Everything you need to know about the largest altcoin by market capitalization, which is preparing for the most important update in its history.
On July 30, 2015, the first Ethereum genesis block was mined. Over the past five years, ETH has become the dominant altcoin in terms of market capitalization, popularity and use, and has grown into the largest blockchain platform, with over 2,000 decentralized applications used. Ethereum may have changed the blockchain world even more than Bitcoin.
Ethereum was the first general-purpose blockchain to allow decentralized ledger technology to be applied to almost any real industry, not just electronic money. With its help, it became possible to create smart contracts, tokenized assets, complex decentralized applications (dApps), alternative methods of fundraising (ICO) and a decentralized finance system (DeFi). But Ethereum also has a number of unresolved issues: scaling, high fees, and growing rivalry with rival blockchains.
Why Ethereum Update: Network Issues
Ethereum is still far from what the developers want it to be. Its current infrastructure is insufficient to meet the demand of tens of millions of people, let alone billions. Developers will devote the next few years to solving them.
Ethereum’s weakest point is scalability. It creates the rest of the project’s problems. The network is almost overcrowded and not ready for more widespread use. Gradually, transactions are slower and slower, and the cost of “gas” (transaction fees) increases. On September 2, 2020, the average cost of commissions peaked at an all-time high of $ 15.2 per transaction. At the time of publication, the commission is $ 3.25, i.e. 20-30 times more expensive than a year earlier and 2 times more expensive than in early August.
The recent boom in DeFi protocols, as well as Yield Farming, are placing even more stress on the network and negatively impacting transaction costs. Because of this, Ethereum is becoming too expensive and slow for use in decentralized applications and the DeFi sector, depending on the ability to make many small and frequent transactions – at current prices, using ETH in them is simply not profitable. The high cost of the ETH is already negatively affecting its development, safety and adoption. And if you don’t update the Ethereum protocol, one day it will simply be impossible to use.
The scaling problem cannot be solved by updating the protocol – the consensus algorithm must be changed. In June, the miners agreed to raise the gas limit from 10 million to 12.5 million, which led to an increase in block size and an increase in network capacity by 25%. However, this did not reduce the cost of “gas”. Level 2 solutions that allow the creation of additional blockchains (sidechains) on top of the main network – Plasma, Omise Network, Optimistic Rollup and others – are either undergoing testing or are not achieving the required indicators.
To address the scalability problem, developers have been working on updating the network to state 2.0 since 2016. It will move away from the mining-based PoW algorithm to a more energy efficient PoS algorithm, in which payment processing goes to validators. The assumption is that the network will then become more scalable, faster and cheaper.
When the transition to Ethereum 2.0 is complete
Ethereum 2.0 will be deployed in phases. This is necessary in order to avoid failures and take into account all the nuances. It is estimated that this will take about two years.
Phase 0. Preparatory (Beacon chain). It will include validators, staking options, new ETH coins, and will test Lighthouse, a new client of the network. The methodology for calculating the cost of gas and the formation of commissions will also be revised. Initially, there will be no smart contracts and no dApps support on the network. In fact, this is another test network, but working on PoS and with real ETH 2.0 coins. But even in this form, the network will be faster and more efficient.
The start of the zero phase can take place on November 4. This will happen on the condition that the Medalla testnet, launched on August 4, has been running smoothly for three months. However, on August 14, due to an error, the network was divided into 4 blockchains, which could not interact with each other. On August 17, developers A day earlier, Buterin admitted that the launch of Ethereum 2.0 was more difficult than expected, but on August 21, the developers said that Medall’s outage would not affect the timing. This is possible thanks to the discovery of a vulnerability at the testnet stage.
Phase 1. Start of sharding – transition from full nodes to load distribution between separate sections of the network (shards) without using a virtual machine. This should be the key change to address the scalability issue. First, 64 shards will be launched in the network, later their number can be increased to 1024.
Previously, it was assumed that the two networks – the old and the new – would work in parallel to each other, and users would be able to exchange the former for the latter. But now the developers believe that the existing ETH network will be integrated into ETH 2.0 as one of the shards. Thus, it will be possible to avoid a hard fork – the old network will enter the ecosystem of the new one, the old smart contracts, without being canceled, will move from ETH 1.0 to ETH 2.0.
Phase 2. Launching a new operating mode (state execution). A fully functional Ethereum 2.0 network, in which smart contracts and dApps will already be available. In this phase, eWasm will be launched in the protocol – a new virtual machine for the execution of smart contracts, which will further reduce fees and make smart contracts more functional. By this point, if the developers are right, the network has solved its main problems.
Maintaining leadership, but losing the monopoly
It is important to understand that Ethereum problems will remain until the full transition to the new consensus. Gas prices will continue to rise and the network will become more and more congested. The network’s capacity may very soon not be enough for all the projects working on it, especially if the DeFi sector continues to develop so rapidly. In this case, Ethereum risks losing its market leader status. Competing blockchains – TRON, EOS, NEO and Steemit, TomoChain and Binance Chain, and others – are getting an excellent head start in order to catch up with Ethereum.
While Ethereum is a universal blockchain for all occasions, competitors are trying to gain a foothold in more specialized and niche areas, focusing on projects with more specific requests. For example, almost 100% of apps on NEO are decentralized exchanges, while EOS and TRON account for the majority of the gambling market. The most promising area for competitors is gaming applications – it is in this area that Ethereum lags behind the most (in 2017, the rather simple game CryptoKitties practically paralyzed the network). Competing blockchains are already surpassing Ethereum in many ways in terms of speed, cheap commissions and scalability. If the launch of updates is delayed, the technical backlog of ETH will only increase.
The real salvation for Ethereum will be the universality of the project. It still seems to be the best choice for p2p lending, insurance, and stablecoins. Ethereum ERC-20 standard is one of the most demanded on the market. Given the cost of developing a new product, it is unlikely that many projects will dare to switch from Ethereum to another blockchain. In addition, the Ethereum community has extensive experience in developing and fixing vulnerabilities that other networks simply do not have. Competing blockchains are not yet capable of replacing Ethereum on a global scale. Probably, in the next 5 years, he will retain his leadership status, although that will be given to him more and more. But Ethereum will most likely lose its monopoly and will gradually cease to be a mandatory standard.
Ethereum 2.0 will change the staking market, but it is unlikely to overclock the coin
There will be no mining in Ethereum 2.0, the confirmation of blocks will occur due to the delegation of their coins by users to masternodes. These ETHs will be frozen, and users will receive part of the new coins as a reward. The more coins are frozen, the higher the income. This process is called staking. For the network, this is an opportunity to mine coins at a lower cost, become safer and create a new infrastructure sector, and for users – to receive passive income from storing cryptocurrencies.
Being a validator is not easy. The minimum amount that a user must freeze to become a validator is 32 ETH (≈ $ 11,292). It is also necessary to keep the wallet connected to the network at all times.
Stakers will receive their first payments only after the volume of frozen coins reaches 524,000 ETH, which is 16,375 validators with a minimum stake. It will take a year or two.
The profitability in ETH 2.0 will be variable – it depends on the number of validators and the volume of frozen coins. The less coins are frozen in the network, the higher the percentage for their storage, and vice versa. At the start, the expected return is about 21%, and after a year – about 5%. To get a net profit, you need to subtract the equipment and energy costs from these figures, which will amount to about 4.75% of the start-up bonus and will eventually grow to 14-20%. It is also worth considering exchange rate fluctuations. Even at rates of 20% per annum in the ETH, if the price of the coin falls, the investor can get a loss in dollars. In this situation, it is more profitable to work on your own equipment, rather than use cloud services. It will also make the chain more decentralized.
The transition of such a large project as Ethereum to PoS will instantly increase the share of staking in the market. The minimum deposit is too expensive for most investors, so it is worth waiting for cloud staking offers and similar products from crypto exchanges. This will have a positive effect on the price of the coin. According to experts from Binance Research, the launch of staking could double the price of ETH and the share of staking in the market.
There is also a downside to staking. If there is a risk that the US Securities and Exchange Commission (SEC) may recognize the ETH as a security. So far, this is only a probabilistic threat, which is little talked about, but it should not be discounted.
If staking is approved by regulators, institutional investors are likely to enter the market. They can afford large steaks, and even 5% profitability will be very attractive for them. In addition, institutional investment will further accelerate the coin’s price and popularity among retail investors. However, as with solving the scaling problem, the transition to staking will not be quick and will take several years.
DeFi will push Ethereum further
DeFi is the main driver of the crypto market in 2020. Now $ 7.72 billion is locked in DeFi protocols – 14 times more than a year ago. And the sector is not going to slow down the pace of development. Against the background of zero interest rates, the yield of 10-15%, and sometimes, as in the case of Yield Farming, and up to 100% per annum, looks very attractive for new users.
However, this return reflects high risks. Security is the main concern of the DeFi sector. This year, hackers were able to take advantage of protocol vulnerabilities several times and withdraw funds. Developers themselves sometimes release unaudited products onto the market. All this suggests that DeFi needs stringent security standards – without them, the sphere will not be ready for mass use.
There is also a good chance that the DeFi sector will repeat the fate of ICOs, which experienced a short period of hype in 2017, but already in 2018 the coins of most projects were worthless. There are also regulatory risks. Now DeFi exists in a gray regulatory area, one day the SEC will get to decentralized finance.
Once security and regulatory concerns have been resolved, institutional investors may enter the sector. They will boost liquidity and build user confidence. This plays into the hands of Ethereum as the main blockchain of the market. Despite today’s complexities, DeFi is likely to continue to grow in the medium term.
Ethereum is a living developing project, the developers of which are methodically working to fix its considerable shortcomings and are focused on long-term development. They continually bypass network restrictions, update development tools, and validate new and current EIP standards. The developers already have plans for where Ethereum will move after the update. This approach pays off – the ecosystem evolves despite scaling problems.
A full transition to version 2.0 is unlikely to be smooth – crashes are inevitable. But the long-awaited update will allow, although not overnight, to solve the problems with scaling and high cost of commissions. This should leave Ethereum as the leader among altcoins.
