Ethereum: Winter is Coming!
Ethereum marches into the Ice Age; the Difficulty Bomb starts to become noticeable, as the miners need more time to find new blocks. This freezing of the network aims to help to master the switch to Proof of Stake.
Currently, the Difficulty Bomb of Ethereum is hard to see. Since the beginning of 2017 the price of the second most valuable cryptocurrency is sharply rising, and with this, naturally, the hash rate of the miners and the difficulty of mining are rising too.
But if you take a closer look, you will find something unusual. The difficulty is growing a bit faster than the hash rate. Usually, both grow in parallel, or the hash rate hurries ahead.
It happens in all cryptocurrencies that the cryptographic riddles the miners have to solve to find a block are becoming more difficult when the miners invest more power. If they would not, neither the interval between the blocks nor the generation rate of new coins would be stable. Without an adjustment of the difficulty to the hash rate, every cryptocurrency would suffer from runaway inflation.
In Ethereum, however, this balance is slowly falling apart. The difficulty is growing stronger than the hash rate. The result is that the system is slowing down. While until now there has been a block every 14 seconds, it has become 15 seconds during April. That is not much, but is significant growth.
At the same time, the daily rate of newly generated ether is falling. In January and February, the miners created roughly 30,000 ether each day. At the time of writing, this rate has been reduced to 27,500. If the blocks arrive more slowly, less ether are generated. That’s easy to get.
Right now the impact of the difficulty bomb is little and not harmful. You might see it in the charts, but there is zero effect on the usability of Ethereum.
In the course of 2017, however, the effect will increase substantially. The difficulty bomb increases difficulty exponentially. It is expected that the intervals between blocks reach 30 seconds in summer or autumn, which would cut the daily growth of ether as the network’s capacity to a half. The difficulty will increase faster and faster, up to a grade, at which it will become impossible to find new blocks. Ethereum will freeze; the Ice Age will begin.
Planned Obsolescence to Smoothly Push the Switch to Proof of Stake
The Ethereum developers planned this Ice Age not without reason. It serves as some planned obsolescence which guarantees that Ethereum will become unusable at some time and hence pushes developers, miners and the ecosystem to carry radical changes of the code base. Such a dithering, as we see in Bitcoin’s block size fight for roughly two years, will be not possible in Ethereum thanks to the Ice Age.
A second, maybe more important reason for the Difficulty Bomb, however, is that Ethereum plans to switch from PoW to PoS. PoW is the abbreviation for Proof of Work and means that miners use computer power to compete for blocks. PoS, however, is short for Proof of Stake and describes the concept that miners do not invest in real computer power, but use ether to buy virtual miners which compete for blocks. Instead of miners, they are called stakers.
Without the massive hardware infrastructure, PoS is substantially more environment-friendly than PoW. Further, it reduces the investment threshold for mining, as you do not need specialized hardware, it enables an even shorter interval between blocks, and it is one of the requirement to shard the blockchain, which is Ethereum’s long term plan for scaling. It could be worth a shot to go the way of Proof of Stake.
The plan with which the Ethereum developers want to initiate the switch is smooth and elegant. At first, in the so-called Metropolis era, mining and staking should happen in parallel. The staker use a “Casper” contract, in which they lock in Ether and with which they validate blocks. At the same time, the miners will continue to use Proof of Work to determine the timing of the blocks.
Since the difficulty of mining will continue to grow during the Ice Age, mining will become less and less profitable compared with staking. There will be a strong incentive for the whole ecosystem to smoothly switch from Proof of Work to Proof of Stake without any kind of force.
Ice Age arrives with delay
The Difficulty Bomb was initially implemented in September 2015. The original plan was, as Stephen Tual outlined on the blog of the Ethereum Foundation, that the difficulty starts to rise exponentially with block 200,000 as early as September 2015. “So, a year on,” Tual explains, “the network will continue to be useful for roughly three to four months, but eventually will reach an ‘Ice Age’ of sorts: the difficulty will simply be too high for anyone to find a block. This will allow us to introduce PoS, perhaps via Casper, if it proves itself.”
According to this roadmap, the Ethereum blockchain would have become unusable at the end of 2016. The developers, however, realized early in 2016 that this timeline would be too tough. So they defused the Difficulty Bomb, at least a little, with the hard fork to the phase of Homestead. Vitalik Buterin explained in early 2016:
“At block 3.5m (one year from now), we would have an equilibrium block time of 25s for 100k blocks (~one month); then we would see 35s for 100k more blocks (now ~1.4 months); then ~55s for ~2.2 months, then ~95s for ~3.8 months, and so forth until we get ~655s for ~26 months (ie. slightly worse than bitcoin), and only after that does the protocol break because of the cap of ~99/2048 downward adjustment, and that final doom does not take place until 2021 (though it certainly gets very annoying by the second half of 2017).”
Like every exponential function, the Difficulty Bomb starts slowly, hardly visible, but does explode later, suddenly and seemingly without warning. Since the hash rate of the miners did sharply increase at the same time, the Ice Age will come even later as set in the Homestead hard fork. According to the calculations of Vitalik Buterin today’s Ethereum, at block 3.7 million something, should have a block interval of 55 seconds. In reality, it is only 15. The reason is that the miners invested massively in new hardware during the last few months, which drove up the hash rate faster than the difficulty is adjusted. Under normal conditions, this would make the block intervals shorter instead of longer.
In the coming month, the increased difficulty will become more obvious, with longer block times and a reduced coin supply. But the Difficulty Bomb will not hamper functionality until spring 2018.
At this time, the Ethereum developers plan to have arrived in the next phase of Ethereum, Metropolis. The roadmap of Ethereum outlines four phases; Frontier, Homestead, Metropolis and Serenity, each of which is activated by a hard fork and highlights a certain focus of development. The current phase, Homestead, is about security and building graphical interfaces. With Metropolis, Ethereum aims to reach mass markets. Part of this new phase will be the implementation of Caspar Proof of Stake, which will operate in parallel to Proof of Work mining. Not until the Ice Age comes really into effect, Proof of Stake will push away Mining. This will introduce the phase of Serenity.
Right now, the Ethereum developers do not completely agree on each part of the Metropolis hard fork. Many updates are agreed upon, written and merged. But the final version of Casper Proof of Stake is not finished, and there are disagreements about the idea that the mining reward should be reduced with Metropolis. So the developers have not yet a concrete date for Metropolis. But they aim to release it in August/September 2017.
At this time the intervals between blocks will grow to 20, maybe even 30 or 40 seconds. This will also result in a reduction of the supply of new ether. For investors, this might be attractive. Those, however, which are working with Ethereum, might wish at this time, that the developers can match their timeline.