Mar 13
DeFi 101: DeFi Infrastructure | Ethereum
The next major Ethereum upgrade is almost upon us. In April, the world’s largest smart contract network will perform its next major upgrade, in Shanghai. Its completion will finally unlock over 16.5 million staked ETH to be withdrawn.
Ethereum has been rolling out many updates as of late. Just months ago, it successfully completed the long-awaited “merge” and officially transitioned to a proof-of-stake network — the new Ethereum is green, far less inflationary, and no longer requires mining to validate transactions. Instead, it’s a collection of nodes secured with staked ETH, and the Shanghai upgrade is a critical next step.
Given all the upcoming changes, it might be time to revisit how and why Ethereum became the leading smart contract network in the crypto industry and what to expect in the years ahead.
Why Ethereum Was Created
Ethereum was created for a simple reason: to expand Bitcoin’s original vision by allowing for computing power. In other words, Ethereum is a ledger that can also run protocols on top of it, unlike Bitcoin, which is more akin to programmable money. Think of Ethereum as a shared computer network onto which a whole host of applications can be built.
Vitalik Buterin first described the idea behind Ethereum in a 2013 whitepaper. In 2015, an initial coin offering (ICO) was held to raise funds for the Ethereum Foundation and distribute ETH to investors. The first few years, however, proved to be tumultuous. An organization on the protocol, The DAO, was hacked for around $50M. Ethereum had to be rolled back to prevent the stolen funds from being spendable. The move still stirs controversy today, but it has never been repeated since.
Since its founding, Ethereum has expanded to support hundreds of thousands of dApps and over 44 million deployed smart contracts. In addition, protocols on Ethereum today hold tens of billions of dollars in value spread through various decentralized finance applications.
How Did Ethereum Become “The One”?
The simple answer is that Ethereum was a trailblazer in the industry: it was the first network to implement easily-deployable smart contracts. Its track record of never being offline has also made it the most trusted.
Its reputation is well-deserved, though, not only because it was the first. Ethereum has pioneered the Ethereum Virtual Machine, the standard across many other layer-1 networks like Avalanche and Fantom. Its programming language, Solidity, has become the industry benchmark. Ethereum also boasts the largest developer community in the entire crypto industry.
Because of its amenable design and streamlined programming language, Ethereum has been responsible for kicking off many of the most important crypto breakthroughs. Two of the most meaningful ones of late have been decentralized finance (DeFi) in the summer of 2020 and NFTs which broke out in 2021. Although other networks have reproduced these two ecosystems on their own blockchains, it all started on Ethereum.
Safe to say, most innovation in the cryptocurrency industry starts on Ethereum. And with the last major upgrade, The Merge, Ethereum’s demand is now directly tied to its supply which is a significant turning point.
The Merge and What Comes Next
In many respects, the Merge was a breakthrough. Years in the making, it was the first time a network had successfully aligned its demand with its supply. Not only did the Merge reduce emissions drastically, but it also introduced a burn mechanic for gas spent. Effectively, the more Ethereum is used, the more deflationary it gets. This new feature has attracted much attention from institutions that find it to be a sustainable, future-proof model.
Following the Merge comes an equally-important upgrade, Shanghai. Although an exact block date has yet to be given, it is expected to happen sometime in March. All staked ETH will be unfrozen, which will undoubtedly cause some short-term volatility.
What follows Shanghai is a complex roadmap that will be carried out over the next decade. Vitalik Buterin put out an updated diagram of the roadmap for Ethereum last year in a detailed tweet.
Here is a breakdown of what to expect:
- The next step of Ethereum’s roadmap is called The Splurge. It will focus on increasing its transaction throughput, further integrating L2 and rollups.
- The Scourge focuses on ensuring reliable transaction inclusion. The goal here is to avoid centralization as much as possible.
- The Verge works to decrease block size as much as possible so they can be easily downloaded and verified.
- The Purge simplifies any redundancies and unnecessary costs hampering the network.
- The Splurge — get everything else so that’s still leftover!
This five-part roadmap after the Shanghai upgrade means that Ethereum will keep innovating for the next decade and beyond.
Tying It All Together
Ethereum was created with a simple idea: decentralize computing power through a shared, global database on which permissionless protocols can be built. This dream has come to fruition today, with countless applications now readily usable anywhere in the world.
After the Shanghai upgrade, Ethereum will complete the most critical step of its journey, which it has been planning and building for years. The next chapter will involve fine-tuning the network for mass adoption. Given that Ethereum has cemented its position as the place for builders and on-chain value, you can bet it will always be a permanent fixture in crypto.
So, for anybody looking to get started on DeFi, Ethereum is the always place to begin. It’s where most of the innovation happens.
