Ethereum to Move Transactions Off Mainnet and Onto Layer-2, ETH-Compatible Chains: Report

Now that Ethereum (ETH), the world’s largest smart contract platform, has completed the Merge, it’s time to get ready for the next set of Ethereum upgrades – “the Surge, Verge, Purge, and Splurge.”

As noted in an update released via an OKXOkcoin research partnership, Ethereum’s long-anticipated Merge update has “made the network over 99% more energy efficient and updated its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS).”

Adam Bloom, a yield farmer based in Los Angeles, notes that the Merge has also “prepared the network for subsequent upgrades to make the network cheaper, faster, and more decentralized.”

When those upgrades are complete, the Ethereum Foundation predicts Ethereum “could be able to process 100k transactions per second (TPS).”

Almost as soon as Ethereum launched in 2015, the Ethereum Foundation began “discussing an upgrade from PoW to PoS. It took seven years, but this week, it happened.” Ethereum’s update to PoS has arrived and “should make the network over 99% more energy efficient.”

Also, Ethereum will now “pay smaller ETH rewards to PoS validators than it paid to PoW miners.” As a result, Ethereum’s total issuance of new ETH “should drop from 5M ETH per year to an amount calculated based on the formula 166*√(total ETH staked).”

A bit messy, but the result is that ETH issuance “would likely go down.” Possibly 90% down.

Some have “compared this reduction to Bitcoin’s analogous process of ‘halving’.” In a Bitcoin halving, the network “reduces mining rewards by half to reduce Bitcoin’s inflation rate.”

If ETH issuance does reduce by 90%, that would be “like three halvings (do the math), a ‘triple halving’.”

In addition, Ethereum adopted “a new rule last summer, EIP-1559, which changed how the network processes user transaction fees (‘gas fees’).” Under EIP-1559, the network “automatically ‘burns’ gas fees rather than paying them to miners.” That is, the network “collects the ETH coins used to pay gas fees and removes them from circulation.”

These two rules – reduced ETH issuance under PoS and gas fee burning under EIP-1559 – could “make the post-Merge supply of ETH drop significantly.”

Next, Ethereum should “pursue a series of complicated and ambitious network updates.” And, in typical Ethereum “are you sure about this?” fashion, developers intend “to pursue these updates all simultaneously, in parallel.”

The Surge – Scaling with shards

If you like using Ethereum’s mainnet for your Web3 transactions, there’s bad news – Vitalik “wants you off there.” Ethereum’s mainnet has been “overrun for at least a year with DeFi, NFT mints, and dog coin transactions, causing gas fees to explode.”

There are two basic ways “to address this kind of blockchain congestion.” One is to grow the blockchain’s capacity “to process transactions on its mainnet. Solana has taken this approach but it comes with tradeoffs.”

On the one hand, Solana can “process over 200k transactions per second on its mainnet.” On the other hand, the network “has faced repeated technical challenges.”

Ethereum is “taking the other approach, which is to move as many transactions as possible off the mainnet and onto ‘Layer 2,’ a collection of Ethereum-compatible blockchains, sidechains and rollup protocols attached to Ethereum like barnacles on a whale.”

Even before the Merge, “a large and growing collection of these Layer 2 scaling protocols had already amassed billions of dollars of total value locked on their chains.” They include Polygon, Avalanche, Arbitrum, Optimism, and new ones joining daily.

With the Surge, Ethereum will “add native sidechains, called ‘shards,’ to Layer 2.” These shards will “roll out gradually until there are 64 of them.” At that point, Ethereum will “look less like a single chain and more like a bungee cord, which looks like this if you bisect it.”

After the Surge, Ethereum would “have this kind of multichain structure, except with one large chain, the Ethereum mainnet, running through the middle of it like a spine.”

All the Layer 2 protocols, “including the Ethereum shards and the third-party scaling protocols, would process transactions away from Ethereum’s mainnet.”

Then, Layer 2 would “send bundles of transactions back to Ethereum’s mainnet for the network to record in the Ethereum ledger.” The Ethereum Foundation “estimates that once this process is complete, Ethereum could jump from a network throughput of 15 TPS to 100k TPS.”

This extra data capacity “could reduce the cost of processing Layer 2 transactions by an estimated 90%.”

Currently, gas fees on these Layer 2 protocol “range from less than a cent to perhaps $0.30.”

Subtract 90% of that cost, and you could “have a network cheap enough to use for everyday internet activities like social media and gaming.”

If that happens, Ethereum could “become not just a place for degens to speculate on crypto trading, DeFi, and NFTs, but a truly decentralized global computer for everyday use.”

And while that’s happening, Ethereum would also “be even further under the hood, working on the Verge.”

For more details on this update, check here.

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