. As per developer Tim Beiko, both ETH 1.0 and ETH 2.0 teams worked together in October on the prototypes for the transition. With most “specifications in place,” Beiko explained what’s coming next in an interview. He said,

“What we’re doing during November is we’re trying to have these very short-lived test nets.”

But, even before that, ETH 2.0 deposit contract has topped the staked value of 100,000 ETH.

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With the confidence in the market, Beiko also hoped that they have something substantial before the December holidays. What Beiko was referring to is the Arrow Glacier upgrade that is projected to take place on 8 December 2021.

The developer commented that the Ethereum community is interacting to understand the changes that are to come. With that, the milestone of the ‘Merge’ is closer than ever. But, when is it scheduled for? Beiko answered,

“Next year, for sure.”

Also, Beiko added that if the codes are done by February, the Merge should commence somewhere in April or May. He also said,

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“It’s hard to give it a specific date just yet because if we find a major bug or something that takes us three weeks to fix you know, that delays things by three weeks.”

Nonetheless, the chair of all core devs at the Ethereum Foundation is looking quite optimistic, as he mentioned,

“I’m feeling pretty good about Ethereum right now”

100 days of EIP-1559

With ETH 2.0 in focus,  EIP-1559, which took place on 5 August this year, deserves a mention as well. According to Christine Kim, a Research Associate at Galaxy Digital,  “EIP1559 has saved users a total of $844 million in transaction fees through base fee refunds” since its activation.

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The improvement proposal is considered a milestone as it is set to begin a deflationary trend on Ethereum. Kim added,

“56% of new coins issued on #Ethereum has been offset by the amount of $ETH burned through base fees.”

However, there are still some shortcomings in the existing network. The researcher noted that the “average cost of sending a transaction on Ethereum has continued to climb.” While it has not decreased miner revenue, high fees remain a problem for Ethereum, according to Kim.

” Despite lower earnings from transaction fees, total miner revenue in dollar terms has increased 33%.

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In this context, Beiko agreed about the fees,

“I think we’re on the right path… If I could accelerate something it would be better tooling and migrations around layer 2. I think the fees on Ethereum are quite high right now. “

Having said that, Real Vision founder and investor Raoul Pal is seeing an Ethereum spike as much as 300% by December-end. He predicted,

“Now, I don’t expect perfection but with all the other analysis I have done, something like a 100% to 300% rally is highly probable into year end.”

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Ethereum 2.0

Ethereum 2.0 node count drops to a one-month low as ETH price climbs to new heights

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The number of Ethereum addresses holding 32 or more Ether (ETH) reached a one-month low on Nov. 9.

The number of externally owned Ethereum accounts (EOAs) holding at least 32 ETHfell to 108,949 compared to 108,965 on Oct. 22, according to data from Glassnode, a sign that traders and investors ignored the prospects of becoming validators on its upcoming proof-of-stake blockchain, dubbed Ethereum 2.0.

Ethereum addresses with 32+ ETH deposit. Source: Glassnode

In detail, staking in Ethereum 2.0 requires users to deposit 32 ETH into a designated smart contract address to become a full node validator. In doing so, the depositor gains the right to manage data, process transactions and add new blocks to the upgraded ETH blockchain.

That prompts Glassnode analysts to treat the Ethereum addresses with a balance of 32 or more ETH tokens as “potential validators.”

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Wealthy Ethereum validators only

The recent decline in the number of potential Ethereum 2.0 validators coincides with a steady Ether price rally.

Notably, ETH price surged almost 37% in the last 30 days, hitting a record high around $4,842 on Nov. 8. In other words, it now costs more than $153,000 to become a full node validator on the Ethereum 2.0 blockchain versus about $23,600 at the beginning of this year.

Meanwhile, data from StakingRewards.com shows that locking up 32 ETH for one year now returns an annual percentage yield of 5.42%.

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Ethereum 2.0 staking rewards as of 1600 UTC, Nov. 9. Source: StakingRewards.com

In contrast, holding spot ETH positions have returned almost 1,000% paper returns in the past 12 months, with the flexibility of profit-taking against potential downside risks.

ETH to $6K?

The number of Ethereum 2.0 validator addresses has also dropped as Ether prepares for a run-up towards $6,000.

The cryptocurrency’s latest climb to a record high of approximated $4,842 comes as a part of a Cup and Handle breakout that expects the ongoing bullish momentum to continue towards or beyond $6,000, as shown in the chart below.

ETH/USD daily price chart featuring Cup and Handle setup. Source: TradingView

The pattern develops after the price first rallies to the upside and then corrects to form a rounding bottom, called the Cup. A rebound towards the prior high ensues, followed by a failed breakout attempt above the said level.

The price pulls back again and grinds out a smaller rounding bottom, called the Handle. In the end, the price returns to a previous high for the second time and breaks out successfully to move by as much as the cup’s depth.

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Ether’s Cup depth is over $2,200 that sets its Cup and Handle profit target around $6,100. Should it happen, the cost required to become an ETH 2.0 validator will climb to $195,200.

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Ethereum 2.0

Study shows three attacks that can compromise Ethereum 2.0

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Ethereum 2.0 is being seen by the crypto community as a lifeline for a network that today suffers from transaction overcrowding and crushing fees. However, recent research produced by a group of computer scientists has shown that next year’s Ethereum consensus shift will not come without risks.

The study called ‘Three Attacks on Proof-of-Stake Ethereum’ was written by a group of six researchers from Stanford University (Joachim Neu, Ertem Nusret Tas and David Tse) and the Ethereum Foundation (Caspar Schwarz-Schilling, Bernabé Monnot and Aditya Asgaonkar), and tries to map the vulnerabilities that Ethereum will encounter in the future in its 2.0 version.

The research focuses on three different ways that the consensus-based proof of participation (PoS) network can be attacked. The first two weaknesses had already been identified in the past and would allow malicious agents to carry out a block reorganization attack and cause delays in consensus.

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The group’s new study, however, found a third type of attack that would be a sort of combination of the two threats already identified.

The Threats of Ethereum 2.0

The first type of attack concerns a possible short-scale reorganization of the consensus chain. The loophole could be exploited by an individual validator who wanted to increase their profit by delaying consensus decisions and thereby manipulating the blockchain in their favor.

This could be done by an attacker with enough resources to produce blocks faster than the original chain. By traversing the network, the validator could insert fraudulent blocks and perform a double-spend attack.

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In the second threat, network delay could be used to paralyze consensus decisions indefinitely. This attack, however, would depend on an ideal blockchain scenario to execute and its advancement could be prevented by only 15% of the validators in the network.

“We provide refined variants of these attacks, considerably relaxing the adversary stake and network time requirements and thus making the attacks more severe,” says the study.

The latest threat discovered by the researchers combines the loopholes of the two previous vulnerabilities, resulting in a third attack that is even more serious. In this scenario, an attacker could, with a small fraction of ether in stake and no control over the propagation of network messages, cause large-scale rearrangements in the consensus chain.

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“Honest-but-rational or ideologically motivated validators could use this attack to increase their profits or paralyze the protocol, threatening the alignment of incentives and the safety of Ethereum based on proof of participation,” warns the study.

While the study describes in detail the threats that Ethereum 2.0 could face in the future, it also proposes solutions that are likely to be taken into consideration by Ethereum developers, as half of the researchers have ties to the project.

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