ConsenSys : Ethereum Roadmap, Merging Unresolved Threats and the Future of Institutional DeFi

This week has been a very important week in Ethereum history. The most anticipated upgrade since launch, the move to a proof-of-stake (PoS) consensus mechanism, was completed on September 15. The upgrade, known as the merger, is the first step in Ethereum’s roadmap and will future-proof the network’s infrastructure and prepare it for increased security, sustainability, and scalability.

In our recently released “The Impact of Mergers on Institutions” report, we discussed in detail the opportunities that mergers will create for institutions in a Web3 world. Written by the MetaMask Institute and the ConsenSys cryptoeconomic research team, the report also explores factors such as network activity, security, and valuation that underlie Ethereum’s long-term growth and success. You can find the full report here:

While the merger means institutions will have more attractive staking opportunities, greater security, and customer diversity and interoperability, some long-standing criticisms of Ethereum, such as high transaction costs and slower transaction processing The speed is still there. In this post, we’ll take a look at some of the threats to the Ethereum ecosystem that will remain post-merger, some of the further upgrades planned after the merger, and what the future of decentralized finance (DeFi) looks like for institutional investors .

Merge unresolved threats

PoS mechanisms may increase the risk of centralization, censorship and fraud in Ethereum. After the merger, ETH whales could theoretically interfere with the performance of the network. While this doesn’t extend to catastrophic events such as rolling back a transaction, it could hamper the accuracy of the results. An example of such a threat is Lido Finance, Rocket Pool and similar protocols. For example, Lido now controls nearly a third of all staked ETH. Despite the decentralization within Lido (for example, Lido has 21 validators responsible for staking), potential attack vectors remain.

Improvements in interoperability pose an existential threat to Ethereum. This includes the emergence of cross-chain messaging protocols such as Axelar, the proliferation of protocols with built-in interoperability such as Cosmos and Polkadot, and improvements in bridging technology. All these factors enable developers to build chain-agnostic applications while allowing users to move smoothly between chains in a more secure manner.

While the merger may not directly address some of these criticisms, it does set the stage for further upgrades that Ethereum has outlined in its roadmap. The merger is a step in the right direction, but only the first.

Ethereum Roadmap

The Surge

The first update after the merger will be Surge, which will allow the Ethereum network to massively scale through sharding. As an overall concept, sharding divides the data processing responsibility of a database (decentralized or otherwise) among many nodes, allowing parallel transactions, storage and processing of information. As we mentioned in the previous chapter, sharding will divide the Ethereum network into shards that will work as independent blockchains. Currently, Ethereum processes an average of 15 transactions per second (TPS). Ethereum co-founder Vitalik Buterin said that once its roadmap is complete, Ethereum could have a processing power of 100,000 TPS.

Sharding will also address the existential threat to Ethereum posed by Layer 2 (L2) such as Arbitrum and Polygon. Currently, Ethereum is significantly more expensive to use than most L2s.

Mature OP rollups like Optimism and still-in-development ZK rollups like Starkware will use a base layer away from Ethereum, while settlement is still resolved on the base layer.

Increasing transaction processing speed will allow Ethereum to reduce network congestion, which in turn can reduce transaction costs. This is achieved by L2 stratification of tasks in rollups and parallel processing of unrelated tasks through sharding. At first, these shards function like rollups, bundling multiple transactions on each shard into one, and then publishing that transaction to the mainnet. Ultimately, these shards will be able to operate like independent blockchains, with their own smart contracts and account balances, and transactions between different blocks will happen through cross-shard communication.

The Verge

The next phase of the Ethereum roadmap, Verge, will focus on further improving the scalability of the network. This upgrade will work on optimizing storage via Verkle Trees, a mathematical proof that is an upgrade from the Merkle proofs currently used by Ethereum. By reducing the amount of data validators need to store on their computers to run operations, the node size will shrink and allow more users to become validators. This will further decentralize the network and improve security.

The Purge

Purge will reduce hardware requirements and simplify validator storage by eliminating historical data and technical debt. This, in turn, will further reduce network congestion.

The Splurge

The final phase of the Ethereum roadmap is a minor upgrade, which is just a fine-tuning of the network. Buterin calls these upgrades “interesting stuff.”

One thing to keep in mind here is that these upgrades won’t necessarily happen one after the other. They are fairly independent and run in parallel. The order in which these upgrades will be rolled out has not yet been decided, but work on all of these upgrades is taking place at the same time.

The future of institutional DeFi

The Ethereum ecosystem is being built for long-term growth. Despite the current disruptions from geopolitical, macroeconomic factors, and market volatility, the community is still working on building innovative products and systems, and institutions still have a strong desire to be a part of these innovations. Financial institutions — investment banks such as Goldman Sachs and Barclays, hedge funds such as Citadel Securities and Point72 Ventures, and commercial banks such as Banco Santander and Itau Unibanco — are putting money into crypto-assets or have further plans to offer crypto-asset investments to their clients options.

As we continue to build through the bear market, we believe the future of institutional DeFi is bright.

For a long time, the debate surrounding institutional investment in crypto assets was a debate about traditional finance (TradFi) vs. DeFi. The growing popularity of DeFi is often considered the death knell for TradFi. However, the digital asset management strategies of some TradFi companies during the downturn suggest that TradFi and DeFi are now coming together to complement each other. This trend is likely to increase post-merger as institutions admit it’s all a long game.

As the merger improves the security of the Ethereum network and prepares it for future scalability, we expect institutions to become more enthusiastic about participating in the Web3 ecosystem.

Over the past two years, DeFi innovations have created the infrastructure and tools that institutions need to adopt DeFi. From permissioned loan pools that ensure only KYC participants, to on-chain asset management, MEV-resistant best-execution protocols, and decentralized identities, more and more institutional-focused projects have entered the market.

We have also seen L2 projects such as Optimism, Polygon and Arbitrum increase DeFi transaction volume with high yields. We expect more institutional-focused projects to enter the market as post-merger L2 scale accelerates.

The transition to PoS creates compelling reward opportunities for institutions. As ETH whales — including crypto exchanges, funds, and custodians — have recognized the power of holding ETH in the DeFi world, they have been able to earn 4.06% annualized returns on their ETH positions. After the merger, we expect the actual return on ETH staking to be between 5.5% and 13.2%, depending on several factors such as block rewards, transaction fees, and the maximum extractable value (MEV) accumulated by validators.

ConsenSys : Ethereum Roadmap, Merging Unresolved Threats and the Future of Institutional DeFi

The opportunity for institutional DeFi is huge, and Merge will help the market mature and create opportunities for investors to chase yield in high-risk areas. Institutional investors who may have previously been skeptical of the investment opportunities in DeFi have now recognized that the growth of Web3 and its related financial instruments is inevitable. They may not fully understand the drivers behind DeFi or Web3, but already know that the asset class cannot be ignored.

The next phase of Ethereum on the roadmap will address the challenges of scaling, thereby building confidence in the ecosystem, especially in investments where crypto assets may be considered too risky. We expect progress and innovation to come quickly, whether from crypto funds and DAOs, or traditional Web2 institutions.

This article is adapted from our exclusive report, “The Impact of the Merger on Institutions,” in which we discuss how the changes to the Ethereum network resulting from the merger will translate into opportunities for institutional investors. 

Posted by:CoinYuppie,Reprinted with attribution to:
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