26 December 2019 22:48 #1
From our Crypto Theses for 2020 – download the full report here.1 ETH 2.0 Research/Governance/Roadmap at a glance If history is any guide, we’re not going to see ETH 2.0 until 2022 at the earliest, even if the earliest phases of “Serenity” begin getting pushed in mid-2020.ETH 2.0’s rollout breaks down into seven (7!!!) phases and brings with it the promise of staking, sharding, a new virtual machine, and more dancing badgers.(One of our analysts, Wilson Withiam, put together an excellent overview of both the ETH 2.0 and ETH 1.x roadmaps for this report.They are critical to track and understand at a high-level given how much Ethereum’s performance will affect other competitive projects and most of the DeFi and Web 3 infrastructure.So these next two sections are longer and more technical.) Here’s what you need to know about the current game plan for crypto’s largest platform.Phase 0 marks the launch of the “beacon chain”, which will serve as the backbone for a new blockchain.The beacon chain will manage network validators (large early stakers like ConsenSys) and ultimately assign validators to individual shards (slicing the new blockchain into smaller chunks is a key, difficult, controversial scaling decision that’s been made).
The new chain will support Ethereum’s new proof-of-stake consensus mechanism, and offer inflation rewards with new ETH2 for those that pony up and lock 32 ETH1 tokens into an irreversible contract.That one way bridge into the new system is also contentious, but it means ETH1 supply will start getting “effectively burned” once token holder begin claiming beacon chain validator slots.Initial reports claimed Jan.3 as a realistic launch date (lol).
It will be amazing to see this launched by end of June.Phase 1 will introduce 64 individual shard chains (reduced from 1,024!!!) to the network, with the option to increase the total down the road as the design gets tested.The Ethereum elite see sharding as the “key to future scalability” as shards can parallelize transaction processing, something that could improve network performance and reduce individual validator’s costs (good for decentralization).It comes with big risk: this is still theoretical.
No network the size of Ethereum has successfully sharded its blockchain.In Phase 1, shard chains will only contain simple data sets (no smart contracts or transaction executions) to test the system’s structure.As with Phase 0, the beacon chain will continue to run in parallel with ETH 1.x throughout the phase.Don’t expect Phase 1 anytime before 2021.Phase 2 marks the full launch of the ETH2 chain, allowing for on-chain contract execution and introducing the new eWASM virtual machine (dubbed EVM 2.0).
At this point, existing dApps can start migrating their contracts from ETH 1.x to a specific shard (one shard per contract) in the new network.Storage rent, charging contract owners for storing data on the network (more on this below), is in the cards as well, which would require mass contract rewrites.Even though Phase 2 intends to replace the original Ethereum blockchain entirely, ETH 1.x may still live on as a shard within ETH2.
(How confused are you by now? See why bitcoin will still dominate the macro narrative for a while?) A late 2021 release for Phase 2 is optimistic.Before the end of 2022 would be a win.The final four phases are less defined, and without an attached timeline: Phase 3 implements state-minimized clients (because stateless clients are just too much).Phase 4 allows for cross-shard transactions.
Phase 5 improves network security and the availability of data proofs.Phase 6 introduces meta-shards, as in “shards within shards within shards,” for near-infinite scaling.If you’re scratching your head and are sadistic enough to read more, the Sharding Wiki page does note, “this may be difficult.” Scaling and compilation efficiencies aside, the most notable change in Ethereum’s metamorphosis is the transition from proof-of-work to proof-of-stake.PoW is the more battle tested security model for blockchain networks, while PoS may prove to be more efficient but with new and less obvious attack vectors.
For the more technical, we recommend reading Bison Trails’ Viktor Bunin on the subject of PoS security threats.Past research has also shown PoS requires an extra layer of “trust” vs.PoW, to help nodes sync to the network.Most models share specific characteristics to address this trust issue, such as allowing for a dynamic set of validators (rotate your security), promoting token holder participation in consensus, and assessing steep penalties (slashing) for any network participant that violates the protocol guidelines.
ETH 2.0 will function similarly, but may be able to learn from other PoS networks (and their R&D) as well as those come live and see real world issues.As Vitalik points out, recent research in PoS resulted in “great theoretical progress,” But…Listen, we’re talking about practice.Not a game.Not a game.Not a game.
We’re talking about practice.Not a game….Practice? We’re talking about practice, man? We’re talking about practice.We’re talking about practice.We ain’t talking about the game.We’re talking about practice, man.Vitalik was eight when this happened, so the clip might help and prove metaphoric.
2 ETH 1.x Research/Governance/Roadmap at a glance.Ok, one more.Bear with us._ Let’s reiterate, ETH 2.0 is a brand new blockchain.It’s going to be a chaotic and high-risk transition.In the meantime, the existing network needs to run existing applications (particularly financial settlements for DeFi transactions).More critical upgrades are needed in the current system.To that end, ETH 1.x devs have three goals to boost performance and reduce blockchain bloat: (1) introduce client optimizations that increase transaction capacity; (2) cap disk space requirements and prune old, memory-sucking data (so running a node is less expensive and more decentralized); and (3) upgrade the EVM to eWASM, a newer open standard for code compilers that simplifies debugging, and is also used by all the newer smart contract platforms.ETH 1.x developers have decided to split the major tasks amongst four working groups: State Rent: Developers today incur a single payment for deploying contracts and storing data on the network.
Thanks to the immutable nature of blockchains, this data occupies the disk space of node operators permanently.As the network’s state grows, so do operating costs, which is where “state rent” comes in.It makes sense to charge for ongoing storage needs since the node operators are on the hook in perpetuity.This is a big change as it could break a bunch of contracts, but also limits state growth and creates economic incentives to run a node.
What happens to data that users don’t want to pay for? Boot delinquent user data off the network but keep a stub (a hash) of information on hand in case the user wants to later reinstate it.Pruning: Similar goal.Pruning removes old data that is longer useful, but does so in a way that allows clients to prove past transactions.
There are a couple of ways developers think this is possible (e.g.maintain a proof of deleted chain segments, which is similar to a “light client” in bitcoin that makes it possible to run a wallet on your phone), but all current strategies would cap annual “state growth” to prevent spikes in storage costs, at the expense of some new complications (e.g., dApps might be unable to access some data, and nodes might be unable to tell if data was deleted or whether it never existed in the first place).eWASM: Like ETH 2.0, devs plan to implement eWASM on the flagship Ethereum chain.
The eWASM virtual machine, a subset of the well-established WebAssembly compiler, offers improved flexibility for the introduction of “high-performance” smart contracts.Simulation and Emulation: This group develops tools to help support and evaluate the other groups because, well, someone has to test everything.Core developers intend to introduce most of these implementations through a series of hard forks, the latest of which activated just over a week ago (Istanbul, Dec.7).
However, Istanbul’s second phase, tentatively scheduled for Q2 next year, has Ethereans at each other’s throats.The controversy boils down to the fork’s inclusion of ProgPoW, an ASIC-resistant hashing algorithm designed to replace Ethereum’s current algo.ProgPoW aims to even the playing field for GPU miners and ward off the entrance of potential ASIC competitors.The miners like that.But many miners and investors see ProgPoW as a threat to their investments.
For miners, the change would shift the power dynamic away from mining farms and render expensive, specialized mining hardware useless.Ethereum (and ERC-20) investors intent on securing their assets might balk because ASIC miners typically prop up hash rates (overall chain security) and their costs “naturally create a price-floor for ASK prices of miners’ sell-orders.” This saga is far from over.The infighting will likely continue leading up to ProgPoW’s activation date mid-next year, and presents the strongest potential for a network split since “The DAO” fork that spawned Ethereum Classic.The looming transition to ETH 2.0 (and proof-of-stake) will likely deter investor pushback, because it’s a short-term battle in a war the miners are ultimately going to lose, anyway.Unless the roadmap changes back to supporting a hybrid PoW/PoS system, of course, but…
Oh my god, I’m just kidding.This section is mercifully over.3 ETH Killers Ethereum will face legitimate smart contract platform competition during its transition, and the most credible early favorites to attract defectors are likely Cosmos and Polkadot.Forgive me, but I’m skeptical of almost all the others.
As I wrote earlier, EOS is a disaster, and the worst fears surrounding its cartel seem to be materializing.
Stellar had to burn airdrop reserves because they could not give this shit away.Most of the other ETH killers haven’t launched yet either, and their communities are tiny.It’s hard to imagine a glut of expensive VC-backed protocol tokens hitting a sideways market at the same time Ethereum soft launches staking (and those associated rewards) on its beacon chain, and that being bullish for the newcomers.
I’m bullish on ETH, short the basket of everything else with that in mind, and that matters because you can’t kill ETH without that sweet sweet monetary premium.The knives are going to come out, though, for sure.Ethereum-now-Polkadot co-founder Gav Wood has acknowledged the new competitive dynamics, even if others are tempted to continue to extend the “we’re all in this together” platitudes.I read Gavin’s piece on CoinDesk earlier this week, and couldn’t have written the punch lines any better myself: 1: “Monopolies make great returns for their backers.Duopolies are okay too.But an active market saturated with great teams doing awesome things is just not worth the bother.Large and vaguely strategic investors act as catalysts, unfairly popularising their own bets, sometimes against better alternatives.In other words, it’s winner-take-all.
This makes the industry-wide “open-source” collaboration and technology sharing, which has characterized blockchain innovation so far, much less likely to continue.” 2.”Consider that Silicon Valley startups are not well known for giving away the engineering secrets to their core products.Sure, Apple “open-sourced” Darwin, but it kept the real jewels of OSX for itself.Ditto Facebook.
Ditto Google.Companies share what makes strategic sense to share, but that rarely means sharing the really cool stuff.The game becomes increasingly zero-sum.This is already happening to some degree in our space with numerous well-funded and research-heavy startups like StarkWare and Dfinity refusing to open up the important bits of their technology.Some are even considering patents.” 3.
As the payout from the winning ticket increases and the total winners are fewer, then in a zero-sum game the participants necessarily begin to start looking at each other not as comrades or a valuable resource but as obstacles to victory, to be removed.This doesn’t paint a pretty picture of the future.” According to Gavin, there’s no regulation or law that seems to protect crypto protocols from black-hat attacks, and no existential consequences for networks that benefit from competitors’ exploited vulnerabilities.This is unique to crypto and will likely exacerbate the problem, but also make the systems more anti-fragile.In other words, it gets (much) worse before it gets better.”As smart systems operating under their own brutal rules backed by dizzying sums of money wake up and gain a form of self-awareness, existential desire will put those resources to work.Over time, governance-backed, economically-incentivized positive action will turn into outwardly-directed negative action against competitors.Initially, it will be the dumb networks that are eliminated.” I agree.
If you’re a public figure in crypto in 2020+, invest in a helmet.4 Compatibility/Composability.“Developers don’t want to build on a moving target, and backwards compatibility should be taken seriously…Ethereum is not a toy anymore, it’s a platform with a sizable investment and a big reach, and as such changes like this need to be professionally measured before being taken.” So said Aragon One CTO Jorge Izquierdo once it became clear that last week’s Istanbul upgrade would break some 680 contracts on his team’s governance platform.Indeed, in last week’s “Istanbul” hard fork, some Ethereum operations were repriced due to small changes, and it broke thousands of dApps.Some argue a lack of backwards compatibility is itself a form of censorship (one reason the bitcoin community has balked on principle on non-essential hard forks), but then again Ethereum arguably has the luxury of this sort of fast-and-loose approach given the enormity of the bigger change that lies ahead with 2.0.It’s caveat emptor when building on ETH 1.x today, and teams should know that now.The question is how much bigger can DeFi get before these structural issues are definitively resolved.
The bigger fear may be around composability, though, which impacts the ability of developers to modularize app development across multiple interoperable smart contracts.
The question is how old contracts will migrate, and how they will remain interoperable in an environment where these things might exist on parallel “shards” of the new network.It’s wonky stuff, but this was a big enough concern that CoinDesk’s Leigh Cuen wrote a controversial article about it during DevCon that inspired a near immediate response from Vitalik.Proposals for smart contract migrations to ETH 2.0 that protect Ethereum’s composability are the most important area of development we’ll monitor in 2020-2021 as the community gears up for the ETH 2.0 launch.If Ethereum handles its composability and backwards compatibility challenges, we’re unlikely to see mass defections to other competitors.(The devil you know.) But that’s a big if, and it’s a narrative competitors will hammer away on during the aforementioned blockchain wars.I think Dan got it right in our prediction piece last year, “platforms will run aggressive marketing campaigns, but stall as ETH’s culture, grassroots mindshare, and developer network-effect lead prove too strong to overcome.” This is still Ethereum’s race to lose, even if its governance processes leave some professionalization to be desired.
5 ETH is money (for DeFi).I can’t imagine a scenario where high-throughput applications run – or should run – on Ethereum vs.
another purpose-built blockchain for a given non-financial Web 3 application.The “world computer” narrative was marketable, but in practice, Ethereum is limited in terms of “throughput, latency, and cost constraints.” Its current network design cannot support the requirements for every potential use case.The CryptoKitties crisis was just one example — an event that snowballed to the developer team at Dapper Labs opting to build a high-throughput alternative.This is the “unbundling of Ethereum” among non-financial verticals.The glaring exception to this trend is DeFi for two notable reasons.First, an open financial ecosystem requires a robust aggregate economy and sufficient liquidity to function, which no other smart contract platforms can support at the moment.Second, Ethereum’s latency and gas requirements do not undermine the user experience for financial asset settlement.Fees are the norm in finance, less so for in-game actions.
6 Privacy on Ethereum Privacy guarantees for certain types of Ethereum contracts should improve markedly following the recent “Istanbul” fork.The upgrade reduced gas costs necessary to power bandwidth-heavy contracts that incorporate zero-knowledge privacy technologies, and protocols like Aztec have developed a series of contracts that help build out Ethereum’s privacy pool.AZTEC is not the first effort to bring zk-snarks to Ethereum: JPMorgan revealed they were adding zk-snark technology to their private ethereum fork, Quorum, and EY introduced a similar implementation called Nightfall earlier this year.This in addition to a growing number of wallets (e.g.
Argent) that include “mixers” as part of their core product.These privacy tools will get more robust, and the effect will compound, as additional assets and contracts that leverage them grow the overall privacy pool and create a larger “crowd” in which to obfuscate transactions.I’m especially excited to see how the partnership between Carbon and Aztec plays out, as a stablecoin that incorporates zk-snarks seems like a killer app.7 Developer Tools It’s helpful that Ethereum has been live for just four years.
Critical developer infrastructure is still missing, which is one reason we haven’t seen more instances of product-market fit in the “dapps” space.By any measure, 2019 was a banner year for some of the pre-requisite building blocks (i.e., wallets, node and data services, code auditing tools, etc.) Node infrastructure in particular has improved.A multitude of new managed node providers launched or expanded operations to offer a simpler alternative to Geth and Parity nodes and a more robust service than ConsenSys’s Infura.Initiatives range from developer-focused, such as Bison Trails, Alchemy, Blockdaemon, and Quiknode, to end-user focused, such as DAppNode and Vipnode.(Infura is also shifting towards a more decentralized, less-AWS reliant infrastructure.) Blockchain data querying also got an upgrade thanks to The Graph, which now indexes 400 smart contract “subgraphs” for Ethereum-based projects, and now services millions of queries per day.The Graph is one of our top companies and projects to watch in 2020.8 ConsenSys resurgent? There are few companies you could argue are existentially important to Ethereum, but Joe Lubin’s “venture production studio” is one of them.They had a brutal end to 2018 with hundreds of layoffs and project spinouts as the price of ETH plummeted.
But I said last year that “rumors of ConsenSys’s death have been greatly exaggerated,” and that seems to be directionally correct, even though ETH is flat on the year.The company’s infrastructure companies are all well-funded, even as the side bets and fat have been cut.
No one has ever increased their risk by focusing, and ConsenSys is no different.A cursory look at their home page highlights the new logical orientation of the business.I expect a big 2020 from them, and wouldn’t be surprised to see a nine figure investment from a strategic partner like Microsoft.9 Proof-of-stake risks: I have never really wrapped my head around proof-of-stake.We talked about it a bit above, but It seems too easy to centralize and create a “rentier” class of oligopolists that control these networks.That could expose the “validators” to censorship or worse.What we’re seeing unfold with staking services is basically leading these risks to compound at hyper-speed: intermediation drives most staked assets to exchanges, and then lending markets (“super-fluid collateral” as my friend Dan Elitzer put it) encourage the centralized services to offer risky synthetics on top of those locked deposits.
That’s bad enough (think: mortgage-backed securities, but backed by memecoins vs.homes), but Digital Asset Research’s Lucas Nuzzi highlights another problem that’s potentially much bigger / existential.Because the ease of exchange has reduced exchange AND network switching costs: “A “synthetic staker” in one network is an exchange rate away from staking in another network.Whales now can just chase yield and engage in “staking arbitrage” across PoS networks.
Like bonds, the staked asset is paying a fixed yield in its own denomination, but price of what’s staked (bond price) fluctuates based on opportunity cost (real yield).At expiration, intermediaries simply adjust the collateral.After all, they make money in trading fees now.
The security budget (or the cost-to-attack) in PoS networks becomes highly sensitive and volatile, like the price of the staked asset as a result.And lower price leads to lower (more volatile) security, which further depresses price: a true death spiral.Perhaps there are solutions (i.e.hybrid PoW / PoS systems like Decred), but this theoretical problem likely applies to most proof-of-stake networks not named ETH, and ironically gets worse as the markets get bigger and more liquid.The further down the pecking order you get, the bigger the risks.10 Other assets not covered.
I don’t have a number 10 for Ethereum this year (because some of the above sections were huge and the ETH sectors of “DeFi” and “Web3” exist as standalone sections), but this is the optimal place to remind you I know there are many “exciting” assets in crypto beyond BTC and ETH and those elsewhere referenced.If your favorite isn’t mentioned herein, it’s either because a) I don’t take it seriously, and I’m following the old Grammy rule of “don’t say anything at all,” (most likely) b) our customers don’t and likely won’t give a shit about it in 2020 (strong overlap with ‘a’), or c) that particular asset has some work to do before it’s coverable (marketing, exchange listing, actual adoption, etc.
which has a strong overlap with ‘b’.) Also, if I say “I like token #347 on CoinMarketCap” (because we don’t even cover it on Messari yet), then Toby from our team is going to flip his shit on me for making implicit investor recommendations on a penny stock.Toby protects me, and still lets me tweet from my own account.He also knows that I’ve already spent too much time on this 60 page beast to opine on much more than I already have.The blocks are full.This is a companion discussion topic for the original entry at https://messari.io/article/ethereum-trends-for-2020.
