The Future of Ethereum — The Merge, Surge, Verge, Purge and Splurge.
Since the launch of Ethereum in 2015, there has been the question on how the protocol should evolve in the future to address its biggest challenges like scaling. Recently it became clear that The Merge will happen on the 19th of September 2022. Of course, the Ethereum development does not stop after the Merge. The Ethereum Foundation deals with the question how what Ethereum would look like ten years from now. The public has the impression that Ethereum development has stalled and is questioning its future. What actually happens is a long and complicated transition toward having a more robust, secure and powerful version of today’s protocol.
Authors: Valentin Kalinov, Christian Viehof
The main purpose of The Merge is to transition Ethereum from a Proof-of-work (PoW) to Proof-of-stake (PoS) model. The PoS will require validators of the blockchain to stake ETH in order to validate the network. The biggest impact of the transition will be the drop in energy usage by 99,95%, as the network will no longer require powerful mining hardware. The transition might also have an impact on the pricing of gaming graphics cards which are used for mining Ethereum and other PoW chains. Secondly, ETH issuance is declining from 15k/day to 1.5k/day. This represents a 90% cut in emissions. The decline in emissions is seen as very positive by the community, as currently, ETH’s issuance is causing a +3.2% yearly inflation. The Merge will also provide 5–15% APR on staked ETH (as transaction fees will go to stakers). One of the many misconceptions about The Merge is regarding the lowering of transaction fees: The Merge will NOT lower transaction fees. Layer 2s (L2s) and EIP-4844 (also known as Danksharding) are the current short-term solutions to improve transaction costs (included in an update after The Merge). The transition to PoS happens in two steps. The Ethereum developers launched the Beacon Chain in 2020, which introduced staking (the first step). The plan is to swap the current PoW with PoS that the Beacon Chain (second step).
In short, The Merge will have the following benefits for the Ethereum chain:
- It makes Ethereum ESG compliant
- Will reduce the energy consumption by 99.95%
- Will reduce ETH issuance (less inflation)
- In theory, should make participation in the consensus easier
The Surge focuses mainly on Sharding. Sharding is a multi-phase upgrade to improve Ethereum’s scalability and capacity, providing secure distribution of data storage. The upgrade will help spread the load of data management and storage. The Surge will also increase the network scalability of the base layer. To help with the scaling of L2s, Ethereum proposes EIP-4844 (Danksharding). Danksharding is an iteration of the Sharding mechanism of Ethereum. Sharding is a way for Ethereum to pass more data through the network. This will create a cheaper solution for L2s to post data on the Ethereum main chain. As of today (10/08/2022), Ethereum is able to process 16 transactions per second, and after The Surge it is expected to process up to 100k t/s (including all rollups).
The Verge will introduce Verkle trees. A Verkle tree is a commitment scheme that works similar to a Merkle tree but has much smaller witnesses. This would mean optimized storage and reducing the node size. The Verge will open the possibility for stateless clients where users will be able to validate and verify blocks without the need to store the whole blockchain history on a disk. It is a great step towards higher decentralization of the protocol.
The Perge will introduce state expiry. Ethereum clients will be required to discard data older than a year after The Purge. The main challenge after discarding the data is the storage of old data. It is still unclear how the developers will implement the mechanism of storing legacy data. The Purge improves Ethereum in a number of ways:
- Reduces hardware requirements for nodes (less storage)
- Allows clients to remove code that deals exclusively with legacy transactions
- Reduces bandwidth on the network — clients need to sync less data
The Splurge is the final phase of the Ethereum upgrade roadmap. It includes everything that could not be fitted to the previous updates. There is not much information on how and when this will be implemented. Vitalik Buterin even mentioned that if Ethereum scales enough with the earlier updates, The Splurge might not be needed.
The classification of Ethereum (ETH) according to the ITC:
Economic Purpose (EEP): ETH is listed as a settlement and access token (EEP22TU02).
Industry Type (EIN): The issuer of ETH is active in the field of CloudComputing, Distributed Systems and Decentralized Applications (EIN05DA03).
Technological Setup (TTS): ETH is a Blockchain-Native Token (TTS41BC).
Legal Clam (LLC): The ETH token does not entitle its holder to any legal claim or rights against the issuing organization therefore it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Ethereum is an Entity without Legal Presonality and it is Distributed Ledger Protocol (LIT62DL)
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The ETH token qualifies as a Utility Token; Crypto Asset in the Scope of MiCA (REU51UT) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via firstname.lastname@example.org and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via email@example.com and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.