A Deep Dive into the Three Major Challenges Facing Ethereum

Ethereum's Three Major Challenges Explored

This article will delve into the three main reasons that Buterin pointed out, which could lead to the failure of Ethereum.

As we navigate through the transition maze of blockchain technology, examining Ethereum’s development trajectory is crucial. According to co-founder Vitalik Buterin, Ethereum faces several major challenges that, if not properly addressed, could lead to its failure.

Primary obstacle: The transition of Layer 2 scaling. As blockchain capabilities expand and demand grows, Ethereum needs to provide a scalable solution to maintain its decentralized vision. This is a balancing act—if this problem cannot be solved, users may become frustrated with high transaction costs and turn to centralized workarounds, weakening Ethereum’s core selling point.

Secondly, Ethereum’s wallet security. Like an experienced fortress guard, Ethereum must ensure the security of user assets. If users cannot trust Ethereum to protect their funds, they may flock to centralized exchanges, which poses another potential threat to Ethereum.

Finally, privacy is crucial in today’s digital world. If Ethereum cannot provide strong privacy protection mechanisms, it may lose users, who may turn to centralized solutions that provide at least some data protection.

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1. What is Ethereum?

Ethereum is the second-ranked cryptocurrency created by Vitalik Buterin. It gained prominence for introducing smart contracts. Its significance is believed to be beyond Bitcoin. Ethereum builds an entire ecosystem for decentralized applications (DApps) and becomes the cornerstone of many other cryptocurrencies.

Ethereum represents an ecosystem of interconnected and diverse communities and toolkits that empower individuals to transact and communicate without centralized control.

Ethereum made its debut in 2015. It expanded on the pioneering concept introduced by Bitcoin and has several unique features. Both platforms can use digital currencies without the involvement of banks or payment service providers. However, Ethereum introduced programmability, allowing for the creation and deployment of decentralized applications on its platform.

While Bitcoin only allows simple value transfer messages, Ethereum takes this concept to a higher level: it can not only exchange messages, but also create any general program or contract. This unlimited contract creation potential has sparked tremendous innovation in the Ethereum network.

Unlike Bitcoin, which is mainly used as a payment network, Ethereum is a diversified market. It hosts a variety of services, including financial platforms, games, and social networks. These applications respect user privacy and resist censorship, consolidating Ethereum’s unique position in the digital world.

Ethereum relies on three basic elements to thrive: L2 scaling, wallet security, and privacy. These three elements are inherently interrelated, and each element plays a crucial role in Ethereum’s functionality. If one of these elements has problems, the entire system is at risk of collapse. Please do not confuse this with the blockchain trilemma, which refers to no blockchain being able to simultaneously optimize decentralization, security, and scalability.

II. The three key elements of Ethereum

L2 Scaling

L2 scaling is critical for Ethereum to handle increased usage. Imagine a busy bar where only one bartender is struggling to serve a growing crowd. In this case, L2 scaling is like hiring additional bartenders, allowing Ethereum to process transactions faster and avoid the high cost of each transaction. Without efficient L2 scaling, Ethereum transaction costs could be as high as $3.75 (or $82.48 during a bull market), which would prompt users to seek centralized solutions.

Wallet Security

Wallet security: similar to our trust in the stability of a chair. Users must feel that their funds and assets stored in the system are secure. Without strong wallet security, users may turn to centralized exchanges.

Privacy

The public visibility of all transactions is a privacy sacrifice for many users, who may turn to centralized solutions that provide at least some data hiding. Without strong privacy protections, Ethereum could lose most of its users.

3. L2 Expansion

L2 expansion involves moving most of the computational load from the main Ethereum chain (Layer 1) to “side chains” or second-layer networks. These side chains can process transactions faster and at a lower cost, much like additional highways alleviate traffic congestion.

However, this transition is not without its challenges. It requires users to adapt to a new framework, namely having multiple addresses on multiple L2s instead of relying on a single address. This transition is similar to having multiple bank accounts at different institutions, each with different purposes, rather than relying on a single account.

There is already evidence of this trend, such as the use of Optimism in ExampleDAO, the implementation of ZkSync in stablecoin systems, and the application of Kakarot in other use cases. In each case, users must create an account on their respective L2s, and the transition to L2 expansion is both challenging and critical. In order for Ethereum to continue towards its goal of becoming a global, open, and permissionless platform, the transition to L2 expansion is a necessary hurdle to overcome.

4. Wallet Security

The second key point in the Ethereum ecosystem is wallet security. Wallet security is a critical feature in the cryptocurrency space, serving as the first line of defense against unauthorized access and potential theft of digital assets. Because digital wallets are a key component of how the Ethereum blockchain operates as a whole, any security issues or vulnerabilities can lead to significant losses and erode trust in the platform.

One key challenge that Ethereum faces is the potential risks to wallet security. Essentially, if Ethereum cannot provide users with strong and reliable wallet security, it is likely that users will move their funds to centralized exchanges. Centralized exchanges can offer advanced security measures such as two-factor authentication, cold storage, and insurance against potential theft, making them a more attractive option for storing digital assets.

There have been several instances in the past where Ethereum wallet security has been compromised, with adverse effects on the ecosystem. For example, in 2017, Ethereum-based company Parity suffered a major security breach, with attackers exploiting vulnerabilities in their multi-signature wallet, resulting in a loss of over 30 million dollars worth of Ether. This security breach not only resulted in significant financial losses, but also shook confidence in Ethereum wallet security.

These events highlight the importance of developing advanced digital wallet security features within the Ethereum ecosystem. Without proper wallet security, Ethereum risks losing users and their trust in the platform’s ability to protect their digital assets. Therefore, in order for Ethereum to succeed and maintain its position in the cryptocurrency space, enhancing wallet security must be given the highest priority and ensuring secure storage of digital assets. This is the issue that needs to be given the highest priority in Ethereum’s development roadmap.

V. Privacy

Privacy plays a major role in protecting transaction confidentiality in the Ethereum network. However, as we continue to navigate the digital labyrinth, we must face a reality that the privacy of Ethereum’s operations is not as secure and reliable as we expected.

The essence of blockchain is an open ledger that records every transaction and every interaction between users. In Ethereum, every transaction and every proof-of-attendance protocol (POAP) can be seen by anyone. In principle, this provides transparency, which is an important factor in trust in any transaction. But at the same time, it also poses significant challenges to personal and transactional privacy. The transparency of these transactions reveals a great deal of information about the parties involved and their transactions, leading to potential abusive behavior.

If privacy measures are insufficient or fail, it will have far-reaching implications for the entire Ethereum ecosystem.

Ethereum’s history is not without incidents where privacy breaches have led to serious consequences. In particular, in 2016, the decentralized autonomous organization (DAO) suffered a hacker attack worth 60 million Ether. In another example, a privacy vulnerability in 2020 led to Ethereum’s “accidental hard fork,” where a malfunction caused Ethereum to split into two independent blockchains.

In summary, Ethereum’s success and its ambition to become a mature technology stack critically depend on how it balances the delicate equilibrium between transparency and privacy. If this critical issue cannot be addressed, it will undermine Ethereum’s infrastructure and hinder its development towards a global, open, and permissionless experience.

VI. Transitional Solutions to These Challenges

Adapting to these major transitions will inevitably reshape the familiar relationship between Ethereum users and addresses, potentially creating a more complex pattern. Take the L2 expansion transition as an example. In this new world, users will no longer be restricted to a single address. Instead, they will have multiple accounts distributed across various L2 solutions, each with its unique address. This change is far from a superficial change, and it brings new complexity and potential confusion to users who are accustomed to using only one address.

However, these challenges are not limited to the user’s perspective. These transitions also require significant adjustments from developers. As Buterin pointed out, the existing “one user ≈ one address” mental model is gradually disappearing, replaced by the need to coordinate interactions between different addresses, L2s, and applications. This transformation requires a deep and fundamental change in how we interact with Ethereum, which may seem daunting at first. The difficulty lies in coordinating these efforts across the entire ecosystem to ensure a smooth transition.

For example, the information required for simple payment behavior now is not just a 20-byte address. It also requires the payee to provide their L2 solution and address, and the sender’s wallet will automatically route the funds to the specified L2 through a bridging system. This is just one example of the many changes that need to happen in the Ethereum ecosystem.

Seven. Prospects for the future

Can Ethereum withstand the heavy pressure?

Despite these major challenges, Ethereum is not sitting idly by. To address scalability issues, developers are turning to Rollups (Layer 2 solutions), which are designed to process transactions off-chain and then bundle them together and add them to the main Ethereum chain. This can increase throughput and reduce costs while maintaining the security guarantee of the main chain.

In terms of wallet security, efforts are being made to transition users to smart contract wallets. These wallets provide a more secure storage solution and leverage Ethereum’s inherent security mechanisms.

Privacy issues are being addressed through various innovative technologies, such as zero-knowledge proofs, which allow users to prove ownership without revealing any sensitive information.

For these challenges, Vitalik’s proposed solution is built on an architecture that separates verification logic from asset holding. Through the keystore contract, verification logic can be placed in one location, corresponding to different addresses on L2, greatly reducing the complexity of dealing with multiple addresses and related security risks.