Why Ethereum’s The Merge won’t overcome the “scalability paradox”

The completion of Ethereum’s long-awaited “merge” (The Merge) this week is unlikely to improve the long-term speed or scalability of the network, writes Mark Lurie of Shipyard Software.

The Merge of Ethereum

Ethereum is expected to complete a much-publicized “merger” this week, drastically reducing power consumption as the network switches from mining to steaming. While this achievement sets Ethereum up for future operational updates, the informed consensus is that the merger itself is unlikely to immediately improve the speed or scalability of the Ethereum network.

Nevertheless, the merger and future network updates will still have a huge impact on the broader scalability war, as lesser-known Tier 1 blockchains step up their efforts to demonstrate their speed and scalability advantages. And in their efforts to create commerce-ready network products, builders and venture capitalists are keeping their eyes on blockchain that is fast and scalable enough to support infinitely complex products online.

The problem of blockchain network scalability

The dream is inspired by centralized computing, which is constantly improving in accordance with Moore’s Law, which states that the number of transistors in a microchip–or computing power–will double about every two years. This has been true ever since it was first stated in 1965, and centralized computing power has scaled fast enough to keep up with our needs from then until now.

But the reality is that it is unlikely that any blockchain will ever reach the computing power of a centralized system that only has to run updates and store data internally. On the other hand, a decentralized system processes and stores data on hundreds, even thousands, of remotely connected computers that need to reach consensus on every transaction. Except for some major breakthroughs, the performance of decentralized systems will always be lower.

Moreover, and this is less intuitive, it is unlikely that any one blockchain will always be faster than others. This is the “scalability paradox.

Every time a popular decentralized network can support more and faster usage, it encourages more usage and more nodes. This is a familiar concept in other industries. Studies show that the expansion of highways and roads simply encourages more drivers until congestion reaches the same equilibrium. Take the case of a decentralized exchange with an order book on the network: the more scalable the order book in the chain, the faster it can process maker and taker orders. This favorable environment attracts even more crypto traders to the exchange, as well as high-frequency traders who help push order volume to the limit. As a result, the network becomes congested and prices rise. Blockchain becomes a victim of its own success.

In other words, Ethereum will never establish a true Web 3.0 monopoly, even though it has extremely strong network effects that attract developers and users. Instead, Ethereum’s continued success will again increase network congestion, thereby creating a vacuum for the development of faster, more innovative and scalable alternatives. As an example, the Ethereum development community decided to abandon the priority of their network segmentation plans after witnessing the emergence of viable third-party scaling solutions such as Polygon and Optimism. This is a tacit acknowledgement of the strength of these projects and an indication of what lies ahead.

After the merger, new so-called “Ethereum killers” are just as likely to emerge as Layer 2 protocols designed to augment Ethereum. Either way, the industry will improve over the past, and arguing about which L1 has the highest transaction volume or total blockchain value is less useful than examining which decentralized network or service is best for a particular task or opportunity.

All this to say, the winner of the scalability war may ultimately be irrelevant. The Merge is not even the most important milestone on the Ethereum roadmap. The next Ethereum update, dubbed The Splurge (followed by The Verge, The Purge and The Splurge), is scheduled for next year, and only then will Ethereum’s speed and scalability be increased by network sharding. Even so, the Ethereum updates simply mean that the network will significantly increase the upper limits of its operating power, but not indefinitely.

Instead of worrying that Ethereum updates will cause a mass extinction of other L1s, we should look forward to a Cambrian explosion of creativity. Faster and more scalable Ethereum will probably destabilize some competing L1 projects, but that’s the nature of competition. A highly competitive cryptocurrency universe is much better than what we see in the legacy tech industry, where the advantages of mass scale make it almost impossible for startups to compete against giants like Google and Amazon.

Web3 developers will likely never create the perfect “one-size-fits-all” blockchain, but the possibilities for the industry as a whole are limitless. Creativity is often born out of necessity, and the result will be better technology for everyone.

Pavel Komarovsky

Financial journalist. Worked as Engagement Manager at McKinsey & Company
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