Breaking down Ethereum’s evolution and its impact on crypto markets

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Welcome to Valid Points. In today's issue, Sam Kessler reviews the five major themes that have defined Ethereum’s rollercoaster year. For an extended version of this article, view the web post here.

In 2022, Ethereum ticked off several boxes on its checklist toward creating a global computer and decentralized financial system. Most notably, the second-largest blockchain finally completed its radical shift to a new, vastly more energy-friendly system for powering its network. 

But the year was also marked with problems – from concerns around censorship to record-shattering hacks on Ethereum-linked infrastructure.

Any recap of Ethereum’s 2022 would be incomplete without mention of the Merge – the blockchain’s massive, years-in-the-making upgrade to a more energy-efficient system for processing transactions. 

Ethereum’s switch to proof-of-stake from proof-of-work, which happened in September, marked a massive reduction to the network’s energy footprint, ditching a power-hungry crypto mining system in favor of a new method for issuing and validating transactions on the blockchain.

Although the Merge did not address Ethereum’s relatively high transaction costs and slow network speeds, it is estimated to have cut the network’s energy consumption by around 99%.

Ethereum’s Merge ushered in changes to the world of MEV, or Maximum Extractable Value. 

As the Ethereum Foundation explains, “Maximal extractable value (MEV) refers to the maximum value that can be extracted from block production in excess of the standard block rewards and gas fees by including, excluding, and changing the order of transactions in a block.”

In 2020, the research firm Flashbots burst onto the scene with a system designed to mitigate some of the issues with centralized MEV. That system, an auction house for MEV-optimized blocks, became responsible for around 50% of all Ethereum blocks by September’s Merge. From January to September 2022, Flashbots netted over $200 million in profit for miners according to the company’s public dashboards – turning MEV from a nuisance into an entire cottage industry.

Once the Merge hit and changed the way blocks are produced on Ethereum, Flashbots only grew in importance. Its new system for spreading out the spoils of MEV, called MEV-Boost, is currently used as a go-between for 90% of the blocks on Ethereum’s new proof-of-stake network.

Though Flashbots’ 2022 has undoubtedly been a year of success, the company has faced rising concern that it is making Ethereum’s block production apparatus too centralized – an ironic charge given that Flasbots initially came along with the goal of mitigating centralization.

Over the Summer, the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) made headlines when it sanctioned Tornado Cash – an Ethereum-based program for obscuring the source of crypto transactions. Some blockchain developers thought that OFAC, by sanctioning a smart contract, violated free speech. OFAC’s order also left open a series of questions about what it means to “facilitate” a transaction on a blockchain.

Along with certain validators, Flashbots – and some of the more popular third-party “relayers” that deliver blocks to validators using Flashbots’ MEV-Boost program – have taken actions that curtail the ability for Tornado-linked transactions to make it onto the Ethereum ledger. 

According to MEV Watch – a watchdog group that tracks Ethereum censorship – around 70% of the blocks that get added to Ethereum’s network each day are OFAC-compliant, meaning they are assembled to exclude (or “censor”) transactions from OFAC-sanctioned addresses.  

For those who believe Ethereum should be a “credibly neutral” platform, blocking off sanctioned transactions in any form amounts to a kind of censorship – even if, for now, those transactions can still find ways onto Ethereum’s ledger, albeit at a slight delay relative to other transactions.

Celsius Network LLC, et al., have established bar dates for submitting proofs of claim.  Persons and entities that agree with their claim as listed in the Schedules [Docket No. 974] need not submit a proof of claim.  Otherwise, all persons and entities that assert a claim against Celsius Network LLC and its affiliates must submit a proof of claim before the applicable bar dates outlined in the Bar Date Notice [Docket No. 1368-1]. 

At the peak of crypto’s bull run in 2021 and the early months of 2022, Ethereum – the second-largest blockchain by transaction volume – became virtually unusable for some people as a result of its high fees and slow speeds relative to some newer blockchains. But 2022 saw major improvements in this domain with the growing popularity of layer 2 networks (e.g. Arbitrum and Optimism) and sidechains (e.g. Polygon) – separate networks that process transactions for cheap and then “settle” them on the main Ethereum blockchain.

2022 was also the year of the zero-knowledge (ZK) rollup, layer 2 chains that use fancy ZK cryptography in order to guarantee transaction integrity. This past fall, several firms – among them, Polygon, Matter Labs and Scroll – made major progress in the development of so-called zkEVMS, which are ZK-rollups that can host any Ethereum smart contract (previously, ZK rollups were limited to specific applications and use-cases).

As Ethereum’s layer 2 chains duke it out over the next several months and years, it's expected that one (or several) of them will eventually become the primary means by which most users access Ethereum in the years ahead. 

One would be remiss to discuss Ethereum’s 2022 without mentioning the myriad of blowups, hacks and failures that have made this year one of the most disastrous in crypto history. 

According to Rekt, a website that keeps a running list of DeFi exploits ordered by the amount of money lost, seven of the 10 largest-ever DeFi hacks occurred in 2022. 

Ethereum’s core code has never been the victim of an exploit, but most of the big DeFi thefts of this past year (e.g. Ronin, Wormhole) nonetheless wrought havoc on users of Ethereum’s DeFi ecosystem. They showed, moreover, that apps on Ethereum and other blockchains – particularly, the bridges that let you send assets from chain to chain – have a long way to go in terms of security.

But the failures of the past year were also proof for many of the necessity of decentralized financial infrastructure. The much-publicized FTX exchange fiasco, wherein Sam Bankman-Fried and his associates allegedly stole around $8 billion in user funds, was only possible because people entrusted their money with an intermediary. 

Future Ethereum development, as with past development, will focus on ensuring that users can transact and store assets without the use of middlemen. 

Consensus is a place for the crypto and Web3 communities to come together, take stock of everything that is happening, talk through difficult challenges and figure out what is needed to make this industry stronger. We want you to be a part of that conversation. Use code VP15 for 15% off your pass. Register now.

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