Is the move to Ethereum 2.0 a watershed moment for crypto?
- Ethereum 2.0 involves a set of upgrades that will move Ethereum from a Proof-of-Work to a Proof-of-Stake consensus mechanism.
- The transition is being touted as a game-changer not just for Ethereum, but for blockchain itself.
Ethereum 2.0, Eth2, or simply ‘Serenity’, refers to a series of upgrades to the current Ethereum network in order to make it more scalable, secure, and sustainable. These upgrades represent a major transition for the Ethereum network, and by extension, the entire Blockchain ecosystem.
Once implemented, Eth2 will boost network speeds from the current average of around 15 transactions per second to potentially 100,000 TPS, according to Ethereum’s founder, Vitalik Buterin. The upgrades will also improve network security and drastically reduce Ethereum’s carbon footprint.
Over the course of these upgrades, Ethereum will change its consensus mechanism from Proof-of-Work to Proof-of-Stake. PoW validates each transaction on the network by making a large number of computer nodes compete against each other to solve complex mathematical problems, which makes it expensive, energy-intensive, and time-consuming. In contrast, PoS uses an algorithm to validate blocks of transactions, which allows it to process them much more quickly and efficiently, at a fraction of the cost.
Is there a release date?
As with most other things in the crypto world, the answer to this question is a complicated one. The transition to Ethereum 2.0 is a massive undertaking that has been in the works since 2014. The Eth2 launch involves three separate phases, the first of which is known as The Beacon Chain and has been live since December 2020. The Beacon Chain is a new PoS blockchain that has been introduced alongside the current PoW network in order to test its functionality and lay the groundwork for future upgrades.
The second phase is known as The Merge, where the Ethereum network will officially switch to the Beacon Chain as its consensus mechanism. Expected to take place sometime near the end of 2021 (with no exact date), this will enable staking on the entire network and usher in the end of energy-intensive mining.
The third and final phase is termed as Shard Chains, scheduled for launch sometime in 2022 (again, no exact date). This phase will involve the splitting of the Ethereum network in order to further increase its capacity for validating transactions, storing data, and improving performance over time.
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The environmental impact
Concerns around the environmental impact of cryptocurrency mining have been a major barrier to mainstream adoption around the world. While Bitcoin has typically received the worst criticism in regard to its energy consumption, Ethereum - as the most actively used blockchain with the second-largest digital asset (Ether) - has also received its fair share of criticism.
“At the moment, electricity is the lifeblood of Ethereum’s Proof-of-Work mechanism. The problem is, Proof-of-Work demands more and more electricity over time,” said Konstantin Richter, founder and CEO of Blockdaemon, a blockchain infrastructure platform. “Ethereum’s energy consumption today is comparable to the energy used by the country of Israel. Naturally, this raises major environmental concerns.”
However, if recent estimates are to be believed, the transition to Ethereum 2.0 will slash the network’s energy consumption by at least 99.95%. Instead of feeding on an entire country’s worth of energy, the new PoS network is expected to consume about as much power as a small American town with 2,000 homes.
Put another way, if the energy consumed by a single Bitcoin transaction was as tall as Dubai’s Burj Khalifa and a current Ethereum transaction was the Leaning Tower of Pisa, then an ETH 2.0 transaction would be as tall as a single 0.025m screw.
Source: The Ethereum Foundation
Jordan Spence, chief marketing officer at MyCrypto, says Ethereum’s transition to PoS will drastically reduce not only its environmental impact, but also related hardware and electricity costs, mining pool fees, and even tax obligations in some jurisdictions.
“Following this move, I can see a world where the environmental concerns around Ethereum are reduced, but those relating to other Proof-of-Work blockchains are heightened,” said Spence. “Because if Ethereum can switch to PoS, why can't other networks?”
Impact on Ether
The various improvements to the Ethereum blockchain are also a good sign for its native coin, Ether. Second only to Bitcoin in terms of market capitalization, Ether could see a further boost in adoption.
“Eth2 will support thousands of DApps (decentralized apps) and other scalable applications for millions of users,” said Blockdaemon’s Richter. “The improved infrastructure, combined with growing DeFi activity, could lead to a substantial increase in the price of the Ether token.”
Patrick Moore, long-time crypto investor and creator of CryptoWhat, points out that Ether’s price has already jumped to over $3,000 – its highest since the May crash – following last week’s London hard fork update to the Ethereum network.
“The new upgrades will bring fresh incentives for all stakeholders, as well as a lot of scaling potential,” said Moore. “This will increase investor awareness and activity around Ethereum's native currency, which could push its price further up.”
Impact on the crypto industry
Ethereum’s upgrades could have an adverse impact on Bitcoin’s reputation due to an increased focus on its energy-hungry PoW mechanism, according to Spence from MyCrypto. “I anticipate that conversations surrounding the inefficiencies of Proof-of-Work will increase, and there will be more pressure to figure out a better solution for Bitcoin and other PoW chains.”
Blockdaemon’s Richter believes the impact of Ethereum’s transition will extend beyond Bitcoin and Ether to affect the entire crypto landscape. Ethereum’s high scalability, low gas fees and negligible carbon footprint will add an extra degree of competition in the smart contract space, forcing its competitors to innovate towards faster, more efficient networks.
“Mass adoption for Proof-of-Stake is just around the corner, which will bring a sea-change across the industry. We anticipate a large influx of interest from financial institutions that will begin to offer staking services, both from within and outside the crypto world,” said Richter.
“We believe the launch of Ethereum 2.0 will be the largest mass-adoption event in the history of DeFi, and a watershed moment for the crypto industry.”