It’s five years in the making but Ethereum 2.0 appears to be just around the corner. While there is no clear launch date, the update could revolutionize the cryptocurrency and solve many of its problems, which is good news for crypto investors.
It’s been five years and thousands of lines of code but Ethereum 2.0 is just around the corner. This long-awaited update promises to solve many of the initial flaws of Ethereum and could represent a new era in the cryptocurrency.
The big question for investors is how to react to the update and whether it will help send Ethereum to new heights, or just produce another pump-and-dump cycle.
Why Does Ethereum Need a 2.0 Anyway?
Ethereum has faced a number of major problems since its inception. The most important of these is scalability. Ethereum has exploded in popularity since reaching over $1,400 in early 2018 when there were under 10 million Ethereum addresses.
Since 2018 the number of wallet addresses has increased by 350% despite the price of ETH declining by as much as 94%.
This, combined with the huge number of transactions taking place using smart contracts, has put a strain on the Ethereum network. In August 2020, Ethereum transactions reached a near all-time-high and gas (transaction fees) cost as much as $99.
The key problem is that Ethereum still relies on Proof of Work (PoW) to process transactions. This means that every transaction needs to be processed by a mining computer. This includes transactions made for verifying the actions of decentralized apps (DApps).
The current system puts Ethereum in direct conflict with Bitcoin and other major PoW-reliant blockchains and this significantly limits the scalability of the Ethereum blockchain today.
How Will the Ethereum 2.0 Rollout Work?
Ethereum 2.0 is unique in that it is by far the most ambitious update of a top-tier cryptocurrency to date. Rather than trying to rebuild the existing blockchain, the initial rollout will occur on a new blockchain network called the beacon chain.
This will allow Ethereum to begin the process of converting itself from a PoW blockchain to a Proof of Stake (PoS) blockchain called Casper. Casper will remove the need for computationally intensive mining by allowing users to earn rewards by securing the network.
The system will deposit a specific amount of ETH into a smart contract on the original Ethereum blockchain. An equal amount of ETH will then be created on the Ethereum 2.0 chain.
This can be put up as collateral to allow a user to become a validator. The amount will then be kept on the Ethereum 2.0 chain until the old and new systems are merged.
This will then be followed by a years-long effort to improve the general reliability and scalability of the Ethereum network. The steps will include sharding, which will partition the database across several blockchains, and will theoretically make Ethereum sustainable into the future.
Why Should Crypto Investors Care About Ethereum 2.0?
A number of ETH investors are already buying the cryptocurrency in anticipation of a gold rush when Ethereum 2.0 does finally launch. There are a number of reasons for this but it is broadly due to growth and the economics of Ethereum 2.0 itself.
Let’s start with the easier of the two: growth. The number of Ethereum wallets has exploded but, more important, so have the number of transactions taking place on the Ethereum network. The total use of gas, the “fuel” for transactions on the Ethereum network, has recently reached an all-time high.
Combined with the rapidly increasing number of wallet addresses, this implies that the Ethereum ecosystem is still healthy, despite scalability problems, and is likely to continue to grow on the successful rollout of Ethereum 2.0.
The economics of Ethereum 2.0 is a little more nuanced. In order to activate a stake and benefit from the interest, an Ethereum investor will need to commit exactly 32 ETH to a smart contract. Any less and the contract won’t activate, any more and the investor won’t see the benefit.
This phenomenon is encouraging investors with a long term view to purchasing large amounts of the cryptocurrency in anticipation of maximizing their potential pay-off once the update finally goes live.
A key driver of this recent surge in ETH purchases is interest from institutional investors. A Proof of Stake system is familiar and provides a way for longterm holders of the cryptocurrency to justify keeping it in their portfolio.
Theoretically, this should lead to higher, more stable prices in the long term, as there are fewer reasons to sell ETH so long as the network continues to grow and there is room to stake.
A Stable Rollout Will Be Key To The Success Of Ethereum 2.0
Investors are banking on a successful rollout of Ethereum 2.0. There is no guarantee that this will happen. And an unsuccessful rollout at an early stage could prove disastrous for the currency and lead to massive sell-offs.
While purchasing some ETH prior to the rollout early next year could be a good idea, you shouldn’t depend too much on a successful Ethereum 2.0 launch. Savvy investors will be watching the early days of the rollout carefully and will decide whether to go big on ETH if the project can prove that it has what it takes to succeed in one of cryptocurrency’s most ambitious projects.