Ethereum 2.0 may be the biggest upgrade to a crypto asset network that has ever happened. There is anothe protocol change that could potentially compete. In terms of overall importance would be the addition of Segregated Witness (SegWit). This was to Bitcoin in 2017, which pave the way for better versions of layer-two protocols like the Lightning Network. With Ethereum 2.0, the crypto protocol aims to make its long awaited switch to proof-of-stake (PoS).
This alteration has been in the works since the earliest days of Ethereum’s existence. It will be a massive change in terms of scalability, security, tokenomics, energy efficiency, and more. Bitcoin is still the largest crypto asset by market cap. This massive change to Ethereum’s fundamentals has put everyone’s eyes on the world’s second largest cryptocurrency for the second half of 2022.
What is the Key Upgrade in Ethereum 2.0?
One should note that “Ethereum 2.0” is a bit of an outdated term. It is no longer in use as the official term for the upcoming upgrade by the Ethereum Foundation. That said, everyone has been referring to the switch from proof-of-work (PoW) to PoS. This is for a number of years at this point. Most people still use this terminology when talking about this upgrade. There are a number of changes coming to Ethereum. Changes that intend to make the system much faster, scalable, and efficient. The reality is the key component of Ethereum 2.0 is the move to PoS.
In PoW, miners use their computing power to solve mathematical equations as quickly as possible. The miner who is able to solve the current math problem the fastest gets a reward with the mining rewards associated with that particular block of transactions. In Bitcoin this block reward is mine roughly every ten minutes, while it happens around every fifteen seconds in Ethereum.
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With the move from PoW to PoS, the miners of Ethereum will replace with stakers. Instead of pointing computer hardware at the Ethereum network to mine new blocks, stakers will have to lock up their ether holdings to participate in network consensus and have a chance to receive block rewards. Those who stake their ETH on the Ethereum network expect to receive at least 7% APR on their ETH holdings.
One should note that the tokenomics of ETH are also going to be alter with the upcoming move to PoS. While Ethereum is still using PoW, there are roughly 13,000 newly-issue ETH sent to miners on a daily basis. This is going to stop when the move to PoS is complete. This leaves around 1,600 newly-create ETH that will be reward to stakers on a daily basis. In other words, the issuance rate of ETH is in expectation to drop by around 90% after the transition to PoS. When this low rate of issuance is combine with the process of burning transaction fees, it is expectation that ETH’s issuance rate will actually be negative or close to zero after PoS is fully activate.
When is Ethereum 2.0 Expected to Launch in Crypto?
The launch of Ethereum 2.0 has already begin, as it is roll out in a few different phases. Currently, there is a PoS chain that is operating alongside the main PoW Ethereum blockchain. This early PoS chain is known as the Beacon Chain, and it launch all the way back in 2020. Indeed, Ethereum users who have decided to stake their ETH on the Beacon Chain are already receiving rewards for doing so.
The next phase of development for Ethereum 2.0 is called “the Merge”. It will consist of the deprecation of PoW. Also, the complete takeover of PoS as the sole mechanism for maintaining consensus on the network. Currently, the Merge is in expectation to take place by the middle of September at the latest. While the move to PoS gets more attention than any other aspect of Ethereum 2.0, an improvement known as sharding is also part of this improvement process. Shading is in expectation to be an addition to Ethereum at some point in 2023. The main benefit of this upgrade involves massive improvements to overall scalability.
How Will Ethereum 2.0 Affect the Crypto Market?
It’s no secret that all eyes have been on Ethereum in 2022, and much of that has to do with the upcoming move to PoS. That said, many of the prominent use cases of blockchain technology, such as non-fungible tokens (NFTs) and decentralized finance (DeFi), have also been found on Ethereum more recently.
In terms of speculating on the ETH asset, most market commentators have been in focus on the removal of block rewards for PoW miners from the ETH issuance rate equation. Such a massive decline in the rate at which new ETH generates is bound to have an effect on the price of ETH. That said, it’s unclear whether this change to the ETH issuance rate is already price into the market. After all, we could be looking at a situation where it makes sense to buy the rumor and then sell the news.
That said, there is also a large amount of ETH already in stake on the Beacon Chain. It cannot be unlock until a further upgrade is release some months after the Merge. This is an extremely technologically-complex change that is happening on Ethereum. It’s possible that something could go wrong from that perspective. Additionally, there are concerns regarding the fact that the largest staking pools may force to censor certain types of transactions that have been sanction by the United States Government, which points to one of the potential downsides of PoS when compare to PoW.
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