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).
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 attempted
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 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 versatility
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)
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 data
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.
The Beacon Chain, which is scheduled to go live on December 1, 2020, and will be the first element of Eth2 to launch
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 batches
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 decentralized
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.