When Ethereum was created in 2015, it opened up a new world of possibilities for the blockchain and cryptocurrency technology originally pioneered by Bitcoin. Ethereum founder Vitalik Buterin had grown frustrated with the limitations of Bitcoin and saw that blockchain could do much more than facilitate a digital currency. The introduction of smart contracts on the Ethereum network has led to the innovation of decentralized applications (dApps), decentralized finance (DeFi), and non-fungible tokens (NFTs). As these ideas have gained increasing mainstream acceptance, Ethereum has increasingly been embraced by major companies and financial institutions.
However, Ethereum has in some ways been the victim of its own success. As Ethereum has become more popular, its network has also become more congested. Users of Ethereum have grown increasingly frustrated with high transaction fees, while scientists and mainstream media have drawn attention to the huge energy demands powering the Ethereum network.
Ethereum developers have spent years working on innovative solutions to some of the biggest challenges facing the network. Many of these solutions are now nearing activation as progress continues toward Ethereum 2.0. So here are three of the biggest challenges facing Ethereum and the solutions that have been proposed for Ethereum 2.0.
1. Energy consumption
The Problem: Like Bitcoin, transactions on the Ethereum network are verified by computers solving complex mathematical problems. Participation in this process is rewarded by distributing transaction fees to the computers which solve these problems. This process is known as mining, and the consensus system it creates is known as proof of work.
There are a variety of benefits to this system, including allowing for open participation in the network and decentralization, which leads to a variety of security benefits for Ethereum transactions. However, the process consumes large amounts of electricity, and cryptocurrency mining has consequently been criticized for its environmental impact.
Some studies have found that Bitcoin consumes as much energy as the entire of Argentina, while the Bitcoin network’s carbon footprint is as large as a city the size of London. The environmental impact of cryptocurrencies such as Bitcoin and Ethereum becomes ever direr as the networks grow in size.
The Solution: Ethereum’s energy consumption will be mitigated by moving from the proof of work mining mechanism to an alternative system known as proof of stake.
The proof of stake mechanism proposed for Ethereum will see holders staking a minimum of 32 ETH to run a network node capable of verifying transactions. The owners of these nodes will be randomly rewarded with newly created ETH for their role in securing the network.
Proof of stake offers additional benefits beyond reducing Ethereum’s energy requirements. The computing hardware needed to mine Ethereum is very expensive, and there is consequently a high barrier to entry for new miners wanting to participate in the network. Running a network node independently also has a high barrier to entry; if the price of Ethereum is at $3,000, then $96,000 worth of Ethereum would be necessary to be part of the proof of the stake consensus mechanism. However, numerous popular cryptocurrency exchanges have said they will allow ordinary users to stake much smaller quantities of Ethereum alongside other users in staking pools once the proof of stake mechanism goes live. It is hoped this will lead to increased decentralization of the network, making Ethereum more resistant to attacks.
2. High transaction fees
The Problem: The current proof of work mechanism powering Ethereum sees users pay a gas fee which is distributed to the miners verifying the network’s transactions. These gas fees are variable and rise at times of high network demand. Users are essentially required to bid to have their transactions verified by miners on the network, with those paying the highest fees having their transactions verified first. When the network is particularly busy, these fees can become prohibitively expensive. Those offering lower gas fees for their transaction may suffer long delays or even have their proposed transaction entirely ignored.
At times of peak demand, Ethereum gas fees have reached levels as high as $70 per transaction. This makes many use cases for Ethereum completely unfeasible. These are also notably higher than many rival cryptocurrency networks, harming Ethereum’s long-term viability. The unpredictability of gas fees is itself a problem that makes doing business on the Ethereum network an uncertain proposition.
The Solution: There are already a number of solutions built on top of Ethereum that can offer huge reductions in transaction costs. Known as Layer 2 solutions, these allow for many transactions to be completed outside of the main Ethereum blockchain before being broadcast to the entire network in one large chunk. The gas fee is then shared by a mass of transactions rather than being attached to each transaction individually.
A longer-term solution to the problem of high gas fees is sharding. This aspect of Ethereum 2.0 is expected to be introduced to the network sometime in 2023. Sharding will see the Ethereum blockchain broken up into 64 smaller “shards”. This will allow far more transactional throughput for the Ethereum network and should also consequently lead to a large reduction in gas fees.
3. Storing transaction data
The Problem: In order to ensure that all Ethereum on the network is correctly accounted for, network nodes are required to maintain a record of transactions conducted on Ethereum. This distributed model of transaction recording is a fundamental feature of the blockchain technology introduced by Bitcoin. A full node on the Ethereum network maintains records of transactions on the last 128 blocks, accounting for around one week’s worth of transactions. The storage requirements of this data vary over time and can exceed 1000 GB in size.
As Ethereum grows in popularity, so do the data storage demands of running a network node. This is another barrier to decentralization of the network and a challenge that must be overcome to allow for Ethereum applications capable of processing large quantities of data.
The Solution: Sharding the Ethereum network will also massively reduce the data requirements for operating a full network node. By splitting the Ethereum network into 64 shards, each node will only be required to store 1/64 of the total network data. Reducing the data demands of Ethereum also allows for greater transaction volume, which should greatly expand the viability of Ethereum applications.
Will Ethereum 2.0 Overcome These Challenges?
The proposed solutions for each of Ethereum’s three key challenges have been talked about for a very long time. The move toward these Ethereum 2.0 solutions has already begun, and most are expected to be implemented in 2023. Most supporters of Ethereum believe changes to the network such as proof of stake and sharding will greatly increase Ethereum’s long-term viability for fulfilling its potential as a decentralized global supercomputer.
