As we navigate the maze of transformations in blockchain technology, it’s important to examine Ethereum’s trajectory. According to co-founder Vitalik Buterin, Ethereum faces several major challenges that could lead to its failure if not properly addressed.
The first hurdle: the transition to Layer 2 scaling. As blockchain capabilities expand and demand grows, Ethereum needs to provide a scalable solution that maintains its decentralized philosophy. It’s a question of balance – if it can’t be solved, users may become frustrated by high transaction costs and turn to centralized workarounds, undermining Ethereum’s core selling point.
Secondly, Ethereum wallets are secure. Like a seasoned fortress guard, Ethereum must keep user assets safe. If users cannot trust Ethereum to protect their funds, they may flock to centralized exchanges, which would pose another potential threat to Ethereum.
Finally, privacy is crucial in today’s digital world. If Ethereum fails to provide strong privacy protection mechanisms, it risks losing users, who may turn to centralized solutions that can provide at least some data protection.
1. What is Ethereum?
Ethereum was created by Vitalik Buterin and is the second-largest cryptocurrency by market capitalization. It rose to prominence in the industry with the introduction of smart contracts. Its significance is believed to extend beyond Bitcoin. Ethereum built an entire ecosystem for decentralized applications (DApps) and became the cornerstone of many other cryptocurrencies.
Ethereum represents an interconnected ecosystem of diverse communities and toolsets that empower individuals to transact and communicate without centralized control.
Ethereum, which debuted in 2015, expands on the groundbreaking concepts introduced by Bitcoin and has several unique features. Both platforms enable the use of digital currencies without the involvement of a bank or payment service provider. However, Ethereum introduced programmability, allowing decentralized applications to be created and deployed on its platform.
While Bitcoin only allows simple value transfer messages, Ethereum takes this concept to a higher level: it can not only exchange messages, but also create any general program or contract. This unlimited potential for contract creation has led to tremendous innovation in the Ethereum network.
Unlike Bitcoin, which is primarily used as a payment network, Ethereum is a diverse market. It hosts a variety of services, including financial platforms, games, and social networks. These applications respect user privacy and resist censorship, cementing Ethereum’s unique position in the digital world.
Ethereum relies on three fundamental elements to thrive: Layer 2 (L2) scaling, wallet security, and privacy. These three elements are intrinsically interrelated, each plays a vital role in the functionality of Ethereum, and if there is a problem with one of these elements, the entire system is at risk of collapse. This is not to be confused with the blockchain trilemma, which refers to the fact that no blockchain can simultaneously optimize decentralization, security, and scalability.
2. Three key elements of Ethereum
L2 extension
It is crucial for Ethereum to handle the increased usage. Imagine a busy bar with just one bartender struggling to serve a growing crowd. In this case, L2 scaling is like hiring an extra bartender, it allows Ethereum to process transactions faster and avoid high costs per transaction. Without efficient L2 scaling, Ethereum transaction costs could be as high as $3.75 ($82.48 during the bull run), which would push users to seek centralized solutions.
Wallet security
Wallet Security: Similar to the trust we have in the stability of a stool. Users must feel safe storing funds and assets in the system. Without strong wallet security, users may turn to centralized exchanges.
privacy
Public visibility of all transactions is a sacrifice of privacy for many users, who may turn to centralized solutions that offer at least some data hiding. Without strong privacy protections, Ethereum may lose a large portion of its users.
3. L2 extension
L2 scaling involves moving the majority of the computing load from the main Ethereum chain (layer one) to “sidechains” or layer two networks. These sidechains can process transactions faster and at lower costs, just like extra highways relieving traffic congestion.
However, this transition is not without challenges. It requires users to adapt to the new framework of existing on multiple L2s instead of just one address. This shift is akin to having multiple bank accounts at different institutions, each serving a different purpose, rather than relying on a single account.
There is already evidence of this trend, such as the use of Optimism in ExampleDAO, the implementation of ZkSync in stablecoin systems, and the application of Kakarot in other use cases. In each case, users must create an account on their respective L2, and the transition to L2 scaling is both challenging and critical. In order for Ethereum to continue moving toward its goal of becoming a global, open, and permissionless platform, migrating to L2 scaling is a hurdle that must be overcome.
4. Wallet Security
The second key point in the Ethereum ecosystem is wallet security. Wallet security is an important feature in the cryptocurrency space, serving as the first line of defense against unauthorized access and potential theft of digital assets. Since digital wallets are a critical component of the overall functioning of the Ethereum blockchain, any security issues or vulnerabilities could cause serious damage and reduce trust in the platform.
A key challenge facing Ethereum is the potential risk to wallet security. Essentially, if Ethereum fails to provide users with strong and reliable wallet security, it will most likely result in users moving their funds to centralized exchanges. Centralized exchanges can offer advanced security measures such as two-factor authentication, cold storage, and insurance against potential theft, making them a more attractive option for storing digital assets.
There have been several instances in the past where Ethereum’s wallet security has been compromised, adversely affecting the ecosystem. For example, in 2017, Ethereum-based company Parity suffered a major security breach when attackers exploited a vulnerability in their multi-signature wallet, resulting in the loss of over $30 million in Ethereum. This security breach not only caused huge financial losses, but also shook trust in the security of Ethereum wallets.
These incidents highlight the importance of developing advanced digital wallet security features within the Ethereum ecosystem. Without proper wallet security, Ethereum risks losing users and their trust in the platform’s ability to securely protect digital assets. Therefore, in order for Ethereum to succeed and maintain its position in the cryptocurrency space, a strong focus must be placed on enhancing wallet security and ensuring safe storage of digital assets. This is the issue that needs to be given the highest priority in the Ethereum development roadmap.
5. Privacy
Privacy carries the heavy responsibility of protecting the confidentiality of transactions in the Ethereum network. However, as we continue to move forward in the digital maze, we must face the reality that the privacy in the operation of Ethereum is not as safe and secure as we expect.
The essence of the blockchain is a public ledger that records every transaction and every interaction between users. In Ethereum, every transaction, every Proof of Attendance Protocol (POAP), can be seen by anyone. In principle, this provides transparency, an important element of trust in any transaction. But at the same time, it also poses significant challenges to personal and transaction privacy. The public nature of these transactions reveals a wealth of information about the parties involved and their transactions, leading to potential abuse.
If privacy measures are insufficient or fail, it will have far-reaching consequences for the entire Ethereum ecosystem.
The history of Ethereum is full of incidents where privacy was breached and led to serious consequences. In particular, in 2016, the Decentralized Autonomous Organization (DAO) suffered a hacker attack worth 60 million Ethereum. In another example, a privacy breach in 2020 resulted in an "accidental hard fork" of Ethereum, a glitch that split Ethereum into two separate blockchains.
In summary, Ethereum’s success and its ambition to become a mature technology stack heavily relies on how it handles the delicate balance between transparency and privacy. Failure to address this critical issue will destabilize Ethereum’s infrastructure and hinder its evolution toward a global, open, and permissionless experience.
6. Transition Plans to Address These Challenges
Adapting to these major transitions will inevitably reshape the familiar relationship between Ethereum users and addresses, potentially creating a more complex landscape. Take L2 expansion transition as an example. In this new world, users will no longer be limited to a single address. Instead, they will have multiple accounts spread across various L2 solutions, each with its own unique address. The change is far from cosmetic and brings new complexities and potential confusion to users accustomed to using just one address.
However, these challenges are not limited to the user's perspective. These transitions also require developers to make significant adjustments. As Buterin points out, the existing "one user ≈ one address" mental model is gradually disappearing, replaced by the need to coordinate interactions between different addresses, L2s, and applications. This shift requires deep and fundamental changes to how we interact with Ethereum, which may seem daunting at first. The difficulty lies in coordinating these efforts ecosystem-wide to ensure a smooth transition.
For example, a simple payment now requires more information than a 20-byte address. It also requires the recipient to provide their L2 solution along with their address, while the sender’s wallet automatically routes the funds to the designated L2 via a bridging system. This is just one example of the many changes that need to happen in the Ethereum ecosystem.
7. Looking to the future: Can Ethereum withstand the pressure?
Despite facing these significant challenges, Ethereum is not sitting idly by. To combat scalability issues, developers are turning to Rollups (Layer 2 solutions), which are designed to process transactions off-chain and then bundle them together and add them to the main Ethereum chain. Doing so increases throughput and reduces costs while maintaining the security guarantees of the main chain.
In terms of wallet security, efforts are underway to transition users to smart contract wallets. These wallets provide a more secure storage solution, taking advantage of the inherent security mechanisms of Ethereum itself.
Privacy concerns are being addressed through various innovative technologies, such as zero-knowledge proofs, which allow users to prove ownership without revealing any important information.
Vitalik's proposed solution to these challenges is based on an architecture that separates validation logic and asset holdings. Through the keystore contract, verification logic can be placed in one location corresponding to different addresses on L2, thereby greatly reducing the complexity of handling multiple addresses and associated security risks.