The next 3 big things for Ethereum: Lack of scalability, capital inefficiency, and block validator centralization

Last week’s Shapella upgrade was a big deal for Ethereum, but the work to scale the network has only just begun.

Today, we take a look at where Ethereum is headed after Shapella.

✔️EIP-1559 completed

✔️Merge completed

✔️ Shapella completed

Despite the bear market, this has not stopped the Ethereum developer community from delivering results.

What’s next on the Ethereum roadmap for the rest of 2023? EIP-4844 Cancun hard fork, distributed validator technology, and proposer-builder separation are in the works. Let’s dig deeper.

1. EIP-4844 Cancun Hard Fork

EIP-4844 is Ethereum’s next big hard fork — designed to solve Ethereum’s scalability issues. We’ve heard the comparison countless times between Visa’s ability to process thousands of transactions per second and Ethereum’s double-digit transactions per second at best. The Ethereum network needs to solve the source of its usability problems: scalability.

Today, scalability issues have been mitigated through rollup chains (Arbitrum, Optimism). The basic idea of ​​how rollups scale Ethereum is to push the computational burden of processing transactions to the second layer (L2). Once completed, they publish the transaction data back to the underlying layer 1 (L1) beacon chain for consensus and storage.

Unfortunately, rollups are only a temporary solution that is still too expensive and slow. This is not the rollup's fault - it is mainly due to the design architecture of the underlying Layer 1 chain. The fastest rollups still require submitting a lot of data to establish consensus on the Layer 1 chain that lacks free storage space. In addition, it puts a heavy burden on nodes to download this data - an estimated 95% of rollup transaction fees are used for publishing data costs.

This brings us to EIP-4844. Named after Ethereum researcher Dankrad Feist, EIP-4844 is a “proto-danksharding” proposal that aims to make using rollups faster and cheaper. In Dankrad’s words, it’s rollups on a whim. Proto-danksharding is an early precursor to full danksharding, which is still a few years away on the Ethereum roadmap, hence the “proto” prefix. But even this early proposal foreshadows big changes to come for Ethereum.

EIP-4844 splits the blockchain network into different databases, which adds space for millions of transactions on Ethereum (a whole new data availability layer). This split is called "sharding". In simple terms, sharding is similar to adding lanes to the current Ethereum network's congested highway. Hence why EIP-4844 is included in the Ethereum roadmap phase once known as "Surge".

When proto-danksharding is complete, Ethereum blocks will be able to store 1-2 megabytes of data (currently 50-100 KB), significantly reducing the cost of using rollups by an estimated 20x (full danksharding will allow blocks to carry 16-32 megabytes. For a fuller discussion, watch Vitalik and Dankrad’s Bankless podcast).

With more danksharding space, there is more room for “blob-carrying transactions,” a new type of transaction that remains in beacon chain nodes for a limited time of weeks or months. During that time, node validators employ a clever technique called “data availability sampling,” which randomly samples parts of data blocks for verification without actually downloading all of the data.

Why is EIP-4844 important? Ethereum rollups are currently not suitable for use cases like games or social media that require higher transaction loads. But developers can't wait, so they find ways to scale by compromising on decentralization, as we see in most crypto games and sidechain bridge designs. EIP-4844 is the unlocking of fully on-chain use cases, potentially ushering in a wave of builder innovation.

When will proto-danksharding be completed? Currently, we know that EIP-4844 is scheduled to take place sometime between Q3 and Q4 of 2023. But like most large Ethereum network upgrades, it is expected that there may be delays.

2. Distributed Validator Technology

Another key technical innovation to watch for in Ethereum in the near term is the rise of distributed validator technology (DVT), an area of ​​research that the Ethereum Foundation has been exploring since 2019.

Today, operating an Ethereum node is a technically onerous solo venture that requires operators to stake 32 ETH alone. Node operators can choose to ease the burden by staking through Coinbase or Lido, but these alternatives make key decentralization compromises.

DVT attempts to simplify node verification without sacrificing decentralization. It does this by enabling a separate kind of "squad staking". Instead of staking 32 ETH individually, a group of friends can collectively stake different amounts of ETH and run a node. This is achieved through multi-party computation (MPC), which lets a group of people share a private key like multi-signature and run a "distributed validator" together.

DVT decentralizes the cost of individual staking by lowering the financial barrier for individuals or small DAOs to participate as Ethereum validators. This could significantly reduce the concentration of the ETH staking market currently accumulated on Lido and centralized exchanges.

Source: Dune Analytic

DVT also makes node validation an overall more robust process. Distributed validators running the same node can replace each other when hardware fails. Just like multi-signature, sharing private keys through DVT makes it more difficult for attackers to break into it.

DVT is not yet available to the public, but companies like Obol have just begun testing deployments on mainnet, and it may be ready by Q3 2023. For more information on DVT, check out companies like RockX, SafeStake, and ssv.network.

3. Proposer-Builder Separation

The word “decentralized” is widely used in cryptocurrency, but it’s an open secret that most blockchains are not.

A major centralization vector at the Ethereum protocol level is the way blocks are built. When we submit transactions on our wallets, they go into a pool of pending transactions in the memory pool (mempool). Block validators (miners in PoW, stakers in PoS) take a bird’s eye view of this mempool, spot a profit opportunity, and start selling the priority to build blocks in an underground bribe market to arbitrage bots (seekers).

These types of value extraction techniques are known as Maximum Extractable Value (MEV) attacks. They are largely hidden from everyday users but remain an existential threat to Ethereum’s decentralized ethos, with block miners extracting approximately $676 million before the merge.

Proposer-Builder Separation (PBS) is the Ethereum development community's answer to this problem. As the name suggests, PBS aims to create a division of labor between the two key tasks of block construction: proposing blocks and building blocks. By doing so, block validators are deprived of the ability to distinguish between individual transactions, as the contents of a block are not determined by the same entity that ultimately builds it on the chain.

PBS will not be ready in 2023, and likely will not be for another two years. Until then, third-party solutions like Flashbots’ MEV-Boost have emerged to mitigate this problem by creating an open free market in block construction.

Summarize

Ethereum is now fully POS. With The Merge and Shapella upgrades completed, the Ethereum community can move on to solving other problems: lack of scalability, capital inefficiency, and block validator centralization.

EIP-4844, distributed validator technology, and proposer-builder separation are just some of the important solutions to keep your eyes on.