Ethereum’s Dilemma and Breakthrough

The cryptocurrency market has been in a bearish trend since the beginning of this year. The main topics in the digital currency market have become "whether the bubble has burst" and "whether the price of the currency has bottomed out". The sluggish cryptocurrency market has made Ethereum's price drop particularly painful. According to Feixiaohao information, ETH reached a high of around $1.5k around January 15 this year, and then continued to plummet from January to April. Currently, ETH is at a low price, hovering around $200. Compared to its highest point, ETH's market value has fallen by about 85%.

01

Why is ETH falling?

The sharp drop in Ethereum prices is mainly due to three reasons. First, due to the impact of the bear market, ICO demand is weak, ICO projects have repeatedly suffered Waterloo, and the market demand for ETH has dropped significantly.

According to ICO WatchList, ICO projects raised about $6.2 billion this year. Of this, EOS raised $4.1 billion, accounting for 69% (the amount raised in June in the figure below was mainly contributed by EOS). In other words, excluding the EOS project, the total amount of financing for other ICO projects was only $2.1 billion. In contrast, the total amount of ICO financing for projects in 2017 was $2.6 billion. According to ICO Rating Agency data, the total amount of ICO financing and the number of successfully funded projects in 2017 showed a clear upward trend. This year, if the impact of EOS in the second quarter is excluded, these indicators show a downward trend.

2017 ICO financing amount and number of successful ICO projects

2018 ICO financing amount and number of successful ICO projects

Blockchain Dynamics pointed out that in the first half of this year, the ICO break-even rate of mainstream domestic exchanges exceeded 95%, and the price of tokens of some projects even fell by more than 99%. Nearly 100 blockchain project tokens have become air coins. Blockchain Capital partner Spencer Bogart said, "Investors are increasingly disappointed with digital currencies and ICOs, and most ICO projects are based on Ethereum." According to statistics from TokenData, the market value of the top ten ERC-20 tokens issued based on Ethereum has fallen sharply since August this year.

All Ethereum-based projects use ETH as the settlement currency. In 2017, 1C0 projects grew explosively, and the market demand for ETH was strong. The price of ETH reached a high of around $1.5K, an increase of 100 times. At that time, the price of Ethereum and 1C0 projects were mutually driven. Now, the situation is developing in the other direction. A token fund investment manager said, "The lower the price of Ethereum goes, the more the project parties will sell, and the sell-off will bring a new round of decline."

Secondly, low scalability has always been the Achilles' heel of Ethereum. In July this year, Fcoin launched new rules for listing coins, which determined whether a project could list coins based on the "accumulated number of deposits". As a result, a large number of small transactions caused congestion on the Ethereum network. Also in July this year, the gambling game Fomo3D attracted a large number of users to join, and the congestion problem on the Ethereum network became more serious. There are many similar situations.

The performance limitations of Ethereum mean that it cannot support too many applications. In contrast, the actual transaction speed of the EOS network is around 3,000 transactions per second, and more and more projects are beginning to choose EOS. In the Ethereum network, new projects and funds are blocked from entering.

Furthermore, the market sell-off also led to the decline in Ethereum prices. After the ICO boom last year, the lock-up period of many projects has expired. As the market is bearish, many project owners choose to sell ETH to cash out. A project founder said, "Projects are selling at a loss and trampling on each other. The sharp drop in Ethereum has caused a shortage of funds for many project owners, and everyone is selling to protect themselves. For those who just want to make money from air coins, they are also selling quickly to cash out and prepare to leave."

Futures can be shorted and leveraged, and many investors (or big investors) use futures as a "ladder in the chaos" to make crazy money by selling investment targets (including ETH) and maliciously shorting.

The market panic caused some retail investors to sell ETH. Part of the market panic came from the security issues of Ethereum smart contracts. Ethereum smart contracts have always had code reuse issues. Ethereum provides developers with commonly used program templates, and many projects directly copy Ethereum code or make only minor changes. This means that once there are potential errors in the contract, these security vulnerabilities will also affect thousands of similar smart contracts.

This month, Ethereum also revealed other smart contract security vulnerabilities. On November 5, the Dimensionality Reduction Security Laboratory found that there has long been a "zero hunter" attack on user wallets on Ethereum; on November 9, Netta Lab tweeted that it and the dynamic analysis team of Tsinghua University's School of Software found that there are major vulnerabilities in the Ethereum smart contract virtual machine.

Under the influence of the bear market, the decline in 1C0 enthusiasm, low scalability, and market selling behavior, Ethereum led the decline in this round of bear market, and its market value was even overtaken by Tron twice.

02

The Constantinople project has been postponed. What has Ethereum been doing in these years?

Ethereum originally planned to launch the Constantinople project in November this year to hard fork the network, simplify and optimize the platform code, and thus improve network performance.

However, unexpected problems occurred in the test version of the Constantinople code, which prevented the upgrade plan from being implemented in November. It is understood that the launch of the Constantinople plan will cause the mining reward to drop from 3 ETH to 2, which directly affects the interests of miners. Therefore, the miners' resistance to the upgrade plan has also led to the postponement of the plan to a certain extent. The Ethereum development team said that the Constantinople plan needs more time to develop.

Regarding this matter, BM said in telegram that "Ethereum's next hard fork is like the prize pool in 'EOS Pixel'...it will be postponed forever." (However, now EOS Pixel has ended a round of games)

On October 31 this year, Ethereum founder Vitalik delivered a speech titled "ETH2.0: Ethereum's Path to Expansion" at DevCon4. DevCon is a series of conferences hosted by the Ethereum Foundation and is an annual "reunion moment" for the Ethereum community.

Vitalik Buterin said in the meeting that after the Constantinople Project, Ethereum's next move is "serenity", which is often referred to as Ethereum 2.0. Ethereum 2.0 will achieve three major innovations: the transition of the consensus mechanism from PoW to PoS, sharding, and the Ewasm virtual machine.

The biggest feature of Ethereum 2.0, and also the biggest challenge, is to transform Ethereum from a proof-of-work (PoW) blockchain to a proof-of-stake (PoS) blockchain. This is an adjustment of the basic consensus mechanism of the Ethereum network and the foundation for the future development of Ethereum. Because PoS is more efficient than PoW consensus, once this change is implemented, the performance of the Ethereum network will be greatly improved. Casper is a protocol of Ethereum in the transition process from PoW to PoS. Based on the performance of the Casper test chain, developers generally believe that Casper is basically stable.

The second important idea of ​​Ethereum 2.0 is sharding. After the sharding technology is implemented, Ethereum can achieve the purpose of expansion by adding computing nodes. Since Casper can also provide consensus for sharding, some people also call Ethereum's sharding mechanism Shasper.

The EWASM virtual machine is the later goal of Ethereum 2.0. The virtual machine is the window for application software to interact with Ethereum. Compared with the existing Ethereum smart contract virtual machine EVM, EWASM is more efficient, supports multiple programming languages ​​and developer tools, and is backward compatible with EVM. Therefore, the implementation of EWASM can greatly improve the interaction between smart contracts and Ethereum.

Ethereum 2.0 is an upgraded version of the Ethereum main chain. In addition to the main chain, the Ethereum development team is also trying to make breakthroughs in technical fields other than the main chain. The biggest challenge for the Ethereum ecosystem is the expansion problem, which involves some very important expansion solutions, such as side chains and zero-knowledge proofs.

The basic principle of the sidechain is to move a large number of transactions outside the main chain, and the correctness and security of the transactions are verified in batches on the main chain through a smart contract. This can greatly improve network performance. Plasma is a well-known sidechain solution.

zk-snarks is a proof mechanism proposed by the ZCASH project. Unlike ordinary verification technologies, zk-snarks compresses a large amount of proof information into a very concise proof. Vitalik proposed in September this year to increase Ethereum's TPS to 500 transactions per second through zk-snarks. If this is really achieved, the performance of the Ethereum network will be greatly improved.

In early October this year, Vitalik wrote on Twitter that "Ethereum will continue to develop even without me." At the same time, he also said that he was gradually retreating to the second line. This statement caused quite a stir in the blockchain circle.

In fact, Ethereum is no longer Vitalik’s one-man show. Liang Zhicheng, co-founder of the Taipei Ethereum Community, said, “Vitalik hopes that everyone can participate in the operation, development and research of Ethereum. He will no longer intervene in everything or give opinions on everything.” Vitalik himself also said in an interview during the DevCon4 conference that “he should step back, which is an important step in the development of the community.”

However, Vitalik is not leaving Ethereum, but hopes that Ethereum can be governed in a more decentralized way. Analyst Tone Vays once speculated whether Vitalik would follow BM, and Vitalik gave a reply on Twitter: "1. I am not leaving (Ethereum). I will not stop or reduce the number of updates to blog posts, research reports and GitHub tasks. 2. When Vitalik is in charge, people will say that Ethereum is centralized! When Vitalik no longer plays an important role, some people will say that Vitalik is leaving like BM! Bitcoin totalitarians really have no credibility!"

Ethereum is an open source community supported by many developers. Simply put, the Ethereum development community can be roughly divided into three layers of development systems from the outside to the inside, from the upper-layer applications to the underlying architecture.

The outermost layer is the various upper-layer application projects built on the underlying architecture of Ethereum. These developers may not directly participate in the technical advancement of the underlying architecture, but they still contribute to the prosperity of the entire community ecosystem. From the popular CryptoKitties to the Ponzi game Fomo 3D that attracted hundreds of millions of yuan in a single day, these DApps on Ethereum have brought vitality to Ethereum.

The second layer is developers outside the Ethereum Foundation (peripheral developers) who invest in the development of the underlying architecture. Since Ethereum is a completely open source ecosystem, developers around the world can participate in the underlying development work in various forms as long as they are interested. Ethereum's off-chain expansion solution Raiden Network is a good example.

The third layer, which is also the core layer, is the Ethereum Foundation headed by Vitalik. The foundation is headquartered in Singapore and currently has a research team of more than 30 people scattered around the world, dedicated to the research and development of the underlying core architecture, many of whom are post-90s developers like Vitalik Buterin.

Ethereum's developer community is particularly active. The number of code submissions and the number of developers on GitHub far exceed those of other cryptocurrencies such as Bitcoin, Ripple, BCH, and EOS. The Ethereum Foundation holds a meeting every two weeks to discuss matters of Ethereum. The topics and conclusions discussed at the meeting will be announced to the world through the Council of Ethereum Magicians website, and everyone can participate, fully demonstrating the open source spirit of Ethereum.

In order to call on more peripheral programmers to participate and help solve difficult problems, the Ethereum Foundation has set up a bounty fund. From the beginning of this year to recently, it has issued up to $11 million in funds to 52 projects. Among them, 61.3% of the bounty was given to projects dedicated to solving scalability problems.

The Ethereum project has largely inherited the free and open development spirit of Bitcoin. At the DevCon4 conference, Vitalik did not give a specific timeline for the planned advancement. These features may be implemented within a year, or it may take more time. Perhaps Ethereum's goal is to change the world with technology, rather than a short-term bull or bear market.

03

Is it possible for Ethereum to regain its glory days?

Ethereum has the potential to recreate its glory. On the one hand, it benefits from Vitalik’s personality and ability. There is no doubt that V God is the guiding light of the Ethereum community. Whether in terms of technologies such as Casper (consensus mechanism), sharding (sharding technology), Plasma (sidechain technology), or in terms of community influence, Vitalik plays an extremely important role.

On June 18, 2016, the DAO incident occurred in Ethereum, and 3.6 million Ethereums were stolen. For a time, the market was in a panic. On June 30, 2016, Vitalik stepped forward and proposed a hard fork of Ethereum. On July 21, 2016, more than 85% of the computing power supported the hard fork, and the Ethereum network fork was successful, recovering the losses of most people.

On the other hand, the starting point of the Ethereum project is positive. The community is doing things with a vision of benefiting the majority of people, and the commercialization tendency is not obvious. (In contrast, some companies that have grown to a certain scale in the off-chain world, Double Eleven and Double Twelve, etc., are not so much a social culture as a feast for merchants, making a lot of money under the gimmick of celebrating the festival) Although projects such as Ethereum have also been questioned, they do not consume user traffic or popularity. In comparison, the development momentum is more lasting.

The decentralized state that Ethereum wants to achieve is an ideal state. To achieve this, it is very difficult both technically and in terms of balancing the interests of all parties. (For example, when solving the scalability problem, it is necessary to find a balance between efficiency and security.) However, Lizhi believes that Ethereum is moving in the direction and trend they expect, and we need to have hope.