8 February 2023
2022 has come to an end and has taught us some important crypto lessons. A great moment to look back on the year of Ethereum and look forward to what's on the agenda. While the past year was overshadowed by collapsed protocols and fallen crypto companies, the flawless execution of the Ethereum Merge was a major success.
With The Merge, Ethereum switched from a Proof-of-Work consensus mechanism to Proof-of-Stake. It is no longer necessary for miners to use computational power to verify transactions. Instead, users can stake ether, and transactions are verified by validators. The work of validators costs significantly less energy than that of miners: since the transition, power consumption has dropped by over 99 percent.
Shortly before The Merge, another valuable update was implemented on Ethereum called EIP-1559. After this update, a portion of transaction fees is burned, or destroyed. The gwei (the unit that ethers are made up of, like bitcoin's sats) used to pay transaction fees are thus removed from circulation.
However, this does not necessarily mean that transaction fees will decrease. It can, however, result in less new ether being circulated.
One important development is the upcoming upgrade in March 2023, called Shanghai. This upgrade should make it possible to withdraw staked ether.
Currently, over $20 billion in value is locked up in staking on Ethereum. The demand from the community to release these locked-up ethers is high. That's why it was decided to give this the highest priority and include this functionality in the next upgrade.
Some investors are concerned that unstaking will lead to a large increase in selling pressure on markets where ether is traded. Whether this is really the case remains to be seen. The ability to unstake ether makes staking ether more attractive to new participants.
If you want to stake ether, you no longer have to weigh liquidity against returns. After all, you can withdraw your ether to sell it. Don't forget that there is a waiting period when you withdraw your ether from staking.
Do you have ether staked? This likely means that from March 2023, you can put your ether in line for unstaking. Approximately 40,000 ether can be withdrawn per day. The queue is expected to be several weeks long in the beginning.
A new development that has been eagerly awaited for some time. Because improving scalability means that more transactions can be processed. And this should bring transaction costs down. Currently, between 10 and 15 transactions per second can be processed. The goal of the update is to bring this up to 100,000 in several steps.
A significant improvement, and one that is needed. When you make a transaction on the Ethereum network, there are sometimes high costs involved. Especially during busy moments on the network when demand for transactions is greater than the available capacity.
You can compare this to a highway. When only one lane is open on a busy road, it causes congestion. Only a limited number of vehicles can pass through at the same time. On a blockchain network with many transactions, this means that the one who pays the most goes first.
By using second-layer technologies, or Layer 2 technology. Transactions are executed on the extra second layer and then processed as one bundled transaction on the Ethereum blockchain.
A popular way to do this is to use rollups, a technique that allows you to process hundreds of transactions at once. One problem: the bundled transactions are quite large and take up a lot of space.
The solution? A new type of transaction in which bundled transactions are processed separately as blobs, allowing for more space for transactions and lower transaction fees. Additionally, blobs are not permanently recorded on the blockchain, which lowers the costs of storage.
The blobs will have a separate lane on the Ethereum highway, with their own transaction fees. When will this lane open? When the EIP-4844 update is implemented later this year.
Lower transaction fees for Ethereum users. If you use the Ethereum network, for example, for trading cryptocurrencies or NFTs, you may have experienced high transaction fees. The scalability improvement from EIP 4844 should reduce this.
Is this already the case with the upcoming Shanghai upgrade? Unfortunately not. The highest priority for that upgrade is enabling ether to be removed from staking, which has pushed other updates to the backburner.
Ethereum will continue to implement upgrades in the future. Ethereum wants to be the platform on which developers build and deploy decentralized applications. With the successful execution of The Merge, Ethereum has taken a big step forward. But, there are still many challenging developments on the agenda. If these are executed as successfully, it could have a positive impact on the adoption of Ethereum.