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Ethereum’s Scalability Issues Will Not Be Fixed With ETH 2.0

09/20/2020

Ethereum’s scalability issues will not be fixed with ETH 2.0 according to one analyst as we are reading more about it in the latest Ethereum news.

ETH 2.0 could not solve Ethereum’s scalability issues as unique addresses for Defi are growing and surpassed the 450,000 mark since the start of the year. Ethereum has to scale dramatically to on-board the existing crypto user base of 50 million in the DeFi platforms already. ETH 2.0 along with the layer 2 implementations could not be able to keep up with the growth of the network usage from Defi.

The transaction fees on Ethereum cost $7.5 three times that of Bitcoin. Setting up a wallet on MakerDAO costs about $40, compared to Compound’s $10. The crazy fees are not sustainable of course. With the new yield farming incentives on Defi platforms are getting launched every other day, space expands despite alarming signals around the high fees and network congestions. Defi users are waiting for the launch of ETH 2.0 which promises to scale the blockchain but this could not be enough to support the existing number of crypto users.

The number of Defi addresses that are rising quickly with the addition of the $350,000 addresses since the start of the year will only increase as Uniswap already surpassed coinbase in terms of trading volume and the user base is tiny compared to one of Coinbase’s 32 million users. Assuming that the network gas fees increased, it is a good time to assess how much of a difference with the ETH 2.0 makes.

eth fees
Ethereum Total Transactions (dotted line) vs Ethereum Transfers (solid line). Source Coinmetrics

ETH 2.0 is set to start with 64 shards and each one will operate as a separate chain with the transaction history. This way, the network could increase the transaction capacity by 64 times. Kruger’s estimate is based on the idea that Defi users have four addresses each. After that logic, that equates to about 114,000 unique users. Following this logic, sharding on ETH 2.0 will not solve the congestion problems. Ethereum’s co-founder Vitalik Buterin endorsed the use of the 2-scaling solutions like OMG and ZK-sync for ordinary transactions and according to him, there’s potential to scale from 12-15 transactions per second.

The higher fees are starting to affect profits and as a result, the exchanges will increase the fees and users will look for other alternatives to move their crypto. Layer-2 solutions are proposed for simple transfers of ETH which the effect of the total gas fees will be minimal.