The Future Of Ethereum

The Ethereum Merge last September will have no significant impact on the blockchains’s throughput or frequency at which blocks get added to the network by itself.

That does not mean there were no major immediate impacts. For one, the Merge brought the platform’s energy footprint down more than 99%. Second, its supply has actually dropped in the time since. Here’s a simple way to think about how this supply will get constricted: Before the Merge ether was getting created in two ways on a daily basis–13,000 ether was getting sent to miners and 1,600 was going to stakers on the beacon chain, which was the new proof-of-stake consensus layer that was inserted into Ethereum. Now that 13,000 ether getting sent to the miners is gone, leaving just the approximate 1,600 units (though again that will change over time).

Ether Issuance Hits A Wall

But that does not explain why Ethereum now appears to be deflationary. This fact is due to EIP-1559 (Ethereum improvement proposal) implemented back in July 2021. This EIP enacted several new features, most notably a fee-burning mechanism. Fee-burning means that the fees previously paid to miners to include a transaction in a block now get taken out of circulation. During times of peak demand the amount of fees paid into the network could outstrip the new ether created. According to the website Ultrasound Money, 2.97 million ether have already been burned, worth a total of $4.65 billion. In fact, since the Merge, ether’s total supply has fallen by 47,314 units ($7.4 million).

This helpful chart from CoinMetrics gives a projection of ether issuance moving through 2021-2022 based on past usage rates. As you can see below, before EIP-1559, the network never got close to deflation; it was technically impossible. Once EIP-1559 came into effect there were a few times of contracted issuance, though those came during periods of surge usage such as the collapse of TerraUST in May 2021 and the BAYC Otherside mint around the same time. We can expect other surges in deflation during times of high network demand.

Deflation Is Now Much More Likely On Ethereum

Those two events led to massive surges in network activity, either to engage in trading and other DeFi activities or prioritizing ApeCoin transactions, which you can see here.

Ethereum Fees Surged In May 2021

So this is where Ethereum stands now. Next, let’s discuss where it is going.

The shift to proof-of-stake was a critical step for readying the platform for another set of four upgrades that are designed to see the platform reach 100,000 transactions per second. Those four upgrades are the Surge, Verge, Purge and Splurge. At a high level here is what they all mean.

The Surge, which is next on the roadmap is going to introduce a concept known as sharding. There are many permutations of sharding, Ethereum plans to use one called Danksharding, but all you really need to know is that sharding essentially splits the network into different sets of validators that work on separate transactions on a concurrent basis. The real magic here is that Ethereum will still have a way for the shards to communicate back to the base layer to ensure that the network maintains its position as a single source of truth. This could not be done under proof-of-work, which by its very definition requires every single node to process and keep a record of every single transaction. This is secure, but highly inefficient. Right now Ethereum can only handle 15-20 transactions per second.

But that will change as sharding dramatically lowers the data lift necessary to maintain a node from several gigabytes today to a number that can be easily handled on a phone or personal computer.

The use of sharding will also allow for the network to take advantage of roll ups. Roll ups allow for transactions to be processed and cryptographically linked and rolled up into one off-chain to be presented to the network as a single entry.

You can see these steps and those of the future phases in this handy chart issued by Ethereum creator Vitalik Buterin.

Ethereum’s Long-Term Roadmap

Once that is complete, attention will be paid to the Verge (introduction of stateless clients–meaning that nodes do not need to keep an entire chain history), the Purge (will delete unnecessary data), and then the Splurge (will introduce a lot of long-term enhancements).

But those will be for another time.

Finally, it is probably worth pointing out where Ethereum is located in its development. Buterin has said that the Merge means that it is about 55% developed, so there is still a way to go. Expect more periods of hyperactivity in the coming months and years, but at some point things will calm down to give developers a break. Here is a chart plotting its development that was shared at a July 2022 speech.