Ethereum Merger: A Netscape Moment for Web3?

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Has Web3 just had its Netscape moment? The launch of the first web browser in 1994 marked a turning point for the Internet. Now, if crypto enthusiasts are to be believed, the Ethereum blockchain’s move to a new transaction validation system – a move known as “the merger” – is an equally historic moment for what is became known as Web3.

Moving away from its old, energy-intensive validation mechanism puts Ethereum on a more sustainable path in the long run. For the network that has become the primary platform for blockchain-based applications like non-fungible tokens and decentralized finance, this is certainly important.

But nine years after the launch of Ethereum, there is still a long way to go. Here are five questions that will help determine whether or not the merger will ever be considered a significant moment in Internet history.

First, the new validation mechanism, known as proof-of-stake, does nothing on its own to solve one of Ethereum’s biggest problems: that it can only handle 15 transactions per second (tps ), a bottleneck that has led to very high transaction fees.

The merger at least paves the way for the network’s next big step, scheduled for the second half of next year. Called “sharding,” this would involve splitting the Ethereum database into 64 shards. Since every computer on the network would no longer need to keep track of every transaction, this would dramatically increase overall capacity and speed.

There are still big unresolved technical questions about how it will work. Also, sharding will not be a complete solution. A 64-fold increase would bring the network capacity to nearly 1,000 tps, which is not far off the 1,700 tps capacity of the Visa network. But Web3’s promise is to use blockchain technology to mediate every online interaction, which means much more capacity will be needed.

Second, the merger carries a whole host of unknown risks. Essentially, a market now worth $200 billion is rocking on entirely new ground, with new mechanisms and new roles for market intermediaries that have not been tested in real-world conditions.

Rather than risks, many market participants are likely to focus more on the potential for higher returns. Under the new proof-of-stake system, holders deposit their ether as collateral to validate transactions in exchange for “staking rewards.” This has transformed a previously unproductive asset into one that now offers a yield, which many investors will likely find attractive. But at this point everyone is wondering if the return will outweigh the new risks, not to mention the enormous volatility of the cryptocurrency itself.

Third, building a broader layer of market infrastructure on top of Ethereum is still in its infancy. So-called layer two networks, like Polygon and Optimism, act as “roll ups”, aggregating many individual transactions themselves and returning only one entry to the Ethereum blockchain. Along with sharding, Ethereum backers claim this could bring overall capacity up to 100,000 tps.

Companies that operate on top of Ethereum in this way could themselves become powerful new intermediaries in the blockchain world, which goes against the ideal of decentralization on which crypto is founded.

This leads to the fourth point: as the wider Ethereum system evolves, its proponents will need to shed some of the ideological baggage of the crypto world in favor of greater pragmatism. The challenge will be to determine which ideals can be compromised in the interests of a more viable system.

The emergence of new influential intermediaries could also give governments a new leverage point over the system. For example, if a large number of holders turn to crypto exchanges for help with staking, these exchanges would play an important role in validating transactions. This could expose them to political pressure to block certain transactions in view of financial sanctions.

Fifth, and finally, improving the underlying blockchain infrastructure will do nothing to solve Web3’s biggest challenge: demonstrating why this technology is needed in the first place.

Optimists say that once the merger is complete and work is underway to address Ethereum’s scaling issues, efforts will increasingly focus on creating the user-friendly experiences needed to attract large numbers. of users. This means designing things like crypto wallets and marketplaces for digital assets that are easier for ordinary people to use. It also means delivering entirely new apps that might not have worked as well on the existing web.

The Ethereum merger does not provide any clues as to what those uses might be. But, to paraphrase Winston Churchill, it at least shows that Web3 has come to the end of the beginning.

richard.waters@ft.com

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