Thousand-word long text, the structural combing of Ethereum
Editor's Note: This article comes fromDecentralized financial community (ID: China_DeFi), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Decentralized financial community (ID: China_DeFi)
DeFi
Decentralized financial community (ID: China_DeFi)
, reprinted by Odaily with authorization.
NFT
2020 is a year full of challenges for the whole world. At the same time, it turns out that it has a relatively positive impact on Ethereum - the Ethereum ecosystem has not weakened in many ways, and it has taken a big step towards our market capitalization. In this article, we will focus on some trends on the Ethereum blockchain, including:
grassroots
Eth2 and L2
BTC on Ethereum
Bitcoin's anonymous creator, Satoshi Nakamoto, published a white paper in 2008 addressing the challenges associated with digital scarcity and launched Bitcoin in 2009.
After that invention, many other projects followed. There are now more than 8,000 unique digital assets identified by CoinMarketCap.
Among them, Ethereum is the second largest digital asset in the world after Bitcoin in terms of market value, and a large ecosystem of other tokens can be built on top of it. That makes it the only other major network effect in the space.
A lot of people ask me what I think about Ethereum and why I personally don't invest in it even though I do invest in Bitcoin.
Below is my analysis of the Ethereum protocol from the perspective of an investor (not a developer).
Ethereum 1.0 Overview
-Vitalik Buterin
Ethereum was proposed by Vitalik Buterin in 2013, crowdfunded in 2014, and launched in 2015.
Buterin, who was about 19 at the time, wanted to create a platform for decentralized applications. big game maker blizzard
Undercutting his in-game persona led him to embark on a years-long quest for technological solutions to correct these horrific injustices:
I happily played World of Warcraft from 2007-2010, but one day Blizzard removed my beloved Warlock's Siphon Life component. I cried myself to sleep, the day I realized how dire the consequences of centralized services can be.
He described the discovery of Bitcoin in 2011, which lit a fire.
Bitcoin uses the blockchain as a savings and payment technology, and the underlying layer is very simple. It focuses on doing one thing particularly well: storing and settling value. Other layers can be built on top of this base layer, leveraging its ability to store and transfer value for more complex purposes. One example is the Lightning Network, which extends Bitcoin's scalability for micropayments.
Ethereum, on the other hand, is Buterin's attempt to apply blockchain technology to the underlying layer of a broader protocol. It markets itself as the "world computer," like an app store not controlled by any central entity. It's like a distributed operating system with a built-in token system, and programmers can use this ecosystem to make decentralized applications, or "dapps" for short, which also often use their own tokens.
The underlying technology of Ethereum is based on smart contracts, which refer to programmatic agreements in the blockchain that are triggered when certain events occur. It takes a fraction of Ethereum tokens to pay for smart contracts executed by miners on the blockchain.
sample application
Ethereum has been used to create various projects. DappRadar is one of several sites that let you explore decentralized applications across categories on Ethereum and other smart contract protocols.
One of the most popular examples is stablecoins. Institutions can collect fiat currency, store it as collateral, and issue tokens that run on the Ethereum protocol. These tokens are ostensibly 1-to-1 convertible into fiat currency and thus tend to maintain a stable price. These are basically dollars utilizing blockchain technology to transfer and store tokens. People rely on third parties because they have to trust that the collateral that hosts and backs the tokens is sound, but the exchange of tokens between counterparties is permissionless.
In 2019 and 2020, a suite of applications called “Defi” or “Decentralized Finance” became very popular. These apps replicate various banking functions, including ways to earn yield, borrow funds, or exchange tokens. One example is Uniswap, a decentralized digital token exchange. This is an exchange that operates in a decentralized manner based on blockchain software and incentives, rather than a company acting as a central trading hub. Several other DeFi exchanges also exist.
There are many other protocols that provide liquidity to these exchanges, often referred to as "liquidity mining". People can deposit tokens and collect interest, and others can borrow tokens and pay interest in a decentralized manner. Because in most cases there is no manual or manual credit check or risk analysis, these systems typically rely on an "over-collateralization" policy to secure the loan.
Gaming and gambling are also important areas of interest for them. An important early example is CryptoKitties. The game allows users to buy, collect, breed and sell virtual cats. Each token represents a cat, and each is unique. Once the cat token is generated, the user owns their cat token and no one can take it or change it, like Blizzar did with Buterin's beloved Warlock. The app became so popular in late 2017 that it slowed down the ethereum network.
Today, there are many crypto-based games. I don’t enjoy playing games as much now as I used to, but if I did, I can definitely see why blockchain could potentially add something of value to the gaming ecosystem. The idea of having players own items/pets/characters independent of the game publisher, and even having those items/pets/characters be recognized by other games is certainly cool.
However, it’s worth noting that many crypto-based games run on Ethereum’s competitors, such as EOS or TRON.
Broadly speaking, non-fungible tokens, or “NFTs,” are a recent area of demand and growth. Unlike liquid and standardized units like bitcoin or ethereum tokens, non-fungible tokens are unique collectibles such as a unique digital cat, piece of digital art, event ticket or domain name that can be stored on the blockchain trade.
Finally, social networks and other systems are also projects in the dapp ecosystem. In theory, the sky's the limit, but the question is whether they make enough economic sense.
Are decentralized applications really decentralized?
One of my concerns when reviewing the largest use cases for decentralized applications is that many of them are circular and speculative.
Ethereum is widely used in the decentralized trading of encrypted tokens, and is widely used in encrypted stable coins, which are used as liquid account units for trading encrypted tokens, and are widely used in lending and earning interest on encrypted tokens. A practice that can be used as a source of liquidity/borrowing on Ethereum for crypto token traders and also for earning or trading various crypto tokens in a gamified manner.
So, this is a big crypto-coin-powered operating system for the purpose of moving… crypto-coins.
In the real world, a healthy banking system consists of people saving money and banks making all kinds of loans for mortgages and business financing to generate real world utility.
On the other hand, the speculation-based banking system, which consists of a series of bank deposits and then lending money to speculators in the nearby stock market, coupled with technology providers to make this easier, then those speculators The trading is mainly composed of stocks of these banks, stocks of technology companies, and stocks of stock exchanges, forming a large round of speculation. Ethereum's largest current use case is based on a decentralized version of a circular speculation system.
Some games are fun in their own right and collectable, but for the most part Ethereum is currently mostly about decentralized finance and speculative trading.
In fact, we can argue that the main reason some decentralized financial applications (such as exchanges and liquidity mining technologies) are more popular than their more centralized competitors is that they bypass the "know your "KYC" regulations for Know-Your-Customer.
The government has attempted to impose KYC checkpoints on regulated exchanges and custodians in order to track who is buying and selling crypto tokens. They can do their analysis on a public blockchain, but in order to enforce tax fraud or other litigation, they want to be able to link blockchain transactions to specific individuals by having KYC gateways at as many exit and entry points as possible.
Decentralized applications make this a bit more difficult and more attractive to users who want to retain their privacy. Increased government surveillance has been a key catalyst in the development of privacy technologies, or offline transactions, in recent decades. There is a common narrative that if cash were invented today, it would be illegal because governments would be hard to track and they wouldn't like it.
If centralized crypto exchanges and centralized crypto banks are subject to KYC rules, and decentralized crypto exchanges and decentralized crypto banks are not, then we should of course expect some growth in non-KYC decentralized versions until they Take some regulatory hits.
Running code on Ethereum is more expensive than running code on Amazon Web Services. There are some games or services that use blockchain technology exclusively, such as enforcing digital ownership of non-fungible tokens (e.g. representing a unique digital cat), but otherwise many games or services are replicating services, such as crypto exchanges All lenders, or lenders, could work just as well without using a blockchain. So a lot of growth seems to bypass KYC and become somewhat "permissionless".
The problem, however, is that the ecosystem is not yet as decentralized as it would like to be, and has a lot of attack surface in case of a regulatory crackdown.
Third-Party Ethereum Node Operators
Bitcoin was designed from the ground up to make it easy to run a full node. In fact, that design task was at the heart of Bitcoin's infamous "fork wars" in 2017, when an easy-to-run version of Bitcoin's node core outperformed its hard fork, which increased the block size to make It is harder to run a full node in exchange for higher network throughput.
This works well for Bitcoin because, under the hood, it focuses on one simple thing: storing and transmitting value. This is an elegant and simple blockchain.
Ethereum is more complex, with more targets at the bottom layer, and the node situation is more complicated, and some dapps have significant node requirements.
Since at least 2018, it has been pointed out that the Ethereum dapp ecosystem is quite dependent on large third-party node operators like Infura. For example, here's an article from December 2018. The situation is still going strong. Ironically, Infura uses Amazon Web Services, so there are two layers of centralization.
Here is how Infura describes their product:
Here is another third-party node operator, Alchemy, describing its product:
Apps running on Ethereum are more decentralized than normal apps on other platforms, but if most of what they do is bypass KYC regulations, and the government decides to crack down on these practices, then they have considerable centralized attack face to chase. Governments can ban cloud providers from hosting Ethereum nodes, and they can go after companies offering large-scale node services. They won't necessarily destroy Ethereum itself, but they will make it harder for dapps to run, threatening use cases.
If the government cracks down on Ethereum’s third-party node services, dapp operators will scramble to find ways to efficiently run their applications without these centralized third parties.
In the August 2020 podcast, Peter McCormack asked Vitalik Buterin a question, "How dependent is Ethereum on Infura?"
Buterin replied:
“I think first of all the Ethereum network does not depend on Infura. For example, even if Infura dies tomorrow, the Ethereum network will continue to operate, and everyone who has an Ethereum full node or an Ethereum light node will continue to operate normally.
Ethereum applications will definitely become harder to use, although at the same time it is possible to use Ethereum applications without relying on Infura.
I think in Metamask you can integrate local node endpoints and there is something like ethereum light client that can run Geth light for example and some other implementations also have light mode which also does block header validation like bitcoin , in fact in Ethereum, we even go out of our way to make the lightweight client more robust. So, for example, Ethereum has a concept called a state tree, where we dedicate not only to transactions, but also to account balances. So, given a block, like given a block header, even a small piece of data at the top of the block, a very short proof can be created that cryptographically proves what the balance of a particular account is. *
These are things we can do better, and there are a lot of active efforts being made in this regard. Like, there's a lot of effort going on, you know, trying to create a more decentralized backend for something like Metamask. For example, you can connect it to your full node or even a light node if you want. "
In a follow-up to Ethereum Bankless in October 2020, Buterin gave further content on this issue:
I mean, I realize that the reality is that there is no better way, but it is definitely one way we should try, and there are a lot of good projects that are trying to pass the efforts of engineers, such as the design of Eth 2. Has a simpler and better light client than Eth 1, so we hope something like Metamask will eventually adapt to it over time. "*
Security Question
In November 2020, the market saw some of the risks emerge as Infura's share price fell. Many exchanges had to temporarily stop withdrawing Ethereum tokens and various tokens built on Ethereum.
Infura linked the issue to a vulnerability in the ethereum client.
"Earlier today (November 11, 2020), Infura experienced its worst service outage in four years of operation. We realized that we are an important part of the infrastructure of many amazing products and projects. I Wanted to apologize to all of our users and the ecosystem. We recognize the trust you have placed in us and we will not take your trust lightly. I would be happy to share the details of this incident with you so that things become transparent, Then you will have confidence that our service will be better and more resilient in the future.”*
Security Question
2020 has had a lot of high-profile DeFi hacks and breaches.
This is different from an exchange/custodial provider that gets hacked (eg someone steals coins from the exchange) when there is nothing wrong with the underlying protocol. Instead, many of these DeFi hacks/bugs exploit flaws in the underlying protocols that lead to loss of user funds. In other words, this is a more fundamental problem at the token protocol layer enabled by Ethereum.
When multiple protocols are involved in a complex manner, and many of them have low security starting with hashrate or other protections (aka network effects and many altcoins have weak security budgets, or high complexity with vulnerabilities nature), are more prone to hacks and errors.
Solve an unclear problem in a developmental way
To sum up, there is a great demand for stablecoins as a liquid unit of account when trading encrypted tokens and for other purposes, the demand for decentralized encrypted token exchanges and decentralized encrypted token liquidity providers, And token-based games/social dapps are also in high demand. Ethereum has a large market share in financial dapps, while some smaller competitors have a significant market share in gaming/social dapps.
These dapps are less efficient than centralized apps in terms of cost per line of code executed, but because people want to get around KYC regulations, and stablecoins are currently very useful in the world of cryptocurrency exchanges, they are in high demand.
But, ironically, the Ethereum solution to this need has a semi-centralized cluster. While it’s more decentralized than a purely centralized system, it’s not actually the level of decentralization some would hope for, Buterin acknowledged. These centralized clusters provide a potential attack surface for governments to crack down on these regulated, fully centralized and KYC regulated companies.
It's almost a façade of decentralization to what is actually a centralized system. This is a step towards decentralization, but decentralization in its current form is not decentralization in its true form.
There are security issues with the various tokens used on Ethereum, and much of the ecosystem is circular. So far, Ethereum dapps have not primarily served non-crypto industries with widespread success, but rather their primary use case has been as a platform for trading, lending, borrowing, and moving various crypto tokens. This cyclical speculation can drive development and price up very quickly, but if the situation goes the other way, it can also be resolved quickly.
Ethereum competition
Ethereum faces competition from smaller smart contract blockchains such as Cardano, TRON, Polkadot, and others.
Just like other currency tokens are unable to capture market share from Bitcoin’s expanding network effects, these smart contract protocols are much smaller than Ethereum. Together they are all smaller than Ethereum’s market cap, so Ethereum has achieved network effects and some escape velocity relative to them.
However, they are not as far away from Ethereum as some currency tokens are compared to Bitcoin, so they are worth keeping an eye on.
Likewise, there are some smart contract platforms that tie themselves to Bitcoin. RSK is an early example.
Another example is Stacks 2.0, released last week, a protocol built on top of Bitcoin that can bring smart contracts and DeFi to Bitcoin's network, using Bitcoin as a settlement layer. The project is well-funded (from actual multi-million dollar financing regulated by the SEC) and they are also issuing grants to dapp developers to potentially kick-start the network effect. Whether this project will succeed remains to be seen, but the point is that between this project and some smaller independent protocols, Ethereum will face some competition in the transition process.
Ethereum 2.0: The Next Iteration
Ethereum.org describes some of the problems with their current protocol:
"High demand drives up transaction fees, making Ethereum expensive for the average user. The disk space required to run an Ethereum client is growing rapidly. And the underlying proof-of-work consensus that keeps Ethereum secure and decentralized Algorithms have a huge impact on the environment."
Core developers, including Buterin, have been working on ethereum 2.0 for years to fix some of the problems associated with the ethereum network, which will introduce drastic changes to the core of the protocol.
First, it will shift from a proof-of-work security model to a proof-of-stake security model.
In the proof-of-work model used by Bitcoin, miners devote their processing power to solving puzzles, and when a puzzle is solved, it adds another block to the blockchain, which means a bunch of transactions get processed. The correct blockchain is the longest blockchain determined by the majority of the network. In the proof-of-stake model, transactions are verified not by providing processing power, but by proving that they own units of the cryptocurrency, and whichever chain is verified by more currency holders wins.
If there is a split in the proof-of-work blockchain, meaning there is a dispute over which block is the latest block, then a miner can only work on one of them at a time, and the longest blockchain will eventually be accepted by the majority . In the event that miners disagree on the most recent block, each miner must choose which chain he thinks is correct and commit processing power to add more blocks to that chain. Inevitably, one chain will overtake the other, and most miners are based on it, so it will be the winner. The shorter chain will be discarded, and any miners contributing processing power to it have wasted their money.
There are various solutions to this, which have been part of research and development in recent years. Proof-of-stake models have emerged for many different blockchains. Typically, blockchains need a way to learn about splits and "penalize" proof-of-stake validators for validating any chain that ends up not being the longest chain. This increases the cost of being wrong and encourages only validating what stakeholders really believe is the correct chain, as proof-of-work miners must. Ethereum 2.0 will have a mechanism to remove Ethereum tokens from validators that fail to do their job properly, which can lead to huge losses for errors or attacks on the network.
Ethereum has a much lower hashrate on its current proof-of-work system than Bitcoin's proof-of-work system, and uses GPUs instead of ASICs like Bitcoin uses. ASICs are specialized hardware with physical supply constraints that make it much harder for an attacker to get most of the resources; attackers may need existing miners to participate using existing hardware), while GPUs are general-purpose and versatile. In theory, someone could buy a lot of cloud GPU power for a short period of time, and then try to 51% attack Ethereum 1.0, which is much cheaper than trying to 51% attack Bitcoin, and No specialized hardware or supply chain constraints are required.
So I can understand why the developers of Ethereum are interested in Proof of Stake because of their low hash rate and GPU based mining. Assuming it works as intended and has no hidden attack surface, Proof of Stake should make Ethereum more expensive to attack than it currently is. However, with any new security model, it actually takes years to prove it is attack-resistant. The more complex things are, the more surprises there will be.
Here is a proof of hashrate comparison between Bitcoin and Ethereum:
image description
Chart source: BitInfoCharts
The large difference in hash rate is not a "by-by-one metric" for assessing the difference in the cost of attacking each network (since they have different hardware, GPUs are more expensive per unit of processing power), but it is a useful comparison nonetheless.
Also, looking at the difference in hash rate in logarithmic form, zooming in on some details, Ethereum has just recently recovered to the same hash rate as it peaked in mid-2018, while Bitcoin's hash rate is currently what it was in 2018 Three times the mid-year peak. Thus, Bitcoin’s security has tripled, while Ethereum’s has remained the same ever since.
Ethereum 2.0 transfer out
Ethereum developers have been working on the Ethereum 2.0 update for years, experiencing multiple delays and aiming to complete it in 2022. It may end up being delayed. I don't blame them; it's extremely complicated.
First, a "beacon chain" was released that runs in parallel to the existing Ethereum blockchain. This was done in December 2020. This allows for "staking," whereby ethereum holders can submit large amounts of ethereum tokens to operate a validator that will validate transactions. Anyone with 32 ethereum tokens can operate a validator, and those who hold fewer ethereum tokens can contribute funds to the validator pool. This is the heart of the proof-of-stake model.
Second, a maximum of 64 "shards" will be created. Ethereum 2.0 will not be one chain, but dozens of parallel chains called shards, processing transactions and connecting with the beacon chain. This will radically increase the transaction throughput of the system. Each validator operates on only one shard at a time, validating transactions that occur on that particular shard. Sharding can pose security issues, for example, if validators can choose which shard to operate on, it doesn't cost much to 51% attack a specific shard, so the beacon chain must randomly coordinate validation device to prevent this possibility.
Third, once all of these are up and running, the current Ethereum 1.0 chain will be "docked" into one of the shards. At this time, Ethereum 2.0 was born, and it can be considered to break away from alpha development and enter beta development, so as to be further improved during the operation process. Then at some stage where there are no major changes for a period of time, it can be considered out of beta development.
Additionally, there are "aggregators" and other sidechain solutions, somewhat similar to how the Bitcoin network uses Liquid and Lightning as auxiliary layers to increase throughput.
With these developments, people are starting to question whether sharding is necessary, which comes back to the question of what the base layer itself is developing.
One of the criticisms of Ethereum by Bitcoin enthusiasts is that Ethereum’s monetary policy is flexible, while Bitcoin’s monetary policy is fixed.
Bitcoin produces a new block every 10 minutes on average, and each time this happens, a certain number of new coins are created. For the first 210,000 blocks, there are 50 new coins per block. 25 blocks each for the next 210,000 blocks. Then it was 12.5 per block and currently it is 6.25 per block. Every 210,000 blocks, the issuance rate is halved and will gradually approach zero over time. Bitcoin investors can tell you with considerable precision, for example, how many Bitcoins there will be in August 2026.
Bitcoin will not exceed 21 million coins or change this exponentially decreasing issuance rate unless most of the decentralized network agrees, which is very unlikely unless some security issue in the future forces them to change the issuance model of. There's no central development team that can easily change it, and it hasn't changed in its twelve-year history.
In contrast, Ethereum's monetary policy is more arbitrary, with lead developers changing over time and being accepted by the network when needed. It has 72 million pre-mined coins from the beginning (unlike Bitcoin, which does not have pre-mined bitcoins), and the current total supply is about 115 million. This chart shows total supply in blue on the left axis and annual supply inflation in orange on the right axis.
image description
Chart source: EthHub
The annual issuance rate with all these annotations looks like it was drawn by Bitcoiners making fun of Ethereum, but in reality this is where Ethereum comes from. Over time, the various Ethereum Improvement Proposals, or "EIPs," put forth by developers have changed its monetary policy as needed for a variety of reasons.
However, in this transition to Ethereum 2.0, it seems that Ethereum will also change its monetary policy again through an update called EIP 1559. This will significantly reduce new token issuances.
Within the framework of EIP 1559, Ethereum will have both a deflationary and an inflationary element, both of which together determine how many Ethereum tokens there are at any given time.
The deflationary factor of EIP 1559 is that the base fee paid by users to validators to validate transactions is burned instead of given to validators. Users can offer additional "tip" fees to validators to encourage them to get certain transactions through the queue faster, but the base fee will be burned each time. So every day a small percentage of Ethereum tokens are permanently removed from the system. The higher the total fees in the system, the more tokens are burned per day.
The inflation factor of EIP 1559 is that validators will receive newly minted Ethereum tokens from the network for permanently validating transactions. The total issuance rate depends on how many ethers are used as validators, the yield is higher if there are few validators (thereby incentivizing more validators for better security), and the yield is higher if there are many validators would be lower (which makes verification less attractive). The more validators on the network, the more tokens will be generated, but the amount generated by each validator will be reduced, resulting in lower rewards for validators.
As mentioned earlier, validators are risky. Improper verification or going offline could result in some of their tokens being taken. Thus, rewards for newly minted Ethereum tokens incentivize them to tie up funds, risk generating more tokens for themselves, and provide the necessary transaction validation and security for the network.
In theory, EIP 1559 is a rather elegant framework. It ensures that validators have an inflationary security budget, while also having a deflationary element in the form of fees.
Many bitcoiners will object to the fact that there is no hard issuance rate or hard cap on EIP 1559. I actually feel like there's nothing fundamentally wrong with EIP 1559; I think it's a better monetary policy than what Ethereum is currently running, and it's well thought out. As long as monetary policy is rules-based and issuance is relatively low, I think this can satisfy what ethereum is trying to achieve with its protocol (as a dapp enabler for oil, rather than a scarce monetary collateral like gold). Indeed, if transaction throughput is high relative to the number of validators chosen to operate on the network, the highest potential issuance rate in the proposed EIP 1559 system is low, and some potential outcomes on the network are crunch of.
node characteristics
Let's look at node characteristics. Nodes are client software that users can run to validate the blockchain and execute the rules that enforce consensus. I will again use Bitcoin as a reference and then compare and contrast Ethereum to it.
Even after 12 years of stable operation, the entire Bitcoin blockchain is still less than 350 GB, and is growing rather slowly by a pre-set limit. The bandwidth requirement to run a full node is only about 500 megabytes per day, which is very low. Smaller in size and does not grow faster than a typical computer's memory growth over time, and requires only a basic internet connection, a full bitcoin storing and validating the entire blockchain can be run on a laptop or similar device Node, and will be for the foreseeable future.
This makes Bitcoin highly decentralized in terms of verification and consensus. While mining power is concentrated in certain countries, a major source of Bitcoin's decentralization lies in its consensus framework across nodes. Each full node can rebuild the entire Bitcoin blockchain, and they run all over the world. Here's a map, which is web-visible:
image description
Source: Bitnodes
Ethereum currently has various levels of nodes. Even though the Ethereum blockchain is much younger than the Bitcoin blockchain, the amount of space required to run a full node is already larger than a Bitcoin full node because it grows faster per unit of time. Given a sufficient length of time,
It will become increasingly difficult for ordinary users to operate a node, which means that the entire node may be restricted to large entities, not accessible to any user.
Alternatively, there is a more complete archival node in Ethereum, as it contains various intermediate states. A full node can be expanded and turned into an archive node, but it takes many days and many terabytes of space, so they tend to only be run by larger specialized entities.
Ethereum 2.0 will change this. In order to greatly increase the transaction throughput of the system, validators will only verify transactions on a specific shard (there may be 64 shards), so they only store data and focus on a small part of the network.
However, there will also be super-full nodes that store the entire data of the entire Ethereum 2.0 network; this will require a lot of storage and bandwidth, and can only be operated by a small number of large entities.
The Ethereum Wiki provides an overview of the node types in Ethereum 2.0:
Note that there are now several "levels" of nodes where such a system can exist:
Supernodes - Download the full data of the Beacon Chain and each shard block referenced in the Beacon Chain.
Top-level nodes — only process beacon chain blocks, including headers and signatures of shard blocks, but do not download all data for all shard blocks.
Single-shard node - acts as a top-level node, but also fully downloads and validates every collation on the specific shard it cares more about.
Light node - only downloads and verifies the block headers of the main chain blocks; unless it needs to read some specific entries in the state of some specific shards, it will not process any ordering headers or transactions, in this case case, it will download the Merkle branch to the latest collation header for that shard, and then download the Merkle proof for that shard from there. Expected value in state.
This is the difference between Bitcoin and Ethereum 2.0. The Bitcoin community emphasizes self-validation as a key principle. Any average user can download the open-source Bitcoin Core software on a basic laptop and the entire Bitcoin blockchain. This allows them to audit Bitcoin's entire money supply, view every transaction in all of Bitcoin's history, and personally verify that the entire network follows consensus rules.
In Ethereum 2.0, ordinary users cannot do this; they will need to trust other network participants, including these supernodes run by large entities, and rely on assessments of the probability that the protocol works as intended. Unless they can invest in the major computer/network infrastructure to run a supernode, which would be beyond the means of most users, they will be limited to a single shard node, beacon node, or lightweight node at a given time. Nodes directly authenticate access to the network.
Again, to their credit, they put a lot of thought into this design. Ethereum developers want to avoid some of the problems of altcoins that try to increase throughput by making it difficult for each node to run, so they want to create a series of nodes to provide different levels of verification to users, which can be done almost in When so much complexity is built into the base layer of the protocol.
Token Price Model
The Ethereum 1.0 blockchain is pretty congested right now, so the transactions the protocol is trying to complete are therefore expensive. This is good for Ethereum price; users need Ethereum tokens to pay for executing smart contracts, and high fees mean users need more tokens to pay for executing that contract.
But in the long run, this is bad for the network, because if dapps are much more expensive than centralized applications, then their reason for existing is less attractive.
The main purpose of Ethereum 2.0 is to massively scale the throughput of the system, literally by orders of magnitude. While this is necessary for the protocol to become a "world computer," as it is attempting to do, it raises questions about the incentive structure for ethereum token pricing.
If transaction throughput is very high and fees are very low, users don't need too many Ethereum tokens to run a dapp. There is an interesting trade-off: high fees make dapps unattractive, while low fees may reduce demand for Ethereum tokens.
However, running validators is a good incentive for Ethereumers to hold Ethereum 2.0 tokens for the long term.
They can hoard tokens and submit them for verification to earn more tokens. So as long as the system is still running, there are likely to be a lot of people who want to hold tokens and get paid for them.
In general, I don't see a clear price appreciation model for Ethereum tokens like Bitcoin does. In theory, if the usage of Ethereum 2.0 dapps grows significantly over time, the price of Ethereum tokens will also increase in value to some extent, thanks to Metcalfe’s Law. However, to what extent is hard to say, since a high-throughput low-fee system does not directly require Ethereum's high token price. On the other hand, if the usage of Ethereum 2.0 dapps flattens and stagnates (see the aforementioned rather circular issue at the moment), then the token value may also stagnate.
Bitcoin vs Ethereum
There is a heated debate going on between some Bitcoiners and Ethereum (yes, it does sound like something out of Star Trek).
First, there are cultural differences.
Bitcoin attracts more libertarian and Austrian economist groups; loyalists of sound money, sovereignty, etc. And a lot of Silicon Valley financiers, so it's a bit of a mix. Bitcoin enthusiasts like to run a full node on their PC and audit the entire money supply and consensus rules of the Bitcoin blockchain (“don’t trust, verify”). The development of this area is slower, but more stable, because preserving the core Bitcoin protocol is the most important thing. Institutions with large amounts of money are starting to take an interest in Bitcoin. The surrounding ecosystem has a strong focus on security, including multi-signature solutions and Bitcoin-only hardware wallets that take security a step further than other wallets. The protocol and surrounding ecosystem have been hardened, tested and stabilized.
Ethereum attracts more player culture and more experimentation. As a platform, it can speculate heavily in small altcoins with a high failure rate, but can also constantly re-evaluate developments in the technology space to see how its underlying framework can be improved. It's more ambitious under the hood, and some people think it's a feature, while others think it's a bug. It relies more centrally on its founders and has more trust in the money supply and details. DeFi on Ethereum has been able to catch up to the second layer of Bitcoin, for example, there is more Bitcoin in Ethereum for decentralized transactions than exists in Bitcoin Lightning Network, but the growth of DeFi has so far It is speculative in nature.
Some Bitcoin enthusiasts believe that any other cryptocurrency or digital asset is inherently a bad idea or a scam. Many of them insist that new applications of blockchain technology should be built on top of the proven Bitcoin, rather than running alongside it as a separate protocol. The Bitcoin developer community prefers to move slowly and carefully rather than take a fast-moving and disruptive approach, which they believe many other coins do.
In fact, digital assets other than Bitcoin have had a pretty bad track record. Thousands of tokens, many are outright scams, many lack adequate security, and have been hacked at the base layer (not only via exchanges, but the actual protocol itself is subject to direct 51% attacks or exploits)
And others are well-meaning and fun, but not successful at all. The vast majority have not surpassed their late 2017 highs in terms of price or hashrate,
And Bitcoin has surpassed that.
On the other hand, the Ethereum folks see a lot of value in the Ethereum network, which is, in fact, another blockchain besides Bitcoin that has built up some degree of network effect over time, and it also Benefit from Metcalfe's Law. Some of them see Bitcoin as an old technology, or limited to digital gold, and believe that Ethereum will be the future of many operations. Many of them see Bitcoin as a savings technology and store of value, but they are just more interested in Ethereum’s potential for decentralized applications.
Buterin coined the term "Bitcoin maximalists," referring to bitcoin enthusiasts who believe that no coin other than bitcoin can sustain significant value over the long term.
hardest money
In this debate, I don't see myself as important.
I'm an investor and I want to invest in projects that I think are done and that have a good risk/reward profile. To me, this includes Bitcoin, but not Ethereum.
For the reasons I stated in my July 2020 article, I prefer Bitcoin risk/reward opportunities in the digital asset segment of a portfolio. It has a 12 year price history and a consistent monetary policy built around difficulty adjustments that happen every 2 weeks and supply halvings that happen every 4 years has algorithmically driven the price so far and increased adoption:
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Chart source: Blockchain.com
Bitcoin's base layer has been out of active beta mode and has been fully operational for a long time. The ecosystem around it is constantly improving, and the base layer gets security updates over time,
But it's still a working system. There have been no major changes to the underlying layers since 2017, and it has been operating under the same general framework since it launched in 2009. Most of the larger changes in the Bitcoin space are happening at a secondary level and in the surrounding software/hardware/financial ecosystem.
Ethereum, on the other hand, is still a work in progress on its base layer and is still in alpha development as it is still changing the core underlying mechanisms. The design of Ethereum 2.0 is smart in many ways, and obviously a lot of thought has been put into it, but there is a lot of speculation about what its needs are, how it will function, and how it will securely maintain itself. To address the current limitations of threatening network functionality, they changed many aspects of the protocol that made the protocol price-wise successful for the first 5 years of its life.
Some macro investors like to have 90% bitcoin and 10% ethereum, or 80% bitcoin and 20% ethereum, for the digital asset portion of their portfolio. Do I think this is crazy? not really.
People should do what they think is right for them, evaluate what they have a good risk/reward opportunity for, and so on. Research the best options and identify for yourself what you think might be successful.
Some people would consider buying some ethereum tokens, stashing them somewhere, and seeing what happens five years from now is a rather asymmetrical speculation. If Ethereum breaks $1,400 to new highs, it has the potential to make big gains in the next year. In fact, whenever the network is congested and fees are high, it helps the Ethereum token appreciate in value.
However, investors should understand that Ethereum is still in alpha development. Maybe in another 5 years, when Ethereum 2.0 is in place and running for a period of time, with consistent monetary policy during that time, it can be considered a largely finished project like Bitcoin. Until then, it's experimental.
Bitcoin has considerable volatility and upside potential, so most investors don't need to take the speculative risk of venturing into a protocol that is still fundamentally developing on its base layer.
Accumulation of value tends to be concentrated in the scarcest form of money in terms of scarcity and safety, which is why gold has been the foundation of the financial sphere for most of human history. something that can be used to perform work (such as copper or oil)
Usually not where the market stores long-term value. This analogy doesn't necessarily apply to Ethereum, as it also has a high stock-to-flow ratio, which we'll see in time, but from an investor's point of view, as far as its main function (store value) is trying to The burden of proof is on any secondary network trying to optimize against the top network.
How well the Ethereum ecosystem can support a large number of applications is somewhat separate from how much its token will appreciate long-term in terms of price, aside from the natural boom/bust cycles it goes through. The complexity of Ethereum 2.0's proposed base layer, which includes a beacon chain and dozens of shard chains, may be less attractive for large amounts of money to buy and hold tokens than the relative simplicity and full verifiability of Bitcoin's base layer. currency.
Concorde's Risks
In my opinion, the biggest risk to Ethereum is that it could end up like Concorde.
The Concorde, the aircraft first flown in 1969, can fly the public at up to twice the speed of sound. While it was practical, it never became an economically sustainable project. As I write this in 2021, more than 50 years later, the public still does not have the option of supersonic commercial flight. People in the 1960s thought we were now in space, or had flying cars like the Jetsons, instead of traveling in a plane that was slower than the fastest commercial jet in 1969.
Designing and operating an aircraft that can safely and repeatedly exceed the speed of sound is extremely challenging; at this point, the sound barrier of many aerodynamic changes is breached. In the 50 years since its conception, this problem still has not been solved in the economical way of commercial flying.
So, while the Concorde is pretty cool and can fly from New York to London in 3 hours, it will never compare to other alternatives when it comes to solving a big enough customer problem at the right price. The market has been content with first-class passengers paying more to make long flights more comfortable, rather than spending money on shorter flights.
Ethereum has a lot of smart developers working on it, and it's exploring some neat avenues. It pushes Bitcoin developers to continue to innovate in the ecosystem around the underlying layer, which is what I want to see. But compared to Bitcoin, I am less convinced that Ethereum will be successful in the long run. I will continue to monitor the situation as it evolves and as new facts and developments become available.
Maybe Ethereum will iterate until it finds a sustainable place for itself. Ethereum, on the other hand, could end up being weighed down by its own complexity and lack of broad economic utility (like Concorde).
final thoughts
I think monitoring Ethereum is important for all kinds of different investors.
Equity investors should perhaps keep an eye on some dapp developments to see if something outside of this ecosystem disrupts some of their traditional investments over time. Bitcoin investors should monitor it as part competitor and part collaborator to see what works, what doesn't, and more importantly why it can inform the development of its own ecosystem.
In my opinion, stablecoins are especially important. I am bullish on the amount of funds locked in stablecoins. This is a space to watch, for good developments and bad. The US Office of the Comptroller of the Currency has now officially allowed US banks to use stablecoins. They are a more liquid form of fiat currency that could have various implications for central bank digital currencies and the existing global monetary system.
While I don't think it's crazy to have a stake in Ethereum, I don't yet have a clear way to model it other than speculation, as it's an unfinished product at the base layer with a sizable use case, so far Involves trading, liquidity provisioning and altcoin gamification. For Bitcoin, I can make a more fundamental point in favor of a non-zero position as a macro asset.
In terms of BTC/ETH ratio, 80/20 or 90/10 or 100/0 both make sense to me as the digital assets portion of a portfolio. My approach is 100/0 in favor of bitcoin, and I haven't seen a compelling reason to change that, unless I'm just looking to speculate. I personally need to see Ethereum 2.0 out of alpha development, with a consistent monetary policy, and more usage outside of token speculation to capture my interest in a more structured way.
Some in the digital asset community refer to Bitcoin as gold and Ethereum as oil. In other words, one is a store of value and the other is an enabler of work.
However, I think Bitcoin has an unexpected uptrend that persists through cycles in a way that most other cryptocurrencies do not. Ethereum may be the second largest blockchain network, staying in a functional form for a long time between cycles, always benefiting from Metcalfe's Law, but it has to go through the 2.0 transformation first.
From an engineering standpoint, I prefer Bitcoin's modular design. The base layer is simple and stable, with an almost bulletproof design. Above this layer, the ecosystem can innovate, and while it may not evolve as quickly as some hope, it will evolve in the direction the market wants. This is also how the existing financial system works; there is a base settlement layer and faster payment layer built on top of those base layers.
So far, the market in the Bitcoin ecosystem has wanted security to maximize the store of value proposition, so it has acquired a level of multi-signature solutions and hardware wallets that exceed the level that includes Ethereum in Ecosystem of other digital tokens within.
There is little market interest in Bitcoin's second layer as a medium of exchange, as there isn't much need for it yet, although Lightning Labs and other developers continue to build tools and infrastructure in response to increased demand (and eventually, higher fees ). base layer may result), and many application developers are already using these tools.
As a metaphor, martial arts all have different philosophies. Some are preemptive and easier to attack. Others emphasize solid bases, then react bigger and use the opponent's momentum against them.
