How Ethereum 2.0 Will Address Gas Issues and Enable Dai and DeFi to Scale

November 23, 2020

Soaring interest in DeFi has accelerated the Ethereum network reaching the limits of its capacity. The current architecture is able to process a maximum of 15 transactions per second (tps).1.https://www.fxstreet.com/cryptocurrencies/news/vitalik-buterin-wants-ethereum-to-scale-from-15-to-100-000-transactions-per-second-201903211025 That small number forces users to either accept long delays or pay high transaction fees.

Ethereum transaction fees, known as “gas” fees, fluctuate with demand and of late have risen sharply, presenting persistent issues that make dapp usage more expensive. This impacts all Ethereum blockchain users, including those who want to generate Dai, lock Dai in other DeFi protocols, or simply send tokens to another user. 

But a solution is on the way.

Ethereum 2.0 (also called Eth2) is an ambitious series of network upgrades that will ultimately address the persistent gas fee issue (and other concerns), enabling the platform to process thousands of transactions per second and scale to globally-useful levels. Scaling to new performance heights will allow Dai and the Maker Protocol to grow too.

What is Ethereum Gas?

The Ethereum blockchain is a global computing network on which open DeFi applications, such as the Maker Protocol, are built. To transact on the network, users pay gas fees in ETH to miners running the computers that validate, or process, every transaction completed (and even some attempted2 https://kb.myetherwallet.com/en/transactions/tx-failed-why-was-i-charged/ )— from simple token transfers to more complex engagements with dapps.

Because gas fees compensate miners for the energy required to complete transactions, miners determine the fees and can decline or prioritize transactions based on the amount of ETH a user is willing to pay. In other words, users who want transactions completed quickly can pay higher gas fees to ensure speed. 

This Ethereum gas problem has seen transaction fees increase unsustainably. At the time of this writing, a simple Dai transfer costs nearly $6, while opening a Maker Vault costs just over $75, making small-scale Dai use uneconomical and creating a barrier to the widespread adoption of DeFi services.

Ethereum gas issues make opening a small Vault expensive.
Opening a small Vault is currently not cost-effective.

Ethereum 2.0 —The Main Upgrades

Eth2, also known as Serenity, comprises a series of upgrades designed to improve the network’s efficiency, scalability, sustainability, robustness, and versatility3.https://notes.ethereum.org/@vbuterin/rkhCgQteN?type=view#. Among other things, it will address the gas issue, making it less expensive to transact using Dai and to engage with other DeFi services. 

The New Proof of Stake Model

Ethereum’s developers aim to reduce the high power consumption and reliance on specialist hardware necessary to the current proof-of-work consensus system by switching to proof-of-stake (PoS)4.https://ethereum.org/en/learn/#proof-of-work-and-mining. The PoS system, which will be introduced on what’s called the Beacon Chain, will allow the decentralized Ethereum network to come to agreement and keep the network secure, but avoid high energy use by requiring a financial commitment.  

Anyone with at least 32 ETH will be able to stake them to become a validator responsible for processing transactions, adding new blocks to the blockchain, and storing data5.https://ethereum.org/en/eth2/staking/. Users who don’t have the 32 ETH necessary to stake on their own can join staking pools. PoS should improve decentralization by enabling more users to participate in securing the network. 

Shard Chains

Another planned upgrade, Sharding, will enable the network to process many more transactions than it does now, decreasing transaction fees in the process, as competition for space in the next block will be reduced. 

In Ethereum’s present form, all nodes in the network must verify, download, and store every transaction that has ever taken place before processing new transactions. This represents the bottleneck: Ethereum’s 15 tps limit. Eth2 will distribute transactions across a large number of shards—semi-independent blockchains—to share the heavy load. PoS validators (stakers) only need to store and process the transactions on the shard they're validating, not the entire network.  

Source: Ethos.dev

The Beacon Chain, which is scheduled to go live on December 1, 2020, and will be the first element of Eth2 to launch6,https://ethereum.org/en/eth2/beacon-chain/, will act as the conductor for the network symphony, coordinating the validators and the network shards that report data. It will serve as the ultimate authority for all the data shared across the network—without having to process each transaction itself.

An Intermediate Scaling Solution: Phase 1.5

The complete rollout of Eth2 will take several years. In the meantime, one existing technology—rollups— can help Ethereum scale and reduce gas costs in the immediate future. Rollups provide a means of bundling transactions off-chain and later submitting them to the main blockchain in batches7,https://docs.ethhub.io/ethereum-roadmap/layer-2-scaling/optimistic_rollups/, which should enable Ethereum to support a 200-fold increase in transactions in the near term. This intermediate solution—known as Phase 1.5—also means developers don’t have to wait for Eth2 to use Dai and the Maker Protocol at scale in their dapps

What Ethereum 2.0 Means for Dai and DeFi

Eth2 is designed to solve the so-called ‘scalability trilemma’— to optimize the network architecture without causing decentralization, security, and scalability to suffer. If developers are successful, the upgrades will enable Ethereum to scale to thousands of times its current capacity, while remaining both secure and decentralized8.https://ethereum-magicians.org/t/a-rollup-centric-ethereum-roadmap/4698. That will only mean great things for Dai and DeFi dapps built on top of the network. 

The Sharding upgrade alone should enable a return to the days when fees to generate and send Dai consistently cost just cents, not dollars. Inexpensive transactions could facilitate an increase in Dai adoption and in how Dai is used around the world. This may mean that gamers will no longer hesitate to transact via video games that use Dai as an internal currency, more online merchants will accept Dai as payment for goods and services, and people worldwide can go back to using Dai for small-scale saving and accessing DeFi services.

To learn about building with Dai and the Maker Protocol, explore Maker’s Developer Library. To see how others have built on the Protocol, see the Maker Ecosystem page

November 23, 2020