How Ethereum 2.0 will affect the price of ETH
For months, there has been a buzz around the upgrade coming to the Ethereum network – how it will affect the running of the network, the security of transactions and what it means for those who own ethers.
In this post, we will explain in detail what the upgrade, Ethereum 2.0, is, the impact it will have on the Ethereum network and how that will affect the cryptocurrency space at large.
What is Ethereum 2.0?
Ethereum 2.0, also known as Eth2 or Serenity, is an upgrade to the Ethereum network. This upgrade promises significant improvement in terms of scalability, functionality, efficiency and, most importantly, a migration from proof of work (PoW) to proof of stake (PoS) which will improve the speed of the network.
Since the launch of the Ethereum network in 2015, there has been a massive growth in the adoption of Decentralized Applications (dapps) which make use of the smart contracts feature of the Ethereum network.
This has consequently led to an increase of scalable applications that help to promote fintech, platforms for showcasing works of art and smooth running decentralised gaming applications, amongst other things. The increase in the usage of the Ethereum network has also increased gas fees.
From an economic point of view, the more activities on the network affect the scalability of the entire system, including the speed at which transactions are confirmed. Thus, the need for a cheaper, faster, and more efficient network emerged.
Ethereum 2.0 is the answer to that need.
Ethereum 2.0 addresses these issues with an improved network enhancement built on proof of stake. Eth2 proof of stake requires that to be a full validator you have to deposit the sum of 32 ETH to a contract address as your stake.
How staking will work in Ethereum 2.0
Staking will affect the security of the network positively as there will be penalties (such as losing part of the ETH staked) for malicious actions, going offline or failing to validate. Also, while a validator’s vote will be weighted based on the amount they have at stake there is no advantage to having more than 32 ETH at stake. This prevents a validator from having too much voting power which can allow them to easily compromise the system if they have malicious intent.
In addition, the introduction of validators means that at least 16,384 full validators – with 524,288 ETH deposited – will be required for the first phase of Ethereum 2.0, the Beacon Chain, to launch on December 1st. Not surprisingly, this target was met before the November 24 deadline, and over 1,400,000 ETH have already been staked as at the time of writing. This shows the confidence of investors in the proof of stake upgrade.
How Ethereum 2.0 will be implemented
It is important to note that Ethereum 2.0 is not going live all at once. In order to ensure the system is stable and secure, the upgrade is going to roll out in phases. And that already started in 2020.
Here is a summary of the three main phases of Ethereum 2.0 implementation:
Phase 0 - In the first phase, the Beacon Chain will be launched. This phase successfully went live at 12 pm UTC on December 1st. The PoS consensus algorithm for Eth2 was implemented in this phase. Beacon chain will initially exist separate from Ethereum’s mainnet before the mainnet is then docked to the PoS algorithm later on.
Phase 1 - likely to launch sometime in 2021. This will see the integration of shard chains. Sharding is basically the breaking up of data within the same blockchain. This will allow ETH 2.0 to be able to process up to 100,000 transactions per second
Phase 2 - likely to launch in 2021 or 2022. This phase is the final phase and will involve adding ether accounts, enabling transfers and withdrawals and merging Ethereum 1.0 chain with the upgraded system.
Difference between Proof of Work and Proof of Stake
Proof of Work
Proof of work is how the current blockchain network confirms the validity of a transaction by preventing users from double spending.
PoS requires advanced computers to solve a mathematical equation. These advanced computers require a significant amount of electricity and can only process a limited number of transactions at the same time.
With the increase in the number of transactions, the network requires more electricity to confirm transactions on the blockchain network.
In times where there is a spike in transactions on the network, the time it takes a transaction to be confirmed can range from several minutes to hours.
Proof of Stake
While proof of work requires massive electrical supply and advance computers to solve mathematical equations to confirm the validity of a transaction, the "proof of stake" consensus algorithm solves this issue by a pseudo node to be a validator of a block. Blocks are formed rather than mined.
Furthermore, the transaction fees are a reward to validators rather than creating new cryptocurrency as a reward for miners in the proof of work consensus.
Benefits of Ethereum 2.0 to ether holders
Ever since the contract address for validators to stake a minimum of 32ETH went up, there has been a minimum of 1 million ETH sent to the address. It has caused the price of the Ethereum network’s native cryptocurrency, Ether, to soar above $600 for the first time since 2018.
With more validators getting involved in staking, there is every opportunity that the price of ethereum will skyrocket because the more the system can facilitate more dApps and smart contracts which will drive up the number of transactions that will be carried out, the higher the gas that will be used.
From this point, we can expect it to only get better. The upgrade will allow the system to be able to support more smart contracts, protocols, and Decentralised apps that will be built on the Ethereum network. As the number of the application on the Ethereum network increases, the price of Ethereum also increases because the value is dependent on the smart contract, protocol, and decentralised financed app built on its network.
It’s the basic law of demand and supply at that point. The more ethers are needed within the system, the higher the value of the cryptocurrency. Indications show that the Ethereum network which has been the second cryptocurrency by market capitalisation stands a very good chance to become an even more worthy contender with BTC in the cryptocurrency space.