Reminder: The Merge Won’t Solve Ethereum’s Scaling Woes by Itself

Ethereum supporters have some reason to celebrate this week.

After yet another delay, the Ethereum network took a step closer to “the Merge” with its first Ethereum mainnet “shadow fork” – a successful test run of the network’s eventual transition to proof-of-stake.

This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.

For those new to the wild world of Ethereum, the Merge signifies the network's long-anticipated shift to a proof-of-stake (PoS) consensus mechanism – the method by which a decentralized community of computers works to secure the Ethereum blockchain.

Much has already been written by way of PoS explainers (including by us at CoinDesk); in essence, the transition away from today’s computation-intensive proof-of-work (PoW) mechanism is expected to cut the network’s energy costs by 95% and help scale the network.

As excitement continues to mount around Ethereum’s big update, it’s important to remember that it will not immediately solve some of the chain’s most pressing usability problems.

This reminder will be obvious to those who have been following this story closely for a while, but it bears repeating for those newer to the space. Changing roadmaps, confusing terminology (RIP Eth2), and Ethereum market-speak have made it hard to pin down what, exactly, the Merge entails.

In reality, most long-term improvements to Ethereum’s usability will come from its ecosystem, not from updates to the Ethereum network itself.

The Merge vs. Layer 2

The most visible annoyance for users of today’s Ethereum network is high transaction costs. According to Etherscan, activities as simple as buying a non-fungible token (NFT) on OpenSea or swapping between tokens on Uniswap’s decentralized exchange (DEX) currently cost upwards of $30 in gas fees.

These fees are used to reward miners – the computers that compete with one another to secure the Ethereum network via PoW. The more congested Ethereum’s network, the higher the fees.

After the shift to PoS, similar fees will still be required to pay “validators,” who will stake a sum of ether for the privilege of processing transactions.

As many of you will remember, Ethereum’s transition to proof-of-stake was originally set to accompany another upgrade: “sharding,” which promised to split up the network into pieces in an effort to increase transaction throughput and decrease fees.

But sharding won’t be coming any time soon. In order to expedite the shift to PoS, sharding was postponed until after the Merge and is now slated to come sometime in 2023 (though Ethereum timelines have a way of stretching out).

In the meantime, the focus has shifted away from the Ethereum network itself to layer 2 systems like “rollups,” which scale the Ethereum network off-chain while borrowing its essential security guarantees. An entire layer 2 industry has popped up to scale, or increase capacity on, Ethereum, with leading products such as Arbitrum, Optimism and Loopring allowing users to transact at a fraction of the cost of Ethereum, and attracting billions of dollars in combined total value locked (TVL) as a result.

In discussing a recent update to Arbitrum’s Optimistic rollup system, Steven Goldfeder, the CEO of Arbitrum creator Offchain Labs, reminded me that scaling is a “long-term problem” that won’t be fixed by any single update or improvement.

“It's … sort of almost a cat and mouse game, right? You scale to a point that we can handle the next 100 million users. But then, you know, they come and you say, how do we get the next billion users and 2 billion users and 10 billion users and ultimately, you have to keep advancing,” he explained.

While the Merge will be a massive development for Ethereum that will (among other things) dramatically improve the network’s environmental impact, it will not suddenly fix the primary issues that have left room for faster and cheaper blockchains like Solana to steal much of Ethereum’s thunder.

Even with the eventual introduction of sharding, upgrades on the scale of Ethereum will always take a while, and it will ultimately be innovation from third parties which determines the network’s staying power.

Pulse check

The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.

Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.

Validated takes

Yearn led the way in adopting the new ERC-4626 yield-bearing token stoken standard.

• WHY IT MATTERS: The ERC-4626 token standard will improve interoperability between apps that allow users to lock tokens into yield-bearing vaults – a near-ubiquitous feature of decentralized finance (DeFi) platforms. Other popular apps in the Ethereum ecosystem are expected to follow in Yearn’s footsteps in adopting the standard. Read more here.

Gas usage on Ethereum was up 13% in March from the previous month, according to DeFi analytics firm HashEx.

• WHY IT MATTERS: The increase in gas fees came as ether’s (ETH) price topped $3,400 at its end of March peak – higher than at any point in February. The rise in fees stands as a reminder that demand for Ethereum block space has continued to grow unabated even as layer 2 chains working to scale the network, like Arbitrum and Optimism, have enjoyed wider adoption. Read more here.

Ethereum’s largest layer 2 rollup chain, Arbitrum, released a major update this week.

• WHY IT MATTERS: Arbitrum, an Optimistic rollup, is the leading Ethereum layer 2 chain with over $2 billion total value locked (TVL) according to DeFiLlama. The “Nitro” update promises to halve fees and increase network speeds as competition between Ethereum scaling solutions continues to heat up. (Just a few weeks ago, Arbitrum’s primary competitor in the Optimistic rollup space, Optimism, announced a $150 million series B led by A16z). Read more here.

SHIB, SOL, Polygon’s MATIC and Compound’s COMP tokens have been added to the Robinhood Crypto trading platform.

• WHY IT MATTERS: In listing a meme coin alongside three DeFi tokens, Robinhood's chief brokerage officer, Steve Quirk, asserted that Robinhood is a “safety-first company” with a “rigorous framework” for token evaluation. Read more here.

Factoid of the week

Open comms

Valid Points incorporates information and data about CoinDesk’s own Ethereum validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site.