Proposed ETH Upgrade Highlights Challenges Of Frequent Network Upgrades

June 22, 2021 03:30 PM
Crypto Story of the Day

Crypto Story of the Day




BTC traded on either side of USD 30,000 this morning as crypto extended its aggressive selloff. BTC dominance has increased to 47%, the highest the metric has been since the beginning of May.

Crypto Story of the Day

Last week, the Polygon network— a network offering a suite of Ethereum scaling solutions— published a revised version of an Ethereum upgrade scheduled for next month. The proposed change highlights the coordination challenges of frequent network upgrades.

The upgrade, Ethereum Improvement Proposal (EIP) 1559, aims to address challenges of using the network that stem from transaction fees. In short, EIP 1559 foresees Ethereum transaction fees consisting of a “basefee” and “tip” for miners. 

The basefee, which adjusts in predetermined increments based on demand, is a fee for transacting, but instead of going to miners, it’s destroyed. The tip, which is adjustable, will allow users who are in need of faster transfers to incentivize miners to prioritize their transactions. 

The EIP’s proponents believe that the use of basefee will introduce greater stability and predictability to Ethereum transaction fees. Polygon, which runs its own proof-of-stake blockchain with the MATIC token as its native asset, was designed to be Ethereum “compatible” and uses that network as a final settlement layer. This allows for Ethereum applications to easily migrate or redeploy on Polygon. Projects that have redeployed on Polygon include DeFi venues Aave and SushiSwap. 

According to Ethereum data site DappRadar, the Polygon version of Aave surpassed its Ethereum-based counterpart in transaction volume in May. According to Polygon’s developers, the network intends to implement EIP 1559 in order “to remain compliant with the Ethereum network and tooling.” However, Polygon’s native MATIC token has a fixed supply, unlike ETH. As such, burning MATIC basefee in a fashion similar to ETH would cause disruptions to the network’s functioning. 

Polygon’s developers have instead suggested the basefee on Polygon be sent to a decentralized autonomous organization (DAO) built on Polygon and governed by token holders. This would allow the Polygon “community” to decide on how to spend the funds. 

According to the proposal, the DAO, which hasn’t yet been established, “will be able to spend the fund on improving and maintaining the network, yielding better long-term gains for all validators.”

Last year, Ethereum creator Vitalik Buterin suggested an approach to Ethereum scaling that would focus on second-layer solutions. Polygon’s revised EIP 1559 showcases the complexities that such a scaling approach could introduce. 

Each second-layer ecosystem, like Polygon, would have its own set of incentives, interests, and technical capabilities. If these ecosystems were to become more prevalent, frequent Ethereum upgrades could introduce changes that challenge the design of some sidechain ecosystems, as is the case with Polygon. 

This dynamic highlights another area of uncertainty for Ethereum’s longer-term functioning and the feasibility of its complex transition to proof-of-stake.

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