This article will give Web3 product designers an understanding of where blockchains came from, what the current blockchain landscape looks like, and where blockchains are headed in the future. We move to Blockchain 2.0 and Ethereum the most dominant smart contract blockchain at present. Stay tuned for future Web3 Design Courses where we discuss other Web3 products that will disrupt the internet as we know it today.
If Bitcoin is like the calculator app on a smartphone then Ethereum is like a smartphone in itself. Bitcoin is designed to serve one, specific purpose. Ethereum, on the other hand, can run any number of applications. Third-party developers deploy applications to Ethereum like they do with the Apple App Store on the iPhone.
Bitcoin and Ethereum are actually similar in many regards. Both are open-source software, anyone can become a node on the network, and nodes are responsible for accepting transactions and creating blocks; however, Ethereum has an extra layer of complexity built into it, allowing developers to deploy decentralized applications via smart contracts. Smart contracts were discussed in Part 9 of the Web3 Design Course 2022.
Bitcoin is a more conservative blockchain protocol than Ethereum with regards to protocol upgrades. Ethereum has an aggressive road map for improving its protocol as we’ll discuss later on. The development ethos of Ethereum is to move fast and break things – and explore what is possible when it comes to building Web3 ecosystems.
Ethereum was the first smart contract blockchain, and is the most dominant smart contract blockchain to date, coming in as the second most valuable cryptocurrency behind Bitcoin. Just as Bitcoin’s native crypto is bitcoin, Ethereum’s is ether; however, ether has a utility aspect to it that bitcoin does not.
Ethereum is general purpose in that it will run any smart contract code that developers deploy to the blockchain. The problem with general purpose coding is that programs are not guaranteed to reach an end state – they can continue to loop forever. This is a problem because looping programs would tie up Ethereum nodes indefinitely, disallowing them from processing other incoming transactions. Thus, an incompetent, or malicious, developer could write a program that halts Ethereum. This is referred to as denial of service (DDOS) and is one attack vector that blockchains need to defend against.
Ethereum solves this problem by making users pay for the amount of computation their transaction consumes. To send ether from one address to another is a simple transaction, and requires relatively little computation. Still, users pay nodes to process this transaction with a network fee, let’s say around $5. Now, when someone uses a dApp, which might call multiple smart contracts on the backend, this added computation is accounted for with a higher network fee (e.g. $20). Thus, it gets prohibitively expensive to tie up the Ethereum blockchain for any significant amount of time.
Ether is a digital currency as well. You can send ether between wallets, and Ethereum wallets have ether balances, just like Bitcoin wallets have bitcoin balances. But ether has added utility over bitcoin in that it powers decentralized applications. This is why ether has a different investment narrative than bitcoin’s store-of-value narrative. Ethereum is a platform similar to an app store. Ethereum’s value as a platform increases as developers continue to deploy useful dApps to it, and Web3 users access these decentralized services by paying ether. Ether as a cryptocurrency has a totally different tokenomics to that of bitcoin, but that’s out of scope for now.
Let’s return to the idea of network fees. Ethereum nodes create new blocks roughly every 12 to 14 seconds, and only a certain number of transactions can be included in each block. This means there is a limit to the number of transactions per second (TPS) that Ethereum can process. In fact, Ethereum can handle roughly 30 TPS. With demand for dApps increasing, demand for Ethereum’s finite blockspace increases, thus driving up network fees.
This especially became a problem with a recent wave of DeFi and NFT-related traffic to Ethereum. The average network fee was as high as $49 per transaction at one point in 2021. Personally, I saw several hundred dollar network fees when using dApps like Uniswap and Aave. And since I was transacting with relatively small amounts of crypto, these high network fees made the transaction not worth submitting. Layer 1 Ethereum has become prohibitively expensive for the average user. In other words, Ethereum needs to somehow process more transactions per second if it wants to retain current users, and onboard the next 100M users to Web3.
You may wonder what I mean by “Layer 1” (L1). Bitcoin, Ethereum, and the other emerging blockchains are considered L1s, because they are the core/foundational blockchain. Layers 2s (L2s) have helped Ethereum scale recently. These are other blockchains built on top of Ethereum that process a bunch of transactions, and send only one transaction to Ethereum L1 for confirmation. L2s reduce the load on L1s, thus helping blockchains scale to more transactions per second.
Ethereum is also in the middle of a major update to its L1 chain as it transitions to Ethereum 2.0. Its new software architecture will feature 64 sharded chains that connect to a main beacon chain. The sharded chains will process transactions in parallel to one another, thus ramping up the transaction per second that Ethereum 2.0 can handle. Also, Ethereum 2.0 will transition its consensus mechanism from Proof of Work to a new mechanism called Proof of Stake (PoS). Developers estimate Ethereum 2.0 will handle 100,000 TPS thanks to its sharded chain architecture plus PoS consensus mechanism.
Ethereum launched in 2015 as the first smart contract blockchain and, despite competitive Layer 1s, has remained the second largest cryptocurrency by market cap to this day. Ethereum’s dominance can be measured in more than market cap – tens of billions of dollars worth of crypto is transacted on it every day, and Ethereum attracts over 4000 active monthly developers, which is the most of any layer 1 blockchain.
Having said all that, other competitive layer 1 smart contract blockchains are sprouting up, and building up significant developer and end-user communities. This landscape of emerging layer 1 blockchains brings us to the present moment. If Bitcoin is blockchain 1.0, and Ethereum blockchain 2.0, then we are now in the era of blockchain 3.0. These emerging layer 1s seek to solve problems in blockchain scalability and interoperability, each with unique design philosophies and cultural ethoses.
If you enjoy videos over reading when it comes to online learning then checkout the course on YouTube. This is part 3 of 5 in the Blockchain Design Course 2022. Also, make sure to stay tuned for future Web3 Design Courses where we will get into more interesting topics about emerging dApps.