Ethereum 2.0 – Millions of Transactions Per Second?
Vitalik Buterin, founder of Ethereum, used his recent keynote speech at Devcon 4 to provide a warts-and-all account of the development of the Ethereum network since the publication of its Whitepaper in 2014. Buterin's presentation also looked forward, exploring the specifications and implications of the different projects which encompass Ethereum 2.0 - a milestone which is 'really no longer so far away': "Ethereum 2.0 combines a lot of different features that we have been talking about, researching and actively building for several years. They are finally about to come together in one cohesive whole" Those 'different features' include the much-anticipated Casper - the switch from Proof of Work to Proof of Stake, and Sharding - requiring nodes to validate only pieces of the database rather than the whole. Each of these developments is aimed, at least in part, towards achieving greater scalability. The question of scalability is pertinent for investors, as the extent to which Ethereum can scale will have a profound effect on how many decentralized applications (DApps) will be built upon it. This is likely to influence the value of ether - the native token of the Ethereum network. Analysts have for years debated whether Ethereum is capable of achieving the scalability, in terms of transactions per second, that will be needed to run many different types of DApps. In a recent OmiseGo AMA, Buterin suggested that through a combination of Layer 1 and Layer 2 solutions, Ethereum could potentially reach millions of transactions per second: "Sharding is a Layer 1 scalability solution...that makes the blockchain itself have higher scalability. Plasma is a Layer 2 solution. Layer 1 and Layer 2 are complimentary because the scalability gains from Layer 1 and Layer 2 improvements do ultimately multiply up with each other... ...So if you get a 100x from Sharding and a 100x from Plasma, those two give you a 10,000x scalability gain, which basically means blockchains will be powerful enough to handle most applications most people are trying to do with them” Transaction speed has presented a serious bottleneck to scale for blockchains generally, but Ethereum's historical emphasis on security has seen it facing greater concerns than its competitors. Specifically, the issues that Ethereum has faced have led to an emergent narrative that Ethereum's share of the DApp market will only extend to those that need the greatest level of censorship resistance. This has benefitted competitors such as EOS who instead employ a lesser, 'secure-enough', attitude to censorship resistance in favour of building greater scalability and transaction speed into their model. EOS' 2017 ICO raised $4 billion. The developments which Buterin describes, if all goes to plan, would see them far outstrip the transaction throughput of Visa - 24,000 per second - which is often seen as the benchmark for blockchain scalability. Buterin pushes back on the significance of this milestone however, instead looking forward to the world of the internet-of-things, the needs of which will be on the order of 100,000s per second. What does this mean for investors? The question for investors is two-fold. First: "Which smart contract platform is likely to capture the most use cases and users?" Second: "Will the value that this smart contract platform creates be captured by its token?" There's no simple answer here, and the best thinkers in the space are divided. Multicoin Capital have provided the best exploration of these questions that I know of in two blog posts. The first, The Smart Contract Network Effect Fallacy, advocates for the idea that smart contract platforms will not benefit from network effects in the same way that platform businesses, such as Facebook or Uber, do. This is because users won’t have to know or care about which blockchain they’re interacting with, and most DApps will be interoperable across chains. This would mean that the native token of smart contract platforms is unlikely to capture much value, regardless of the scale that the network achieves - a bearish stand on ether. The second, Paths to Tens of Trillions, pits founders Kyle Samani and Tushar Jain against each other in a debate which explores what kind of cryptocurrency or token is most likely to become sound money. In advocating for the utility hypothesis, Tushar Jain believes that the most useful cryptotoken is likely to become the most valuable. This isn't a direct advocation of a smart contract platform's native token, as the argument could extend to a DEx or governance token as well. However, in a Web 3.0 enabled world, it's hard to envision what kind of token could become more useful than one that enables the smart contract platform itself - a bullish position on ether. So, it's not clear what Ethereum 2.0 means for ether as a potential investment. However, successful blockchain scalability improvements would have wider ramifications than those for ether. The Bigger Picture Ethereum stands at the forefront of what blockchain technology can do. The viability of many potential use cases of blockchain technology will be demonstrated by Ethereum and the specific features, protocols and applications it can support. A scalable Ethereum network would facilitate the operation of thousands of DApps, and succeed in moving more and more financial and online services over to the blockchain. Ethereum 2.0 is therefore an important step along the way toward a decentralized future. One emergent narrative right now is that of Bitcoin maximalism - the belief that Bitcoin, a censorship-resistant store of value outside the reach of nation-states and Central Banks, is the only use-case that blockchain technology will ultimately serve. One central tenet of this thesis is that blockchains are slow and cumbersome, and therefore unsuited to any other application. An improvement to the number of transactions per second that Ethereum can facilitate would therefore provide a powerful refutation of Bitcoin maximalism, and a bullish signal for the viability of a much larger blockchain technology market. Blockchain enthusiasts and crypto investors should therefore be keeping a close eye on the success of Ethereum 2.0. One reason is that the timing and magnitude of future market bull runs will likely be influenced by it. Another is that it will provide a clue as to 'how deep the rabbit-hole goes', and how much of our future online and financial lives will be decentralized, supported by the blockchain. So, watch this space and stay tuned with Cryptonomos for further exploration of the world of blockchain and crypto.