The Undeniable King Returns in 2023
As a technologist, I’m here to harness the blockchain for positive impacts. Today, I’m going to focus on the actual blockchain, the foundations of the Web3 space, and how Ethereum will regain its crown in 2023.
There are a few upcoming improvements to the Ethereum network that I’m super excited about but before I get there, we need to reflect on the massive upgrade of 2022. What is by far the largest update of the Ethereum Network, we saw the network move from Proof of Work (PoW) to Proof of Stake (PoS).
Many said it might never happen but it was a highly successful upgrade, thanks to all the tireless work from all involved to have such a smooth process. The sky didn’t fall in and the energy consumption has decreased by 99%. This is an enormous success.
The narrative of energy usage was an important battle ground with the anti-crypto mainstream narratives and I’m pleased that we can now put that argument to bed. The energy FUD was real, and lots of “normie” people I’ve spoken to were dissuaded from getting a NFT for environmental reasons so they instead continue to buy Funko Pops which are basically non-compostable landfill that is shipped around the planet and wrapped in even more plastic.
I’m not hating on Funko Pops. I have some and love them, but it is the framing through the environmental lens that is rarely fairly applied. The PoS energy consumption narrative is important and chains like Polygon are doing 100% green offsets which means that we can negate these stupid arguments and continue to build value.
The debate of PoW and PoS is one for another day but before the BTC Maxi’s jump into the comments, it is important to note that I still have BTC and I think Bitcoin mining can be harnessed to aid the transition to renewables and more importantly, become a real commercial driver for methane capture but that’s another topic again. I’m primarily a software guy so Ethereum is getting the majority of my focus in this piece.
Firstly a quick primer — generally a blockchain pays for the security of a network by rewarding miners, validators and network processors through a base payment, plus transactional fees. The nodes that process the network get paid for supplying compute to the network via minting of new coins.
The PoS upgrade combined with the EIP-1559 that went live in August 2021 means that the age of supply deflation for ETH is on the cards in 2023. Also coined as “ultrasound money”, EIP-1559 is the gas change that smoothed out the gas pricing but also included a partial ETH burn. The PoS upgrade has significantly reduced the inflation on Ethereum as we pay less for security now than in the previous PoW approach (much less ETH is paid out per block).
I’m not sure people really understand that this change has reduced the inflation by around 1 million ETH so far. We have not had a true deflationary currency before and I think it will be fascinating to see how this plays out over a longer time frame.
The burn mechanic introduced with EIP-1559 means that through the normal usage of the network, we will burn more ETH than we mint new ETH for validators. This is deflationary as we use more than we create. That, in partnership with a reduction of new coins minted (in PoS) and the base load of the additional layer 2s always running (committing to the mainnet) means a deflationary supply is on the cards.
So what does this mean for 2023?
The enabling of staking withdrawals is the big one. Since the opening of the beacon chain validators in 2021 it has been a one-way stake. The ability to exit and get your coins back out of the staking contracts is not currently there. If you need liquidity then there are 3rd party liquidity staking protocols like Lido.
You see some people talk about this “Hotel California” staking from outside the Ethereum community, but a large portion of stakers have happy with a low risk 4% APY. This is a high priority, and will be released soon. This is super important to have a full staking implementation with the ability to effectively exit being a validator to liquid ETH, but the stakers I know will not be withdrawing. We must fulfil the commitments that we set for the continued trust in the network, and it is important for solo staking to keep the network maximumly decentralised.
The actual change which I think has the most impactful in the short term is the upcoming initial release of proto dank sharding through EIP-4488, so why is this important?
A quick primer: congestion on a network is generally managed by gas price and we have high gas costs at times of congestion (like uber surge charging). The increased demand pushes up the price of gas during the bull market which means that it is really difficult to use a blockchain for low value items (the costs of the network transactions can exceed that of the item, defeating the value of using a blockchain). So we need to figure out how to reduce congestion to keep the cost of usage low for the continuing block space demand. This is a must for the continued adoption of the technology, and especially with off chain assets.
The scaling roadmap for Ethereum is through additional layers on top of the mainnet that can optimise for low costs or speed,. A simplistic mental model for layer 2s is that they do a bunch of transactions and then save the output to Ethereum Mainnet (for security). These have mostly been roll-ups, so logically zipping up a bunch of transactions into one zip that is then saved into Ethereum. That allows more transactions into the congested Ethereum network. Think of this as more buses on the road than single person cars. The Ethereum Mainnet is optimising for decentralisation and security so it needs to think about scaling differently.
This proto dank sharding (EIP-4488) is an important step in optimising Ethereum to become the base layer, the value layer, a settlement layer for the majority of execution in layer 2, and I believe this is the future. The EIP makes certain functions used a lot by layer 2 much cheaper, making the layer 2 transactions cheaper for users. This is super important for the long term viability of the Ethereum ecosystem. What is the value of an alternative layer 1, if the Ethereum ecosystem via layers 2 gives you the fastest, cheapest, and safest transactions around?
The incentives to build on these alternative competitors are dwindling, the actual usage on these chains has also fallen off a cliff. Big projects continue to move to the network with the largest user base, most economic usage, that is the Ethereum ecosystem. I see Polygon are aiding projects from multiple ecosystems migrating to the Ethereum ecosystem.The race for alternative layer 1s that are cheaper and faster than Ethereum was more prominent in 2022, but now that the bull is gone, the speculation on new chains fades and their token values rationalise, we return to the fundamental.Some had a play with the rest and now it is time to return to the best. The king’s mantle will return in 2023, and Ethereum will be crowned the Undeniable King of Chains.
This is an article we wrote for 'The Chainsaw 2023 Prediction series, https://thechainsaw.com/business/opinion/ethereum-predictions-2023/