In brief

  • Ethereum marked its fifth anniversary on July 30, 2020.
  • Its next milestone is the upcoming launch of Ethereum 2.0 and the switch to a proof of stake consensus model.
  • Decentralized finance (DeFi) has propelled Ethereum's growth and could soon reach mainstream consumers.

Since its launch on July 30, 2015, Ethereum has risen to become the second-biggest cryptocurrency by market capitalization—second only to Bitcoin.

It was the first, and until quite recently, the only general-purpose blockchain, featuring a Turing-complete virtual machine and native programming language able to use code of any algorithmic intricacy.

Five years after its launch, there are around 200,000 active developers building on Ethereum, with exciting developments such as decentralized finance (DeFi) and Ethereum 2.0 waiting in the wings. But Ethereum also faces challenges, with new entrants threatening its domination; so, what do the next five years hold for Ethereum?

The switch to Ethereum 2.0

According to Alex Batlin, CEO of Trustology, with the upcoming launch of Ethereum 2.0, his company is experiencing development first-hand as a participant in the Codefi pilot run by Consensys (which funds an editorially-independent Decrypt). “It allows us to work with leading ETH developers in order to fast track staking for our clients,” he said.

Ethereum 2.0 is set to go live in 2020, but the roll-out will take place in phases.  Phase 0, which is due out in late Summer/early Fall, is a core upgrade of Ethereum’s entire ecosystem from a Proof of Work (PoW) consensus model to a Proof of Stake (PoS) model.

“The upgrade will provide lower latency, higher throughput—the key things it will deliver on,” said Batlin. 

Today, any one ETH block is 500 transactions, and a block is created every 20 seconds (latency). The upgrade to a PoS model means that you no longer need the computation to verify transactions, so it’s faster.

“When you think about it, the time spent on computing acted as a mechanism to combat fraud,” Batlin added. “With the ETH 2.0 PoS model, you’re now looking at a blockchain that will be leveraging sharding data structures, which will increase the number of transactions processed at any given point in time. More pressure so it will be faster and wider.”

Kosala Hemachandra, CEO and founder of MEW (MyEtherWallet) says that it has become “somewhat of a meme” by now that the timeframe for Ethereum 2.0 keeps changing.

“But you have to remember: with blockchain, we are dealing with immutability. It’s more important to get it right, than get it faster,” Hemachandra said, adding that this Fall should mark the beginning of the switchover. “Ethereum always took multichain support as a crucial factor before any release,” he said. “This was the case for ETH 1 and this is also the case for ETH 2. There are about seven ETH 2.0 beacon chain clients. Using this methodology, it is easy to capture and fix unforeseen bugs and exploits.”

Stand-out projects building on Ethereum

There are a number of project teams building Ethereum 2.0 clients, all with unique approaches to the issues at hand. 

Jonathan Zerah, Head of Marketing at Status Network, highlighted the Nimbus client, “which has the end goal of creating a client designed to perform well on embedded systems and personal mobile devices, including older smartphones with resource-restricted hardware.”

"DeFi tools [...] have found novel ways of disrupting legacy financial systems."

Jonathan Zerah

Zerah says that the Ethereum space has evolved significantly in the past year, with more developers coming into the ecosystem—particularly in the fast-growing DeFi sector. “DeFi tools such as MakerDAO with DAI, Uniswap, Synthetix, and Keycard have found novel ways of disrupting legacy financial systems,” he said. “There are also a number of interesting projects outside of the immediate DeFi space, such as Tornado.cash for private transactions and LeapDAO working on layer two solutions for greater scalability.”

Ethereum’s DeFi boom

DeFi has drawn widespread attention in recent months, with over $4 billion now locked up in DeFi projects. However, the space is still very much in its infancy, meaning that the process of decentralization is ongoing.

“Decentralization will improve as governance tokens are distributed and begin to find a market value,” Zerah told Decrypt. DeFi products are also becoming more accessible to the general consumer. “For example, a year ago, the process of accessing a DeFi dapp could be quite cumbersome to a new user,” he addd. “Now, a user can simply download the Status app, scroll to our browser tab, and begin using a number of DeFi tools such as Uniswap.” It’s one of a number of applications that are providing user-friendly portals to access DeFi tools, including Argent, MathWallet and Eidoo.

Zerah added that as the onboarding experience becomes simpler, the draw of better interest rates on things like loans or savings accounts will likely draw more and more retail consumers to the DeFi space. 

Batlin thinks that in the next five years, decentralized finance could become the most trusted global liquidity pool on earth. “It’s clearly on a growth trajectory,” he said. “As DeFi goes global and becomes reliable, more liquidity will flow there, and attract more liquidity. All of this will be enabled by decentralization, because it is safer.”

"As DeFi goes global and becomes reliable, more liquidity will flow there, and attract more liquidity."

Alex Batlin

By pioneering a custodial service, institutional investors and retail clients alike will be able to enter DeFi with all the security controls of conventional finance and more, said Batlin. “This, in turn, will breed legitimacy and thus generate much-needed confidence in the market”.

Hemachandra said that DeFi growth is explosive at the moment, thanks to the current craze for yield farming. “While this boom is attracting a lot of attention to the space, which is good for adoption, over the next few years DeFi will transition from being a trendy and high-risk way to maximize gains in crypto, to a daily necessity and reality for personal finance—less risky, more usable, more reliable, and more ubiquitous,” he added.

Ethereum's future challenges

Two of the main issues that the Ethereum 2.0 upgrade is intended to address are Ethereum scaling and gas fees. 

There are multiple protocols and solutions being considered and integrated, but they remain an important challenge if Ethereum is to become truly useful for hundreds, perhaps thousands, of active dapps, according to Hemachandra.

“The other big change is transitioning to proof of stake,” he added. “The number of wallets with 32 ETH, the amount required to be a validator, is growing, but how many participants will be able to deposit and maintain this stake—and how smoothly the transition to proof of stake will go for users and dapps—remains to be seen.”