Fusion of Ethereum: A Netscape moment for Web3?

WEB3 had its Netscape moment? The introduction of the first web browser in 1994 was a turning point for the Internet. If you can believe crypto enthusiasts, the change of Ethereum blockchain to a new system for validating transactions-a step known as the "Merge"-is an equally historical moment for what has become known as web3.

The departure from its earlier, energy -intensive validation mechanism brings Ethereum on a more sustainable long -term path. This is certainly important for the network, which has become the main platform for blockchain-based applications such as non-fungible tokens and decentralized finances.

But nine years after the start of Ethereum is still a long way to go. Here are five points that help determine whether the merger one day is seen as a significant moment in the history of the Internet or not.

First, the new validation mechanism, known as the Proof of Stake, alone contributes nothing to solve one of the biggest problems from Ethereum: that it can only process 15 transactions per second (TPS), a bottleneck that has managed to be very high.

The merger at least clears the way for the next big step of the network, which is planned for the second half of the next year. This is called "Sharding" and would include the division of the Ethereum database into 64 fragments. Since every computer in the network no longer had to record every transaction, this would significantly increase the total capacity and speed.

There are still large, unresolved technical questions of how that should work. Sharding will also not be a complete solution. A 64-fold increase would raise the capacity of the network to almost 1,000 TPS-not far from the capacity of the Visa network with 1,700 TPs. However, the promise of web3 is to use blockchain technology to impart every online interaction, which means that much greater capacities are required.

Secondly, the merger brings a whole series of unknown risks. Essentially, a market that is currently worth $ 200 billion is relocated to completely new foundations, with new mechanisms and new roles for market intermediaries that have not been tested under real conditions.

Instead of the risks, many market participants should focus more on the potential for higher returns. As part of the new ProOF-of-Stake system, owners deposit their ether as security to validate transactions against "staking premiums". This has transformed a previously unproductive asset into an asset that now offers a return - something that many investors will probably find attractive. But at this point it is unclear whether the return will compensate for the new risks - not to mention the enormous volatility of cryptocurrency itself.

Thirdly, the construction of a wider level of the market infrastructure on Ethereum is still in its infancy. So-called layer Two networks such as polygon and optimism act as "roll-ups", summarize many individual transactions themselves and only deposit one entry in the Ethereum blockchain. Together with the Sharding, the supporters of Ethereum claim that this could increase the total capacity to 100,000 TPS.

The companies that operate on Ethereum in this way could become mighty new intermediaries in the blockchain world-something that runs counter to the ideal of decentralization is based on the crypto.

This leads to the fourth point: While the wider Ethereum system develops, its supporters must drop part of the ideological luggage of the crypto world in favor of greater pragmatism. The challenge will be to find out which ideals can be compromised in the interest of a more functional system.

The appearance of influential new intermediaries could also give governments a new influence on the system. For example, if a large number of owners turn to crypto exchanges to get help with stilting, these stock exchanges would play an important role in the validation of transactions. This could suspend political pressure to block certain transactions in the course of financial sanctions.

Fifth and recently, the improvement of the underlying blockchain infrastructure will not help to solve the biggest challenge of Web3: to show why this technology is needed at all.

The optimists claim that the efforts after the merger and the work on the solution of the scaling challenges of Ethereum will increasingly shift to the development of consumer -friendly experiences that are necessary to attract a large number of users. This means developing things such as crypto money exchanges and marketplaces for digital assets that are easier to use for normal mortal. It also means developing completely new applications that could not have worked so well on the existing web.

The merger of Ethereum does not provide any evidence of what these uses could be. But, to paraphrase Winston Churchill, at least it shows that Web3 has reached the end from the beginning.

richard.waters@ft.com