Ethereum

Ethereum (ETH-USD): a wolf in sheep’s clothing

TechCrunch Disrupt London 2015 - Day 2

John Phillips/Getty Images Entertainment

Summary of the thesis

Ethereum (ETH-USD) continues its long road to Ethereum 2.0, with new ideas and potential updates emerging in recent weeks. In this article, I review the latest news and argue that Ethereum could potentially be left in the dust. There are two main reasons for this. First, the idea that the Ethereum blockchain is actually not as decentralized as other cryptocurrencies, like Bitcoin. Second, many superior alternatives exist today, especially when it comes to DeFi applications.

The latest on Ethereum

For some time, plans have been made on how Ethereum will increase scalability and reduce gas fees, including moving to a PoS system, among others. However, the task turns out to be more difficult than expected.

December 6, Ethereum suffered the “Glacier of the Arrow” update, which pushes the difficulty bomb date back to June 2022. As it stands, miners are still enjoying mining rewards from a PoW system, but that will have to end eventually when the network will switch completely to a PoS system. This is where the hard bomb and ensuing “ice age” comes in. Meanwhile, Ethereum has now become, in some ways, the most profitable cryptocurrency at mine.

In other news, Ethereum creator Vitalik Buterin recently released his vision for The “Endgame” of Ethereum 2.0 The proposals aim to improve scalability and privacy concerns. To do this, Buterin offers a second level of staking, which can allow staking using fewer resources.

Transactions in a block are divided into 100 buckets, with a Merkle or Verkle tree state root after each bucket. Each second level staker is randomly assigned to one of the buckets. A block is only accepted when at least 2/3 of the validators assigned to each bucket approve it.

Source: Vitalik.ca

Buterin aims to split the production and validation process. Validation can happen more efficiently because validators don’t need to keep a full record of the entire blockchain.

blockchain timeline

Source: Vitalik.ca

This process should also improve resistance to censorship. What Buterin is discussing here is how to scale Ethereum while maintaining an acceptable level of decentralization. This has no immediate implications, but it gives us a lot to think about.

Is Ethereum decentralized?

This is ultimately the question to be answered, and it is a key differentiator between Bitcoin and Ethereum. Decentralization is a key part of cryptocurrencies, but in many ways Ethereum sacrifices its essence to make itself more scalable. Transitioning to PoS eliminates the need for miners and puts all the power in the hands of stakers. Although some contingencies have been foreseen, such as fines for malicious behavior, the centralization of Ethereum production seems inevitable in this model.

Another big misrepresentation of centralization comes when we talk about DeFi, which has been the main driver behind the rise in Ethereum usage over the past year. DeFi often relies on decentralized exchanges, DEX, which allow users to freely trade and stake coins. While these exchanges may be decentralized in terms of day-to-day operations, their governance is an entirely different matter. The evidence suggests that Uniswap insiders control over 40% of voting power.

Finally, we could also apply a similar argument to tokens such as Wrapped Bitcoin (WBTC) and Stablecoins, which represent a large part of the liquidity in Ethereum funding pools. Stablecoins, in particular, are centrally controlled and susceptible to any problems that arise.

For DEXs and centrally controlled tokens/stablecoins, this opens the door to regulation, which we have seen governments are pushing for these last weeks. Ultimately, this makes Ethereum much more fragile than some might perceive, and that doesn’t even take the competition into account.

Time is counted

Ethereum has a very big promise to keep with the upgrade to Ethereum 2.0, and the clock is ticking. The ticking time bomb to cut the mining reward continues to be pushed back. Who’s to say it won’t happen again? And how long can Ethereum continue to do this before people lose faith in the network? In the meantime, there are plenty of reliable alternatives that promise to lead us into the third wave of DeFi.

An example of this is Cardano (ADA-USD). Cardano has now launched Ardana, its own decentralized DeFi hub, and they also plan to launch dUSD, their USD stablecoin. I previously compared Cardano and Ethereum in this article.

Another contender for the throne is Polkadot (DOT-USD), which has Acala, an Ethereum-enabled DeFi hub that allows for additional scalability and faster transactions.

And finally, we have Solana, (SOL-USD) which has already made great strides in the NFT world. Solana recently launched Atani which acts as an aggregator for all decentralized exchanges. Solana has established partnerships with major exchanges and has superior technical specifications to Ethereum.

Final Thoughts

That said, I have to say that I still have a substantial amount of Ethereum in my crypto wallet, but I am considering moving some of it to other cryptocurrencies. Ethereum still has the upper hand, and perhaps the ability of large holders to take control of the network will bolster institutional support. However, there are inherent issues that Ethereum continues to fail to address, with better options. While I believe Bitcoin’s position as a store of value is entrenched, Ethereum’s place as an enabler of DeFi and Internet 3.0 remains a question mark. Think about it before investing.