Poor scale and speed threaten Ethereum's maturation
The technical standards for smart contracts on the Ethereum blockchain, ERC20, have revolutionized fundraising and disintermediated banks, venture capital, and crowdfunding platforms like Kickstarter with true peer-to-peer funding.
In its first three years, Ethereum has levelled the playing field for startup funding which once used to be domain of VC investors in very specific areas like Hong Kong, Tokyo or New York. Now people who have never met from other parts of the world could essentially donate to a project. The informal nature of ICOs has also been a poisoned chalice. For example, the 2016 hack of the ICO funds raised for the Decentralised Autonomous Organisation (DAO) led to a schism in the community and the creation of Ethereum Classic.
But Ethereum has also suffered from scalability issues since its inception and is capable of handling just 14 transactions per second, compared to Visa’s 24,000 per second, causing network congestion. Last year, one of the most popular DApps, Cryptokitties, infamously crashed the network.
Ethereum is preparing to hard fork from Ethereum Metropolis version 3.0 to version 3.1, Constantinople, by October which will make transactions more efficient and reduce fees. Four Ethereum improvement proposals (EIP) are also being tested by developers on the network. Several scaling solutions are in the works, including sharding the network (breaking the ledger into smaller chunks) and a Layer 2 solution called Plasma, that would function in a similar way to the Lightning Network for Bitcoin.
There are over 700 DApps listed on Dappradar and over 1,700 listed on community website State of the DApps (though a majority of these are inactive). If Ethereum is to become the ‘Blockchain 2.0,’ there is an urgent need for the network to scale to thousands of transactions per second before it is usurped by a superior technology that can.
Sharding and migration from a proof-of-work protocol to proof-of-stake are the imminent priorities for Ethereum. According to Ethereum researcher Justin Drake, the two goals have been merged into one project instead of being worked on separately, with the move to the PoS Casper protocol slated for 2019 and sharding implemented in two phases over 2020 and 2021.
Ethereum has been using a proof-of-work mining algorithm similar to bitcoin’s SHA256, the newer SHA3, before it removes mining altogether with a proof-of-stake algorithm. This migration will be done during the “Ethereum Ice Age” — a period in which the PoW mining difficulty is exponentially raised to a point where it becomes unviable to mine and is expected to kick in sometime in 2020.
Ethereum is also in a race to move to a PoS protocol before ASIC chips (processors purposely built to mine ETH) overwhelm the hash rate of the network, making it susceptible to attacks. Some believe the development team isn’t taking these threats seriously enough.
Hedge funds are also reportedly starting to take short positions in ETH due to the slow progress in improvements.
But with 17,000 nodes running the network globally and a community of around 250,000 members, the network effect of Ethereum could reach a critical mass before it is undercut by a competitor.