ETH 2.0 and the gas crunch

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Lately, the cost of trading on the Ethereum network has gone sky high. These fees have become so expensive that it has priced out many casual investors. This has led to the rapid growth of alternative L1 chains, which are much more accessible due to their lower trading fees.

These other L1s have experienced their own issues, including security breaches and network outages. In addition, there is the open question of whether they can scale up without raising their fees.

The question becomes: are alternative L1s really a long term solution? Or are they placeholders until Ethereum can solve the scaling issues? To answer these questions, let’s discuss why the fees on Ethereum became so high and what the plan is to solve the scalability issues and lower transaction costs.

Why are gas fees so high on Ethereum?

In short, gas fees are so high because of the rapid expansion of the Ethereum user base. Having security and decentralization on such a massive scale comes with a cost. When a transaction is sent to the network to be processed, a miner must validate it. The Ethereum network can only process a maximum of around 15 transactions per second, so backlogs happen constantly.

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When the network becomes clogged with many transactions, miners will choose those transactions which offer them the highest gas fees. Because of this, the price is driven up over time as more transactions are executed on the network. Over the past couple of years people have been flocking to join DeFi , and get in on the NFT movement. Both of these waves have contributed greatly to the gas crunch.

Why not simply increase the transaction speed of Ethereum?

Many have suggested that Ethereum should increase the size of the blocks on the network, and reduce the time it takes to process them. This would have an exponential effect on speeding up transaction processing on the network. The problem with this solution is that it would lead to a huge increase in the size of Ethereum nodes.

If the size of nodes was increased, then running a full node would require dozens if not hundreds of terabytes of hard drive space. This would lead to a reduction in the number of people working to verify the network, and thus more centralization.  To address these problems, Ethereum plans to incorporate several new mechanisms into the next version of the network, called Ethereum Serenity or Ethereum 2.0. They hope that these changes will reduce the cost of gas, increase network speed and energy efficiency, while maintaining decentralization,

Ethereum Serenity (2.0), Proof of Stake, and Sharding

Ethereum has begun moving to the Proof of Stake (PoS) mechanism for network consensus. A section of the Ethereum chain has already begun implementing this which will be merged with the main chain in the coming months.  In this model, to verify a transaction, a miner stakes their ETH and signs off on the authenticity of the transaction. If this action turns out to be malicious, the miner can lose their ETH.

The Etherium Serenity merge with L1
The Ethereum Serenity merge with L1

Using Proof of Stake would be much more energy efficient and would remove the need for expensive hardware to run an Ethereum node. The goal is to make it possible to run a node from an ordinary laptop.

The Beacon Chain

One of the major features of Ethereum Serenity is the Beacon Chain. This is where PoS is being tested and implemented. Trading is not currently on the Beacon Chain, but it will soon merge with Ethereum L1. The Merge is scheduled to happen in Q2 of this year which will migrate the whole network to the Proof of Stake method.

The Beacon Chain of Ethereum
The Beacon Chain of Ethereum

Sharding

Another mechanism that Ethereum will implement in Ethereum Serenity will be Sharding. This refers to a splitting up of the database so that validators will only need to validate the state of the shard where they are working, and the transactions therein, without having to store/run the whole network. This will make it much easier for anyone to run a node on Ethereum and will increase transaction speed drastically.

ETH sharding
ETH sharding

Once the Merge occurs, the current Ethereum L1 that we all are using now will become just one of what will be over 64 total shards of the wider Ethereum network. At that point the Beacon Chain will become the brains of the Ethereum network, working to coordinate all the shard chains and keep them in sync.

This will lead to a vast reduction in the energy costs of the Ethereum network and will also improve the network scaling for the future. Gas fees are not expected to go down right away when the merge happens, because sharding will not be fully implemented until later. The goal is to increase the maximum transactions that the network can process from the current level of 15 per second to more than 1000.

The Holy Trifecta

The goal which all crypto protocols strive for is: Scalability, Security, and Decentralization. For all its faults, Ethereum is the most battle tested protocol in crypto outside of Bitcoin. Ethereum has never gone down as the result of a malicious attack as of this writing. The high price of gas is an urgent problem which has been building for several years now. The developers saw this coming and proposed many solutions to fix it, but the rollouts have been slow.

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The larger an asset becomes, the more difficult it is to change the way it operates. Bitcoin is notoriously slow in reaching a consensus to adopt new changes, and Ethereum has begun to be weighed down in the same way as it has grown larger.

Other L1s have offered much more affordability for every day traders, but it remains to be seen if they can maintain their low fees as they start to grow larger. Decentralization and security are uncertain on smaller cap L1s, as they haven’t proven themselves yet like Ethereum has. No one has truly solved the riddle yet, but hopefully Ethereum 2.0 can see the holy grail of crypto materialized. The sooner this problem gets solved, the sooner DeFi can see acceptance into the lives of more people worldwide.