The Future of the Ethereum Protocol

• Demand for Ethereum will increase as PoS becomes the dominant consensus mechanism.
• ETH 2.0 establishes a more secure, sustainable, and scalable network.
• The 3-year delay of ETH 2.0 will ultimately result in a seamless end result.

The counter-intuitive consensus mechanisms overshadow the advantages of blockchain as they are too heavily dependent on energy consumption. As industry narratives shift amid investor confusion, the PoS mechanism has gained market dominance. The Development of ETH 2.0 attests to the network complexities that are required to produce a lasting and error-free consensus mechanism.

The Network Bypass

Ethereum is undergoing a significant network change in how consensus is reached in the network. In the ‘Into The Bytecoin’ podcast, Tim Beiko and Danny Ryan, who coordinated the ETH 1.0 and ETH 2.0 upgrades, discussed how PoW expanded the network’s value proportionally by broadening the community and justly disassociating itself from early PoS obsession.

Vitalik Buterin pushed to release phase 0 of Ethereum during 2020 after developers such as Justin Drake argued that it could only be released during 2021, “at the earliest.” Still, with the ETH 2.0 genesis block being produced on December 1st, 2020, Danny Ryan emphasizes that it’s “easy to see the messy part” because it’s all transparent and public. 

He further argues that people fail to see the end result, which is a lucrative and fully functional product. The podcast’s host adds that such an “idealistic and pragmatic” design is imperative to the operational success of blockchain and, ultimately, the entire network.

As ETH 2.0 is on the fast track towards “The Merge,” which will see the consensus switch from PoW to PoS, foundation developers are stress-testing the network testnet to ensure “a smooth transition.” Ben Edgington, a ConsenSys’ developer, highlighted that developers managed to achieve a “multi-client merge devnet,” as the final pieces of the ETH 2.0 puzzle fall into place.

A Plethora of Changes

On October 27th, Ethereum will initiate the Altair hard-fork, offering clients a “low stakes warm-up” for the functionality of the Beacon Chain. In addition, Altair adds additional elements to facilitate “The Merge,” creating processes that correct any shortcomings in rewards and participation efforts.

Ethereum’s much-anticipated upgrade adds new interaction dynamics between the network and its actions. ETH 2.0 will supplement the security layer and will create a scalable, more sustainable system. Thus, with the introduction of staking, interplays between stakes and reward networks will change; specifically, the amount of ETH the network issues after “The Merge.”

In a podcast with Laura Shin, Justin Drake revealed that the amount of ETH issued to stakers will decrease by 10x, causing “triple halvening.” Despite the EIP-1559 update, which has burned a record number of ETH, the new mining mechanism will issue less ETH than it is currently burning. As a result, the lack of supply, and the growing demand for ETH, will transform the token into what it is called “UltraSound Money,” as scarcity drives up the “monetary quality of ETH.”

On The Flipside

• There is no estimation for how much network fees will decrease on the network, or whether they will decrease enough to continue to incentivize users to use Ethereum.
• Ethereum has burned 560,219 tokens; however, the value of ETH is still highly dependent on Bitcoin’s actions.

Network validation will still be arbitrated between block creators and validators. One element that will not change is the MEV (Maximal Extracted Value), as transaction ordering on ETH 2.0 will be the same as on the PoW network. However, as argued in a hackmd post, with ETH 2.0, validators will have control in ordering blocks over miners. 

Validators on the network will therefore earn more than they currently do in the ETH 1.0 format. It is estimated that they will earn 70.9% more than in the current network design. However, Forkast News noted that MEV poses threats to the network as it entitles miners, as well as validators in the PoS system, to select transactions to be added to the network.

Why You Should Care?

Ethereum took a long time to set the foundations and advance towards PoS. Nonetheless, the entire network,  not only the miners, will benefit from the shift as less ETH supply will drive up demand for ETH tokens, which in turn will increase the value of a single token.