ETHEREUM

Into the Ether

ETHEREUM (ETH)
Into the Ether

+ An asset primer tackling the fundamentals of the ethereum network

+ A discussion of key-trends and challenges in ethereum

+ An overview of ethereum 2.0 and future scaling solutions

PRICE TX/DAY MARKET CAP TOTAL ETH SUPPLY

$234 1M $26b 111M

Data as of 19 July 2020 • Source: etherscan

EXECUTIVE SUMMARY
Over the last few years, numerous cryptocurrency projects have come to market, many relying
on the ethereum protocol for computational properties and transfer settlement. In this note, we
provide an in-depth overview of the ethereum network that launched in 2015 and discuss the core
characteristics that set it apart. Ethereum was developed as a decentralized computing platform
that allows users to enforce agreements and run applications without a centralized party through
autonomous agents known as ‘smart contracts.’ Smart contracts run on a computational set of
instructions and are expected to change the way individuals, businesses, and societies transact
through programmable monetary transfers over decentralized applications. That said, as network
user transaction count grows and usability improves, ethereum – like other crypto networks – will
continue grappling with scalability concerns. Longer-term, the success of ethereum rests on the
success of executing against new scalability initiatives, described as “ethereum 2.0.”

This report breaks down the discussion of the ethereum network into six parts: Origins, The Protocol,
Key Events, Scalability, Adoption, and Conclusion. We’ll begin with a background on the launch of
ethereum, break down key aspects of the protocol, and delve into the defining moments of the
network’s history. We’ll then take a look at scalability and review developments that address current
limitations, and wrap up with a discussion of adoption. Our aim is to provide a holistic overview of
the ethereum network and contextualize its place in the broader cryptocurrency space.

JULY 2020 • [email protected] 2

Table of Contents
I. O R I G I N S
II. T H E P R O T O C O L
III. K E Y E V E N T S
IV. S C A L A B I L I T Y
V. A D O P T I O N
VI. C O N C L U S I O N

Disclosures
This document is for information purposes only and must not be the basis for making investment
decisions or be construed as a recommendation to engage in investment transactions or be taken to
suggest an investment strategy with respect to any financial instrument or the issuers thereof. This
report must be read with the Disclosure Appendix.

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I. ORIGINS

The concept of digital money existed long before the advent of bitcoin, tracing its roots as far back as
the early-1980s with David Chaum’s paper “Numbers Can Be a Better Form of Cash than Paper.”1 Chaum
first proposed the idea of an electronic cryptocurrency, ‘ecash,’ which ignited the Cypherpunk movement
of the 1990s, almost a decade later. Many of these cypherpunks shared an ideological opposition to
centralized control and censorship, which led to endeavors focused on a censorship-resistant monetary
system leveraging cryptography. An early member of the cypherpunk movement, Nick Szabo, introduced
the concept of digitally-enforced, trustless transactions with “smart contracts.” Nearly 20 years later,
the introduction of bitcoin inspired the launch of a new platform that would focus on smart contracts:
the ethereum network. Envisioned by several crypto enthusiasts, listed in figure 1 below, Vitalik Buterin
released the ethereum white paper in 2013, concluding that the design of bitcoin was functionally limited
by its specific operation as a peer-to-peer currency.

1 "Numbers Can Be a Better Form of Cash than Paper" (https://link.springer.com/chapter/10.1007/3-540-57341-0_61)

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Figure 1
Co-founders of ethereum

Vitalik Buterin • co-founder and writer of the Bitcoin Magazine (2012)

• authored and published the ethereum white paper (2013)
• co-founder of ethereum (2014)

Mihai Alisie • co-founder and editor-in-chief of the Bitcoin Magazine (2012)

• co-founder, chief innovation officer, and VP of ethereum (2014)
• founder of the AKASHA Project (2015)

Anthony Di Iorio • co-founder of ethereum (2014)

• founder and CEO of Decentral Inc.(2014) and Jaxx (2018)
• chief digital officer of the Toronto Stock Exchange (2016)

Charles Hoskinson • co-founder, CEO of ethereum (2014)

• co-founder of IOHK (2015)

Amir Chetrit • co-founder of Bitcoin Magazine (2012)

• co-founder of ethereum (2014)

Joseph Lubin • co-founder of ethereum (2014)

• founder of ConsenSys (2015)

Gavin Wood • co-founder and CTO of ethereum (2014)

• authored the ethereum yellow paper and designed the Solidity smart contract programming language (2014)
• founder of Parity Technologies (2015)

Jeffrey Wilcke • co-founder of ethereum (2014)

• co-founder of Grid Games (2018)

Source: Kraken Intelligence

Anticipating a world with broader application of blockchain technology, Vitalik Buterin created
ethereum to be a decentralized application2 platform where one base protocol could seamlessly
enable thousands of individual applications. Pursuing the vision of a “world computer,”
the ethereum team modified the original bitcoin protocol and blockchain design to support
smart contracts such as a Turing-complete3 programming language acting as a generalized,
transaction-based state machine.4

2 Decentralized applications (dapps) are applications designed to run on peer-to-peer networks rather than on a centralized server.
3 A computer programming language that can perform any computational problem, by recognizing an input to yield an output. (https://www.computerhope.com/
jargon/t/turing-completeness.htm)
4 A state machine is a device capable of reading an input and producing a new state, or output, based on the implemented changes dictated in the input.
(https://cointelegraph.com/ethereum-for-beginners/what-is-ethereum#is-ethereum-like-bitcoin)

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II. THE PROTOCOL

Ethereum utilizes the concept of ‘accounts’ and ‘state’ in place of bitcoin’s unspent transaction
output (UTXO) model. Under the UTXO model, a balance can be transacted, split, or combined,
and are associated with a wallet holder’s “balance” simply through their ability to sign a
transaction that spends the UTXO. Under ethereum’s state model, every account retains a
balance state, and each transaction results in a single output for transfers or expenditures.
The UTXO model is akin to that of a cash transaction where a serial numbered bill must be
transferred from one individual to another, for the receiver to have the right to spend the money.
However, ethereum’s state model is similar to that of a bank transaction where a bank account
will recognize the ‘credits’ under an individual’s name and when transfered, the recipient has the
right to use the credits. Ethereum’s account-based model recognizes two types of accounts:

1. externally-controlled accounts; and

2. contract-controlled accounts.

Tracking the balance of an account is intuitive, as the network verifies the state of an account
before approving any transactions, much like debit cards or ATM machines that check the total
balance of a user’s account before approving an expenditure. Now that we understand the state
model, let’s delve deeper into the protocol infrastructure, which can be broken down into several
core features: smart contracts, Solidity, Ethereum Virtual Machine (EVM), gas, miners, nodes, and
proof-of-work consensus (PoW).

• Smart contracts are programmable contracts that allow the trustless execution of codified
terms without the need for a third party. They are seen as autonomous agents that
manage the exchange of value in the ethereum network by self-executing when specified
conditions are met, similar to the concept of an escrow account. Although the bitcoin
protocol also provides for the creation of smart contracts, some argue it lacks flexibility
relative to ethereum as it is limited to the transfer of currency and was not intended as a
platform for smart-contracts. Smart contracts are entirely dependent on previous events
and states, in order for the network of nodes to validate and maintain consensus on the
newly mined blocks. Smart contracts have their own address in order to receive and
send ether, and may employ oracles, or intermediaries that feed external information to

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 the smart contracts. Because smart contracts can only access information broadcast on
the blockchain, oracles are necessary to leverage data from the outside world for smart
contracts that require such data. In these oracle-dependent smart contracts, certain
external data providers are explicitly defined to maintain the consistency and authenticity
of the data source. Some consider oracles a primary fault-point for the ethereum network,
but efforts are underway to improve the integrity of this weakness in smart contract
execution.5

• Solidity is a programming language native to ethereum, used in the implementation of

smart contracts which executes the EVM. It has similarities to Javascript, C++, and Python,
making it widely accessible for programmers.6

• The Ethereum Virtual Machine (EVM) is a Turing-complete virtual machine, which

performs computations of arbitrary complexity.7 The EVM’s design is the foundation for
ethereum as a programmable application platform. The EVM operates inside of every
ethereum client and is used by nodes and miners to validate transactions and to store,
process, and reconcile state in exchange for ether as gas.

• Gas represents the number of computational steps involved in executing a smart contract.
Payable in ether, the gas price is the amount of ether paid by the sender on every unit of
gas, usually measured in gwei, with 1 ether being the equivalent of 1,000,000,000 gwei.8
Ether acts as both the fuel that pays for the execution of decentralized applications and as
a transactable currency. The use of gas encourages miners to process smart contracts and
simultaneously discourages developers from executing inefficient and clunky programs.
Ether is currently mined using proof-of-work at a constant rate of 2 ETH per block 9 and
the total supply of ether remains unconstrained with over 109M ether in circulation.10
Ethereum employs a gas limit in place of a fixed block size, effectively capping the volume
of transactions and smart contract execution capacity.

• Nodes (computers) store replica copies of the blockchain and broadcast new transactions
over a network of peer nodes. When someone executes a valid transaction, a node
propagates the transaction information to other network nodes, which collect these
transactions in the memory pool (mempool), a queue of unconfirmed transactions.

5 "What are Oracles? Smart Contracts, Chainlink & "The Oracle Problem"" (https://blockonomi.com/oracles-guide/)
6 "From Javascript to Solidity" (https://medium.com/coinmonks/from-javascript-to-solidity-12317e8965de )
7 "Surprisingly Turing-Complete" (https://www.gwern.net/Turing-complete)
8 Definition of Gwei (https://gwei.io/)
9 As outlined in the Constantinople upgrade.
10 Total Ether Supply (https://etherscan.io/stat/supply)

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• Miners are nodes that compete to introduce new blocks onto the blockchain by confirming
and packaging transactions from the mempool.11 Miners are rewarded with newly minted
ether and transaction fees for each block they successfully mine. The process of mining
involves an expenditure of computing power to create a valid proof-of-work.

• Proof-of-Work (PoW) consensus is the set of network rules that determines whether
blocks and transactions are considered valid. This process is carried out by nodes and
miners, the former being responsible for propagating and storing of the blocks in the
blockchain and the latter for introducing new blocks by confirming transactions from the
mempool.12 Miners receive block rewards, or newly minted ether along with transaction
fees, with each new block successfully mined. The ethereum network was designed with a
PoW algorithm known as Ethash to make mining fairer by skewing towards GPU hardware.
However, due to the computational effort expended with PoW and for greater scalability,
the ethereum network will migrate to a Proof-of-Stake (PoS) mechanism. The gradual
transition to PoS has been scheduled since 2018, but has seen multiple delays.

For a closer look at the mining process and proof-of-work consensus, we recommend our
Cryptocurrency Mining Primer.

11 A pool of unconfirmed transactions.

12 Kraken Intelligence Cryptocurrency Mining Primer (https://kraken.docsend.com/view/7qqtw5i8qr7z3mev)

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 III. KEY EVENTS

2013 ethereum white paper published: the development of the ethereum network was split into four distinct phases.
Frontier was the first official phase that launched the network. The second phase, Homestead, was the first major
upgrade to the network and during this phase the network experienced three hard forks - the DAO fork, Tangerine
Whistle, and Spurious Dragon. All three forks were in response to major attacks on the network. The third phase
was named Metropolis, during which two main upgrades were made to the network, known as Byzantium and
Constantinople. The last known planned phase is Serenity, or ethereum 2.0, which introduces important technological
upgrades such as the Beacon Chain, sharding, plasma, and Casper. Each stage implemented major updates designed to
optimize the system and efficiently address issues that arose. Details of each stage are outlined in figure 2 below.

Figure 2
Ethereum
roadmap

Source: Ethereum Foundation, blockexplorer.com

2014 ether pre-sale: the pre-sale for the ether token was released to the public, utilizing the bitcoin blockchain as a purchase
database, with bitcoin accepted in exchange for ether tokens.13,14 At a token price of 2,000 ether per bitcoin, or $0.31 per
ether, the pre-sale raised more than $18M, with over $2.3M raised within the first 12 hours of the sale.15,16 On September
2nd, pre-sale investors received a total of 60M ether, and an additional 12M was allocated to the developers of the
network and the Ethereum Foundation.17

2015 launch of Frontier: ethereum launched its initial version of the protocol, Frontier. During this year, ethereum saw
tremendous growth in demand as the protocol underwent constant improvement, attracting developers to its accessible
platform.

13 "Background on the Mechanics of the Ether Pre-sale" (https://blog.ethereum.org/2014/07/09/how-to-make-a-purchase-in-the-ether-presale/)

14 "Ether Sale: A Statistical Overview" (https://blog.ethereum.org/2014/08/08/ether-sale-a-statistical-overview/)
15 "Ethereum Raises 3,700 BTC in First 12 Hours of Ether Presale" (https://cointelegraph.com/news/ethereum-raises-3700-btc-in-first-12-hours-of-ether-presale)
16 Ethereum ICO Stats (https://icodrops.com/ethereum/)
17 Ethereum total supply and market capitalization (https://etherscan.io/stat/supply)

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2016 the DAO attack and Ethereum Fork: the first network attack on ethereum with The DAO hack in June. The DAO was
the name of a particular Decentralized Autonomous Organization,18 and experienced an attack through a recursive bug
identified in the smart contract of The DAO.19 The Ethereum Foundation and network users decided to find a solution to
nullify the stolen ether, and Vitalik Buterin proposed a soft-fork to make any stolen ether transactions invalid. However,
network consensus was to push forward with a more aggressive hard-fork of the ethereum network, effectively reversing
all transactions related to The DAO and rewriting history to return all funds back to the respective owners. This was a
controversial decision perceived by some as a bail-out by a central party, and created an ideological rift in the network.
A group of people who believed it ruined the integrity of ethereum and the tenets of cryptocurrency remained on the
original chain, now known as ethereum classic. However, around 90% of the network hashpower moved on with the
hard-fork, supporting the ethereum network of today. 20 This attack raised concerns about the stability and long-term
outlook of the network as an autonomous, truly decentralized application platform.

2017 the rise of ICOs: the popularization of ICOs enabled developers around the
world to raise capital for project developments by creating and issuing their Figure 3
own tokens on the ethereum blockchain. Investors would send either fiat or
cryptocurrencies to developers in exchange for newly minted tokens. The ease Major ICOs to date
of creating and deploying applications for ICOs on the platform ultimately
led to an explosion of ICOs flooding the market and was a primary driver of
the bull run of 2017. Consequently, high profile ICOs began to take place as
the market gained traction in the latter half of the year, raising over $6.4B in
funding in 2017, $1.7B of which was raised in December alone. Some of the
largest ICOs to date are listed in figure 3. 21,22,23 A majority of these projects
successfully raised millions in capital, creating a flurry of demand for ether,
resulting in a gain of over 9,000% in 2017 for ether holders.

ERC-20 token standard formalized: Ethereum Request for Comment (ERC)-20

is the technical standard used for smart contracts in creating fungible utility
tokens on the ethereum network. It’s a common set of rules implemented
to program tokens to function, improving interoperability between different
projects on the network. Most tokens issued during the ICO boom were
created as an ERC-20 token.

launch of CryptoKitties: a notable event that contributed to the congestion

of network activity was the creation of CryptoKitties, one of the earliest
viral dapps on the ethereum network. CryptoKitties is a game implementing
non-fungible (ERC-721) tokens represented in the form of virtual kittens, Source: project websites, thecoinoffering
or ‘CryptoKitties.’ The game leverages smart contracts to breed and
sell CryptoKitties on the blockchain and is one of the most well-known
implementations of a non-fungible token/digital asset 24 used in the form of a
game.

2018 Scalability Research and Development Subsidy Programs announced: the Ethereum Foundation announces grants for
the development of layer-2 scaling strategies on ETH2.0. 25

partial proof-of-concept released for sharding: Vitalik Buterin releases the ‘fork choice rule,’ a code repository that
dictates the interaction of shards with the main chain and enabling efficient scaling. 26

18 A Decentralized Autonomous Organization (DAO) is an organization that seeks to eliminate hierarchical management in institutions by replacing the operational middlemen with a DAO on the ethereum
platform.
19 "Understanding The DAO Attack" (https://www.coindesk.com/understanding-dao-hack-journalists)
20 "From Crowdfunded Blockchain to ICO Machine: An Ethereum Price History" (https://blog.sfox.com/from-crowdfunded-blockchain-to-ico-machine-an-ethereum-price-history-ddb31c3134c4)
21 "ICO Scams – Fake Initial Coin Offering Tokens List" (https://bitcoinexchangeguide.com/top-6-ico-fundraisers-eos-telegram-dragon-huobi-hdac-and-filecoin/)
22 "Top 10 Biggest ICOs" (https://www.bitcoinmarketjournal.com/biggest-icos/)
23 Basic Attention Token ICO (https://cryptoslate.com/coins/basic-attention-token/)
24 Individually unique tokens that are not interchangeable; contrary to cryptocurrencies like bitcoin that are mutually interchangeable.
25 "Ethereum Scalability Research and Development Subsidy Programs" (https://blog.ethereum.org/2018/01/02/ethereum-scalability-research-development-subsidy-programs/)
26 "Vitalik Releases Partial Proof-of-Concept for Ethereum ‘Sharding’ Tech" (https://www.coindesk.com/vitalik-releases-partial-proof-concept-ethereum-sharding-tech/)

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 Casper FFG code released on Github: ethereum’s PoS implementation, Casper the Friendly Finality Gadget, code for v1
of ETH2.0 is released on Github.

2019 launch of Raiden Network on mainnet: Raiden Red Eyes, an off-chain payment channel network, goes live on ethereum
mainnet. The Raiden Network enables fast, scalable, and cheap decentralized payments. 27,28

Constantinople/St. Petersburg upgrade: the ethereum network underwent its scheduled Constantinople/St. Petersburg
update at block 7,280,000 which reduced the block reward by 33% and paved the way for ethereum 2.0. 29

Istanbul hard fork: the ethereum network went through its scheduled mainnet upgrade at block 9,069,000. 30 This
upgrade implemented 6 backward-compatible changes which set the groundwork for ethereum 2.0. Main changes
include distributed denial-of-service (DDoS) resilience, interoperability with other equihash PoW tokens, and adjustment
of gas costs for greater network bandwidth. 31

27 "Red Eyes Mainnet Release Announcement" (https://medium.com/raiden-network/red-eyes-mainnet-release-announcement-d48235bbef3c)

28 "Raiden Network: Vision, Challenges and Roadmap" (https://medium.com/raiden-network/raiden-network-vision-challenges-and-roadmap-593dfa34b868)
29 "Ethereum Constantinople/St. Petersburg Upgrade Announcement" (https://blog.ethereum.org/2019/02/22/ethereum-constantinople-st-petersburg-upgrade-announcement/)
30 "Road to Istanbul: ETH Hard Fork Explained" (https://medium.com/superorder/road-to-istanbul-eth-hard-fork-explained-d0101377dcc7)
31 "Ethereum’s Istanbul Hard Fork Is Now Live" (https://www.coindesk.com/ethereums-istanbul-hard-fork-is-now-live)

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IV. SCALABILITY

Scaling has been, and remains, one of ethereum’s greatest challenges. During booming market
conditions and the ramp-up in the creation of dapps and ICOs in late-2017, the network began
experiencing scaling difficulties. One notable example that laid bare the network’s failure to scale
was the launch of CryptoKitties on November 28, 2017. CryptoKitties was the first decentralized
application (dapp) to go viral such that amateur crypto users could interact with the platform. As
the popularity of CryptoKitties congested the ethereum network with an extremely rapid increase
in transactions, unprocessed transactions grew sixfold and total activity on the dapp accounted
for nearly 12% of all transactions on the ethereum network in the first week of December 2017.32,33

To meet the demands of the real-world while preserving decentralization, Vitalik Buterin
announced his vision for ethereum 2.0, which outlined a set of upgrades slated to take place over
the coming years with a focus on improving network security, privacy, and scalability.

Ethereum 2.0

Ethereum 2.0, also known as Serenity, is a network upgrade that seeks to achieve all three
elements of the blockchain trilemma: security, scalability, and decentralization.34,35 To accomplish
this, its main components – the Beacon Chain, Proof-of-Stake (PoS) consensus protocol, sharding,
and eWASM - work together to move the majority of computational effort off the main chain.

• The Beacon Chain is the core of Ethereum 2.0 and a vital chain running in tandem with
other chains, cross-linking the main chain with all shard chains.

• Proof-of-Stake (PoS) consensus protocol is an alternative consensus mechanism to

the current Proof-of-Work (PoW) mechanism, which assigns the right to create a block
through a lottery process rather than through computational expenditure. Consequently,

32 "The Ethereum Network is Getting Jammed Up Because People are Rushing to Buy Cartoon Cats on Its Blockchain" (https://qz.com/1145833/cryptokitties-is-
causing-ethereum-network-congestion/)
33 Top 10 ETH Contracts By Transaction Count (https://ethgasstation.info/gasguzzlers.php)
34 "Ethereum Co-Founder Vitalik Buterin Weighs in on Blockchain Improvement & Scaling Issues" (https://cryptovest.com/news/ethereum-co-founder-vitalik-
buterin-weighs-in-on-blockchain-improvement--scaling-issues/)
35 Ethereum Github on Serenity (https://github.com/ethereum/wiki/wiki/Sharding-roadmap#strongphase-3strong-light-client-state-protocol)

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 PoS should theoretically encourage decentralization by allowing validators to simply
stake their ether balance. The ethereum network plans to gradually transition to a PoS
consensus protocol from the current PoW mechanism through the implementation of a
hybrid consensus mechanism with Casper Friendly Finality Gadget (FFG). Under PoS,
misbehaving validators will have their staked coins taken away (slashed) and barred
from future staking activities. Though PoS systems are not immune to 51% attacks,
compromising the security model relies on a significant acquisition of the circulating
currency supply. This exposes the attacker to great economic loss, as attacking the
network would likely result in the value of all their staked coins plummeting if users catch
on and lose confidence in the protocol itself.36

• Sharding is a method of scaling on-chain transaction throughput by splitting the network’s

state information into partitions with their own independent state and transaction history,
or ‘shards.’ These shards will make up a chain, with reference points through the Beacon
chain, that will act as the layer on which all user transactions take place on the record.
This architecture allows the synchronous processing of thousands of sharded transactions,
splitting up validation responsibilities across the widespread network of nodes, with
no validators required to run the entire network on their server. Each shard will include

Figure 4
Ethereum 2.0 chain structure

Source: Hsaio-Wei Wang

36 "Responding to 51% attacks in Casper FFG" (https://ethresear.ch/t/responding-to-51-attacks-in-casper-ffg/6363)

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 an eWASM-based virtual machine, the equivalent of today’s Ethereum Virtual Machine.
An eWASM, or Ethereum-flavored WebAssembly, is an engine that executes smart
contracts.37 Currently, there is no developer consensus on the complete replacement of
the EVM, but developers plan to allow users to choose between the two, if eWASM is later
implemented.38
Eight teams are spearheading the development of ethereum 2.0, as shown in figure 5 below.39

Figure 5
Developers of ethereum 2.0

Developer Description Ethereum 2.0 clients

ChainSafe Systems Blockchain research & development startup with consulting services Lodestar

Harmony Ethereum's original Java client, formerly known as Ether Camp Harmony

Parity Technologies Blockchain infrastructure company responsible for the second most popular Shasper
Ethereum client on the platform 'Parity Ethereum'

PegaSys Blockchain protocol engineering company; Supported by Consensys Artemis

Prysmatic Labs Company developing Ethereum's first sharding client Prysm

Sigma Prime Information security and blockchain technology consulting company Lighthouse

Status Messaging platform and mobile browser for users on the Ethereum network Nimbus

Ethereum Foundation Python client for the Ethereum network Trinity

Source: Coinspeaker.com, coindesk.com, Prysmatic Labs, Trinity Ethereum

As part of the network transition to ethereum 2.0, a major network upgrade under the name
‘Istanbul’ went live at block 9,069,000. Though there are more updates to follow, this upgrade
rolled out significant improvements that would set the foundation for ethereum 2.0 and the
PoS consensus algorithm. Before the launch of the beacon chain, Programmatic Proof-of-Work
(ProgPoW) will be introduced as a transitional measure prior to migrating to a PoS system.40 The
current PoW algorithm, Ethash, will be replaced by ProgPoW to close the hardware efficiency gap
between ASICs and commodity GPUs. This is intended to resist centralization brought forth by the
PoW protocol.41

37 "Serenity - The Vision of Ethereum 2.0" (https://etherworld.co/2019/01/04/serenity-the-vision-of-ethereum-2-0/)

38 "Serenity - The Vision of Ethereum 2.0" (https://etherworld.co/2019/01/04/serenity-the-vision-of-ethereum-2-0/)
39 "8 Teams Are Sprinting to Build the Next Generation of Ethereum" (https://www.coindesk.com/next-gen-buidlers-the-8-teams-working-on-ethereum-2-0)
40 "Road to Istanbul: ETH Hard Fork Explained" (https://medium.com/superorder/road-to-istanbul-eth-hard-fork-explained-d0101377dcc7)
41 Kraken Intelligence Cryptocurrency Mining Primer(https://kraken.docsend.com/view/7qqtw5i8qr7z3mev)

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The ethereum 2.0 roadmap is split into three main phases and addresses layer 1 and layer 2
scalability. First, layer 1 (on-chain) improvements are focused on efficiency, throughput, and
security. Second, layer 2 (off-chain) improvements focus on scaling the network beyond the
limitations of the one base chain. Layer 1 scalability solutions impact the foundational blockchain
layer of the protocol while layer 2 solutions operate on top of this foundation.

In order to improve scalability, core developers of ethereum are contributing improvements to

both layers 1 and 2 of the network, some of which are outlined in the ethereum 2.0 roadmap.
Scaling solutions aim to simplify the mission-critical base layer, while pushing complex
functionality further up the stack. In the future, greater weight will be placed on innovation and
development in the second layer.

1. Layer 1 (on-chain) scalability solutions on the ethereum network include the Casper
PoS protocol, sharding, and zkSTARKs. Zero Knowledge Scalable Transparent Argument of
Knowledge (zkSTARK) is a method of proving the existence of something without exposing the
underlying information, through the use of zero-knowledge proofs. An implementation of this
technology would create an avenue for privacy and scalability, as it provides fast computations
and smaller proofs while protecting sensitive data.42 The Casper PoS protocol and sharding are
part of the ethereum 2.0 roadmap while zkSTARKs is included in future development plans post-
ethereum 2.0.43,44

2. Layer 2 (off-chain) scalability solutions include sidechains,45 state and payment channels,46
and Truebit.47 Off-chain scalability would move computational effort off the main chain while
retaining the decentralized security benefits offered by the main blockchain. Plasma, or
sidechains, is one such solution developed by Vitalik Buterin and Joseph Poon. It enables faster
transactions and lower transaction fees by the creation of ‘child-chains.’48 Various iterations of
Plasma are currently under development.

Another layer 2 solution is state and payment channels. A payment channel is the idea behind
the Lightning Network of bitcoin, where payment transactions are made off-chain. State channels
are similar to payment channels but have the benefit of smart contract operability, by enabling
state updates off-chain. Both channels can be included onto the main chain by submitting the

42 "Starkware Industries Presents zk-STARKS for Supercharged Blockchain Scalability, Privacy, &…" (https://hackernoon.com/starkware-industries-presents-zk-
starks-for-supercharged-blockchain-scalability-privacy-c42e15a74f98)
43 "Buterin Lays Out Ethereum's Next 3-5 Years, Explains Sharding" (https://www.ethnews.com/buterin-lays-out-ethereums-next-3-5-years-explains-sharding)
44 "The Year in Ethereum" (https://medium.com/@jjmstark/the-year-in-ethereum-87a17d6f82760)
45 "Plasma: Scalable Autonomous Smart Contracts” by Joseph Poon and Vitalik Buterin (http://plasma.io/plasma.pdf)
46 "Making Sense of Ethereum’s Layer 2 Scaling Solutions: State Channels, Plasma, and Truebit" (https://medium.com/l4-media/making-sense-of-ethereums-
layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4)
47 "Making Sense of Ethereum’s Layer 2 Scaling Solutions: State Channels, Plasma, and Truebit" (https://medium.com/l4-media/making-sense-of-ethereums-
layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4)
48 "Plasma: Scalable Autonomous Smart Contracts” by Joseph Poon and Vitalik Buterin (http://plasma.io/plasma.pdf)

15
final state of transactions and closing the channel.49 Ethereum’s Raiden Network is an example of
a state channel, which will likely complement and operate on Plasma sidechains.50

The last proposed solution is Truebit. Whereas Plasma and Raiden work to increase total
transaction throughput, Truebit addresses computationally complex transactions that would
be too expensive to conduct on the main chain. It alleviates the main chain from computational
weight by taking it off-chain.51 The workload of computation verification will be shifted onto
a separate network, only utilizing the ethereum blockchain for disagreement settlements,
significantly lowering the workload placed on the main chain.52 Truebit approaches scaling from a
different angle and seeks to address transaction complexity rather than transaction count.

3 phases of ethereum 2.0

+ Phase 0: The first phase is the launch of the beacon chain. Ethereum 2.0 will implement PoS
and sharding on this new beacon chain. As seen in figure 4, this will lead to the creation of three
distinct chains - the main chain, the beacon chain, and the shard chain. The beacon chain will run
in tandem with other chains, cross-linking the main chain with all sharding chains. Shard chains
will act as the layer where user transactions are placed and recorded. The beacon chain will link
to shard chains, signaling new blocks that can be added onto the main chain. Network validators
will identify and sign shard chain blocks and their crosslink to include on the main chain. A
crosslink is a set of signatures attesting to a shard chain block’s inclusion into the beacon chain.
These three chains, synchronizing and communicating in parallel with one another, will result in
speed and scalability as transactions and subsequent operations are moved off the main chain.
The main chain will provide staking, the beacon chain will be responsible for blockchain validity,
finality, as well as validator registration, and the shard chain will account for all transaction data
on the network. The concept of block finality included in the beacon chain is akin to the concept
of block confirmations in a PoW network. The deeper the block is embedded into the blockchain,
the more finalized it is, making the block more irreversible and resilient against 51% attacks. The
beacon chain will use the Casper FFG overlay for finality.53

The Capser FFG protocol is one of the core upgrades to be released in ethereum 2.0. In addition
to finality, it will migrate the network to a PoS system. To do this, validators must submit a deposit
of 32 ether into a smart contract on the current PoW main chain. This will create a receipt proving

49 "Making Sense of Ethereum’s Layer 2 Scaling Solutions: State Channels, Plasma, and Truebit" (https://medium.com/l4-media/making-sense-of-ethereums-
layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4)
50 "Understanding Ethereum Scaling — Categorizing projects by approach adopted" (https://medium.com/matic-network/understanding-ethereum-scaling-
categorizing-projects-by-approach-adopted-97c79b25eb55)
51 "Making Sense of Ethereum’s Layer 2 Scaling Solutions: State Channels, Plasma, and Truebit" (https://medium.com/l4-media/making-sense-of-ethereums-
layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4)
52 "Inside TrueBit: Ethereum’s Lesser-Known Scalability Effort" (https://www.coindesk.com/inside-truebit-ethereum-scalability-effort)
53 "Blockchain Finality- Proof of Work and Proof of Stake" (https://medium.com/coinmonks/blockchain-finality-pow-and-pos-35915a37c682)

16
validator ‘membership’ on the beacon chain, enabling validator participation.54 Unlike the PoW
consensus method which requires massive computational power, in PoS, the deposit, or ‘stake’,
determines a node’s chance at block validation. Once validators stake their coins, they join a
queue and eventually migrate into the pool of active validators.55 Similar to PoW miners, active
validators sign off on blocks and crosslinks, confirming valid transactions. While validators only
manage the beacon chain in phase 0, they are expected to also handle shard chains from phase 1
onwards.

Another development in phase 0 is the introduction of Beacon ether (BETH), a new asset for
stakers to use on the beacon chain. BETH will be released as the validation reward of the
beacon chain, and later for shards, or can be purchased through a deposit of 1 ETH per BETH.56
As the initial iteration of the beacon chain in this phase will not yet support sharding, smart
contracts, and asset transfers, BETH coins cannot be withdrawn until the execution of sharding is
implemented in phase 2.57

+ Phase 1: Once the beacon chain is implemented in phase 0, the development community will
shift focus to implementing shard chains. This phase will aim to create consensus on the structure
of shard chains, more than the specific execution of the technology. Sharding will break down
state information into smaller ‘shards’ and achieve the network’s goal of greater scalability and
speed. At this stage, shard chain blocks are expected to be premature in their structure, not
yet including concepts like accounts, assets, or smart contracts.58 These blocks will be mere
collections of data, verified by shard validators who will then crosslink the block into the beacon
chain. The validity of a crosslink will be proven by validators’ consensus. Specifications on phase
1 are still in development, but crosslinking is expected to support cross-shard communication
past phase 2.59

+ Phase 2: In this phase, shard chains will transition into a structured chain state that supports
smart contracts and asset transfers. Each shard will have an eWASM-based virtual machine
and state rent may also be implemented, which will require developers and users to pay ‘rent’
for storage on the eWASM-based virtual machine.60 This is to encourage unloading of unused
information from the state to shift the cost burden from full nodes to users over time.61 Phase 2
is regarded as the final stage of Serenity as it completes the upgrade of the base layer, and this
phase is set to take place around 2021.62

54 "Two Point Oh: Explaining Validators" (https://our.status.im/two-point-oh-explaining-validators/)

55 "The Year in Ethereum" (https://medium.com/@jjmstark/the-year-in-ethereum-87a17d6f8276)
56 "What to Expect When ETH’s Expecting" (https://hackernoon.com/what-to-expect-when-eths-expecting-80cb4951afcd0)
57 "What to Expect When ETH’s Expecting" (https://hackernoon.com/what-to-expect-when-eths-expecting-80cb4951afcd0)
58 "What to Expect When ETH’s Expecting" (https://hackernoon.com/what-to-expect-when-eths-expecting-80cb4951afcd0)
59 "What to Expect When ETH’s Expecting" (https://hackernoon.com/what-to-expect-when-eths-expecting-80cb4951afcd0)
60 "What to Expect When ETH’s Expecting" (https://hackernoon.com/what-to-expect-when-eths-expecting-80cb4951afcd0)
61 "What to Expect When ETH’s Expecting" (https://hackernoon.com/what-to-expect-when-eths-expecting-80cb4951afcd0)
62 "Ethereum 2.0 (Serenity) Kicks Off “Feature Complete” Pre-Release" (https://www.investinblockchain.com/ethereum-serenity-kicks-off-feature-complete-pre-
release/)

17
V. ADOPTION

In the volatile market of cryptocurrencies, one way to measure the dominance and strength of a
network is through the growth of adoption. One way to measure adoption can be improvements
on the platform, and we look to ethereum’s developer community to see on-going signs of
activity. As of early-January 2020, the go-ethereum repository on Github lists over 11K commits
and 440 contributors and continues to grow.63 Anecdotally, ethereum continues to host many
emerging projects across a host of applications, including stablecoins, games, prediction
markets, and decentralized finance. According to State of the DApps, projects such as Gnosis,
Status, Trust Wallet, and Aragon have seen the most developer activity in the past 30 days.64

Initial coin offerings (ICOs) also serve as a relevant proxy to the growth of ethereum network
adoption. Aside from the ethereum ERC-20 token standard serving as a highly efficient
mechanism for crowdfunding campaigns, ICO volumes directionally signal development
resources applied towards applications leveraging the ethereum network. While some of these
projects will ultimately deploy their own blockchain separate from the ethereum network,
the number of projects that have conducted ICOs generously skews in favor of the ethereum
network. Though market demand has chilled for ICOs, many projects conceived during the boom
cycle of 2017-2018 continue to operate today.

63 Ethereum Github Repository (https://github.com/ethereum/go-ethereum)

64 Dapp Statistics (https://www.stateofthedapps.com/rankings?sort=dev_30d&order=desc)

18
Figure 6 Figure 7
Monthly ICO volume Quarterly ICO funding trend

Source: Coinschedule.com Source: Coinschedule.com

We can also consider daily on-chain volume and active users to gain a more holistic picture of
user adoption and utilization of the network. As per figure 8, ethereum’s daily on-chain volume
hit an all-time high in January 2018, but sharply trended downwards for the rest of the year,
stabilizing into 2019. This pattern indicates that network adoption largely followed market price
trends. Daily active user count on the ethereum network has been seeing a steady decline as
seen in figure 10, falling over 76% from its peak in January 2018 to February 2019 when active
user count resumed growth. The network has seen continuous growth since February 2019,
recording over 229K active daily users as of early-January 2020.65

Ethereum was once heralded as the alternative to bitcoin that would change the future of crypto
by pioneering mainstream adoption with its distinct capabilities to support the expansion of
blockchain usage. Ironically, its success as a smart contract platform and subsequent failures
to scale spawned its own field of direct competitors. Though it still remains the leader in smart
contract platforms in terms of market capitalization, its dominance has not gone unchallenged.
Various projects rivaling ethereum were created to improve on the limitations of the platform, as
outlined in figure 10.

65 Ethereum Network Statistics (coinmetrics.io)

19
Figure 8 Figure 9
Daily on-chain volume Daily active users

Source: Coinmetrics.io Source: Coinmetrics.io

Figure 10
Top competitors

Platform Description Similarities Differences

EOS Platform for decentralized Supports smart contracts Delegated Proof-of-Stake (DPoS)
(EOS) applications Supports decentralized No tx fees; 1% inflation rate tied into native token, distributed to
applications node holders

Stellar Platform for cross-border Supports smart contracts Proof-of-Stake (PoS)

(XLM) payments Low tx fees
Smart contracts not Turing-complete
In-house decentralized exchange

Cardano Platform for decentralized Supports smart contracts Proof-of-Stake (PoS)

(ADA) applications Two-layer platform

NEO Platform to digitize assets Supports smart contracts Proof-of-Stake (PoS)

(NEO) and automate management Supports decentralized PKI (essential public infrastructure) used to verify identities
of digital assets using smart applications Supports atomic swaps
contracts

20
 Tron Platform for decentralized Supports smart contracts Proof-of-Stake (PoS)
(TRX) applications Supports straight-forward Low - no tx fees
contracts Supports atomic swaps
Supports Java Adheres to Google Protobuf protocol for scaling
programming language Three-layer platform

Cosmos Central platform which Supports independent Bonded Proof-of-Stake (BPoS)

(ATOM) allows blockchains to exist in blockchains Connects blockchains using Inter-Blockchain Communication
parallel, scale, and transfer (IBC)
value to one another

Polkadot Central platform which Supports independent Mainnet yet to launch

(DOT) allows transfer of data blockchains
between private and public
blockchains

Source: Kraken Intelligence, project websites

According to DappRadar, almost 60% of dapps listed run on the ethereum network, 17% on
EOS, followed by 17% on tron.66 However, looking at the top 10 new dapp releases as of January
6, 2020, the ethereum and tron network each accounted for 40% of the new releases. Going
forward, any changes in network dominance may be driven by the need for speed and scalability,
the two current limitations of the ethereum network.

66 Dapp Statistics (https://dappradar.com/rankings)

21
VI. CONCLUSION

The ethereum network has experienced explosive growth in its five short years of operation. The
application of smart contracts revolutionized the way we structure businesses and the continued
technological developments of the network point to a future with boundless growth. However,
while witnessing its many successes, we also uncovered many of its vulnerabilities. Despite
ongoing improvement and patchwork, the network continues to see attacks on its platform,
technological difficulties in deploying new infrastructure, and issues with scalability. Various
competitors have come to the fore declaring themselves at par with ethereum, showcasing
roadmaps that will overcome the shortcomings and complexities of this network. Regardless of
this noise, however, ethereum treads on. Its developers and founders continue to work tirelessly
on improving the platform and expanding its infrastructure while flexibly adjusting to unforeseen
issues as they rise.

The network’s ultimate goal of building ethereum 2.0 is an inspiring, but complex, future. It will
tackle many of the issues we have witnessed, such as scalability, but the network will need to
stay agile in dealing with the new attack vectors created by the complexities of ethereum 2.0.
However, aside from the technological aspects of the network, we believe the societal values
ethereum embodies will continue to be its strength. By promising a censorship-resistant, shared
societal structure that defies current plutocratic arrangements, we see liberated access to finance
and a progressive future in which ideals, like democracy, can be programmed through the use
of dapps. The road is far and long for ethereum to reach its full potential, but if irresponsible,
inflationary monetary activities, centralized data collection, and government censorship
continues, the world may soon be ready to accept a truly global, decentralized computing
platform.

22
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JULY 2020 • [email protected] 23