Limitations of Ethereum
Ethereum co-founder Vitalik Buterin popularized the term “blockchain trilemma.” This trilemma refers to the fact that a blockchain must sacrifice 1 of 3 key features: decentralization, security, or scalability. For example, Ethereum and Bitcoin suffer from a lack of scalability, but they are both secure and highly decentralized. Often, new blockchains are more centralized, but they have outstanding performance and safety.
The Ethereum blockchain goes through periods of network congestion, constant transaction delays, and arbitrary fee increases. Because of these issues, the protocol finds it challenging to process more than 30 transactions per second (TPS), despite the recently completed switch to POS.
Due to limited block space, the system prioritizes high fees, leading to gas wars to determine the transactions added to the next block. Gas is the fee charged for making a transaction.
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Ethereum's Risk Factors
The move from proof-of-work to proof-of-stake for Ethereum laid the foundation for a more scalable, energy-efficient platform. However, the move may have made it easier to control the network centrally.
Transaction validators don’t have to build and maintain complex mining software to earn ether. The feature change allows more people to participate in consensus. A potential concern is that validators with extensive holdings would no longer need to sell ether to cover overhead costs.
At present, four entities hold 60% of all ETH. The more supply these entities have, the greater the validator rewards they will earn (and thus more market share).
While the price of Ethereum may react positively and more people can engage in consensus, the risk of collusion to censor transactions or even attack the network is growing.
If you feel prepared, take our Introduction to Bitcoin and Blockchain quiz:
Consultancy.eu. (2022, September 14). The Ethereum merge: The changes, benefits and risks. Consultancy.eu. Retrieved October 31, 2022, from https://www.consultancy.eu/news/7966/the-ethereum-merge-the-changes-benefits-and-risks#:~:text=Some%20risks&text=The%20first%20risk%20is%20the,hands%20of%20four%20big%20parties.
- Shukla, S. (2022, September 15). Ethereum (ETH) Faces ‘blockchain trilemma’ when ‘merge’ mania cools. Bloomberg.com. Retrieved October 28, 2022, from https://www.bloomberg.com/news/articles/2022-09-15/ethereum-faces-blockchain-trilemma-when-merge-mania-cools#xj4y7vzkg
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