Is Ethereum really a unicorn? 3 expert takes on why it won’t last

Andrew Munro 15 June 2018 NEWS

Ethereum is impressive, but some of its flaws are permanently baked in.

Ethereum was the first platform to recognise the potential of smart contracts on the blockchain, and deliver them. It also gave rise to a new genre of coin, the so-called "Ethereum killer," which generally refers to any smart contract-focused platform that can do everything Ethereum can, except better.

Whether any of them have succeeded so far is debatable. But that Ethereum has increasingly tough competition is self-evident.



How to beat Ethereum

Ethereum is widely considered a unicorn because it seems to have a good chance of overcoming the blockchain "scaling trilemma" (speed, security and decentralisation – pick two) and becoming the first truly decentralised and highly scalable application platform.

Most of the competition to date has managed to eke out various shades of success by shifting the balance of those three pillars. Ethereum chose security and decentralisation at the cost of speed, while EOS, for example, dropped some decentralisation and security in favour of more speed.

Getting all three pillars is one of the holy grails of cryptocurrency, and so far no one has pulled it off.

Ethereum planned to be the first right from the start and was purpose built to start with the necessary decentralisation and security before adding speed later. It's intended to come in the form of a shift to Casper proof of stake, the addition of sharding and some other features with equally cool names like Raiden and Plasma.

But it's not there yet and many believe it will never get there. Others feel that even if it does it will still inherently be too far from perfect for real world use.

Problem 1: Volatility and dependence on gas

Volatility is a long-running issue in cryptocurrency, with many arguing that it stands in the way of real adoption of cryptocurrency as digital money.

"Enterprise and merchants simply cannot conduct business via smart contracts and DApps on a network without a price-pegged currency," says Eiland Glover, CEO of the Kowala stablecoin project. "The volatility of Ether, for example, can make profitable business agreements turn bad on a price swing."

This problem can be solved with the use of stablecoins. These are price stable cryptocurrency which can absorb price shocks and offer consistent value. They're typically pegged to the US dollar, and their sheer usefulness for the commerce and currency elements of a decentralised system means they're widely regarded as an essential piece of the cryptocurrency puzzle.

Ethereum has a few stablecoins of its own which work in different ways. Havven, for example, aims to create a self-sustaining economic system on the Ethereum network. And Maker is designed to remain completely stable while being backed by the value of Ether itself.

But according to Glover, Etherum's inherent design means it will never be the best option for a stablecoin project and it might forever miss out on that critical piece of the puzzle.

So far, Ethereum's current scaling problems mean it just can't turn over transactions quickly enough.

"Creating an ERC20 stablecoin on the Ethereum blockchain can solve some of these [volatility] issues, but it still suffers from fatal drawbacks," he said. "To create an enterprise grade crypto payment network, quick execution and high transactional throughput are paramount. An ERC20 stablecoin implementation on the Ethereum network would limit block times to 15 seconds – too long for many payments scenarios."

Even if Ethereum does sort out its scaling problems, he says, users still can't escape volatility entirely because network fees still need to be paid with volatile Ether.

"Transactional throughput on the Ethereum network is still very slow today but may improve if the Casper proof-of-stake consensus protocol is implemented in the future. Even so, users will still have to pay fluctuating transaction fees in a currency – Ether – whose price itself continues to fluctuate."

Solution? Independent stablecoin network

This problem drove it to create its own blockchain, built from the ground up to use high speed proof of stake with network fees set in the native stablecoin.

"By creating a separate blockchain, Kowala has begun to solve many of these issues," Glover says. "The kUSD blockchain is a faster version of Ethereum because it already uses a proof-of-stake consensus protocol derived from Tendermint. This means we’re able to process and fully settle 1000's of transactions in one second. Furthermore, the network's transaction fees are set in advance at very low rates in a currency that is stable."

"At Kowala, we want to make cryptocurrency accessible as a means of payment for consumers, enterprise, and merchants. There are still many barriers to achieving our mission using a network like Ethereum."

Others point out that Ethereum has yet to actually implement its planned scaling solutions, and that plenty could go wrong.

Problem 2: Migrating to proof of stake and reliance on third party off-chain scaling

"If all proposed scaling solutions are correctly implemented, Ethereum will be sufficiently scalable for a global user base of billions," says Vladislav Dramaliev, marketing lead at æternity. But that's still a big if. Or a big æf, if you will.

"Most of the proposed solutions are only theoretically implementable in a complex, running blockchain platform that is managing billions of dollars worth of value," he says.

There's a big difference in what's actually possible when building a system from the ground up, and when cobbling upgrades onto a sprawling existing network. This alone might mean Ethereum is stuck with an early mover disadvantage.

At the same time, Ethereum's other off-chain scaling solutions are being implemented in different places and with different types of reliance on third parties, which opens up potential vulnerabilities and points of failure.

"Off-chain scaling solutions in Ethereum are implemented on levels over the protocol layer, which creates inefficiencies where multiple third-party layers are required. As on-chain scaling in Ethereum is addressed by sharding, it introduces a number of new types of attacks and must be built on top of a Proof-of-Stake system, which introduces significant consensus-related issues itself," he explains. "These proposed solutions will make the Ethereum system very complex causing an increase in security issues and could result in a number of inefficiencies along with affecting cost of use, developer ease-of-use and user-friendliness."

It's also worth noting that Ethereum is stuck on its very own Solidity programming language, which is notoriously finnicky and prone to expensive mistakes. Simply offering a better user experience for developers, and smart contracts which can be programmed by existing languages, is low hanging fruit for Ethereum rivals.

Dramaliev also points out that faster networks can inadvertently centralise around fewer nodes if one's not careful, and that scaling might all be a moot point if it doesn't actually bring down transaction fees.

"[More] TPS [transactions per second] affects centralisation by making slower nodes leave the network," he says. "Some off-chain solutions, such as æternity's state channels, remove TPS as an intra-system metric, making transactions speed primarily dependent on external factors – much like peer-to-peer bandwidth. Overall, global scalability for a public blockchain is very much dependent on the "cost per transaction" metric. Even if very high transaction speed is theoretically possible, high-costs could prevent the system from reaching its full capacity."

Solution? Building for scale

æternity solves these by implementing its own on- and off-chain scaling solutions into the core protocol layer rather than needing to tack it on later, he says. The envisaged end result is creating a more scalable system, with more security and simplicity. The end result is that æternity has an on-chain speed of around 100TPS, and an off-chain speed that's limited only by peer-to-peer bandwidth, and can theoretically hit millions of transactions per second.

"The æternity platform is built to address scalability and is integrated in the core protocol layer, with æternity users and developers covering fewer edge cases and interacting with a simpler system," he said. "The aim of æternity’s development team is to minimize the latency of the protocol layer and make the use of secure smart contracts as cheap as possible. æternity uses Bitcoin-NG for on-chain scalability, which has been thoroughly tested in close-to- realistic environments, and has already been implemented in other projects."

The scaling trilemma is a tough nut to crack, but it's not impossible and developers are reaching it in different ways. But others are setting their sights even higher, and trying to create systems that solve the much tougher problems of economic inequality caused by proof of stake systems.

Problem 3: Ethereum is skewed towards economic inequality

Severe economic inequality is a stress sign in any ecosystem, but it can be especially problematic in stake-based cryptocurrency networks where wealth distribution, decentralisation and security are all inextricably tied together and dependent on each other.

Ethereum's proof of stake will let people become miners by putting their Ether up as a kind of collateral, and then simply have at it without any special hardware or excessive computing power of the kind that bitcoin needs. It basically works by using the Ether coin as a kind of finite weight and collateral which can be taken away by automated systems if a node misbehaves. The system is only as decentralised as its wealth distribution is, and if one party manages to own more than about a third of the money in Ethereum, they can start controlling the network in various ways.

At current prices, a third of all Ethereum would be pushing US$20 billion in value so that's quite a tall order, and unlike equivalent proof of work majority attacks, the attacker actually risks tanking the value of their holdings if they try it with a proof of stake system.

At the same time, stakers need to be incentivised to stake, and that incentive typically takes the form of additional rewards based on the size of their stake. In the case of Ethereum, it's expected to be about 5% per year. This creates an inherent "rich get richer" situation, which some argue is just outright unethical, unsustainable and completely antithetical to the real spirit of decentralisation.

Some argue that in the long run simple economic incentives, such as Ethereum staking, aren't the way of the future.

Ryle Goehausen, VP of engineering at Constellation, points out that for all practical purposes Ethereum and other proof of stake systems are using wealth as a convenient but ridiculous proxy for trust.

"Fundamentally, the goal of decentralisation is to provide securitisation of a network by spreading out the risk among enough participants with auditing such that we can trust the results of the network operations," he explains. "Proof of stake obviously has some benefits... but the only reason for that is that it uses a mechanism similar to a trust-based network, with the gross oversimplification of defining money as equal to trust."

"If you were asking a layman to evaluate the trustworthiness of someone based on how much money they have, how do you think they would respond? It would be considered absurd. I'm not going to trust someone I've never met before simply because they're rich. In fact, the reverse would most likely be true. Those with great resources are generally viewed with far more suspicion, especially considering the history of malfeasance in the financial industry at large."

"Relying on money solely as your source of trust in the world would be a terrible idea if it was applied to other areas of life," Goehausen said. "People just seem to view this in blockchain as some sort of magical improvement because it doesn't require a PoW - a pretty low bar."

Fair point.

Solution? Tokenising trust in a carefully balanced system

Tokenised trust existed and carried value before blockchains did. You see it every day in the form of star ratings ("this eBay seller/Uber driver/tourist attraction/movie/restaurant/etc has an x-star rating"), aggregate reviews, number of likes, shares, upvotes and other metrics on social media, and much more.

At some level, it can all be thought of as a proxy for trust. People read reviews, for example, because they don't trust the advertising for a product or the word of an individual. And it's widely accepted that they have value. Businesses measure advertising success with those social trust metrics, reviews and stars can make or break a business and you can even buy Instagram likes and followers at kooky Russian vending machines if that's your thing.

Constellation aims to cut out the problems with monetary value as a proxy for trust, and instead just cut right to trust itself as a weighty token that can be used to secure a system.

"Conventional mechanisms already exist for establishing trust between people. We want to create a way to digitally capture and quantify the existing trust in the world and use it to secure the network," Goehausen says.

The idea is that the Constellation system itself can be a large platform for decentralised applications, and reputation on the system will carry a worth of its own. Node operators are incentivised through a system that rewards tokens proportional to their expenditure on computing power, electricity and other network-securing resources, rather than a reward that's designed to be used to turn a profit.

"The rewards are directly tied to participation in the form of resource expenditures, along with a small reasonable incentive on top of the gross cost of running the node," Goehausen explains. "Our validation program is designed to last 10 years, and doesn't require that you 'get in early' to see a reward. The reward mechanism is only designed to cover the costs of computation; it doesn't funnel money towards the 'top' of trust, but rather fairly and equally pays operators."

The idea is that in early years, as the network grows, node operators can earn trust and its accompanying monetary value by honestly securing the network. If and when the network grows sufficiently large and widely used, it will become more decentralised as network reputation increasingly becomes its own reward and can be worn as a badge of honour when selling one's products and services.

Similar to Ethereum's Casper PoS, node operators are motivated with a combined stick and carrot approach. There are modest rewards for good node operators, and a large automated stick to programmatically beat tokens out of hostile node operators.

This tokenised reputation system can potentially allow for a more scalable network, with an accessible field of reliable and appropriately motivated node operators. And rather than funnelling wealth upwards and centralising the system over time, this approach stands to create a more decentralised network as time goes by.

Ethereum has a long mine-strewn road ahead of it. And even if it does successfully navigate the minefield, some shortcomings are irrevocably built into its DNA and might continue holding it back. It's not yet clear whether other projects can successfully overcome those difficulties, but there are plenty of attempts coming from plenty of angles.


Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, XRB

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Latest cryptocurrency news

Picture: Shutterstock

Latest crypto guides

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy.
Ask a question
Go to site