The first stage of the transition to Ethereum 2.0, the Beacon Chain, has already begun.
ETH 2.0 will increase accessibility, performance, decentralization, and scalability.
Regular users won't be affected as existing ETH will carry over.
Despite uncertainty over the 2.0 roadmap, its likely to inspire a large ETH rally.
Ethereum‘s move from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus system has raised questions about its effect on ETH prices since its first formal proposal in 2018. The initial release of this system in December last year, the ’Beacon Chain, only increased speculation, financial or otherwise.
Rather than expending resources (i.e. ASICs and electricity) to mine blocks, Proof of Stake users “validate block transactions according to how many coins they hold,” by definition. Project lead Vitalik Buterin has been pushing for PoS since Ethereums early days as it “offers more security for the same cost,” among other improvements.
As the shift will only affect the internal workings of Ethereum, the platform states that the existing ETH of HODLers, dApp creators, and regular traders “will not need changing or upgrading.” Any changes to the coins price will rest solely on the new features 2.0 brings.
PoS Is Attractive to New Users
Currently, Ethereum “uses the equivalent energy of a house for 2.8 days per transaction.” ETH 2.0, however, is estimated to reduce this figure by up to 99.95%. Traders, regulators, and high-profile investors like Elon Musk, who were previously dissuaded by the environmental damage of Bitcoin, are likely to be swayed by a ‘green’ cryptocurrency.
As the first major cryptocurrency to adopt PoS, ETH 2.0 would also receive extra attention for the convenience of staking compared to PoW. As ETH‘s official documentation notes, “you don’t need elite hardware to stand a chance of creating new blocks,” whereas mining is, by design, computationally taxing. Regular people will be able to stake ETH to earn money, increasing Ethereums broad appeal beyond the current crypto niche.
Scalability Means Usability
Most relevant for existing users is the projected increase in scalability. A significant hindrance to Bitcoins wide adoption has been its low transactions/second rate (between 3.3–7, according to research done in 2017). According to a 2021 report from the Bank of America, Bitcoin “remains limited by its complex settlement process,” and as a result, it saw “no good reason to own BTC” aside from simple value appreciation.
In contrast, Ethereum 2.0 can already process roughly 30 TPS, and, in a recent podcast, Buterin has floated figures of “up to 100,000 to 1 million per second” TPS. Increased scalability will markedly improve quality of life, reduce waiting times, and increase ETHs total liquidity. For the NASDAQ, this boost, alongside the other benefits of PoS, make ETH a “bargain to buy now.”
On the Flipside
The timeframe for the rollout is uncertain, but seems imminent.
A post-merge hard fork will inherently create volatility.
Invested miners may drive a bull rush to ETC pre-Merge as rewards dry up.
Rollout Uncertainty
Ethereum‘s transition to PoS has already taken several years, and the roadmap detailing future updates isn’t set in stone.
A ray of hope came in April, when ETH researchers successfully launched a private “Eth1-Eth2 post-merge test network,” suggesting that the long-awaited merge would be ready sooner than anticipated. Similarly, platforms like Coinbase and Binance are already offering services for ETH 2.0 staking, which is indicative of industry confidence for only minor delays to the rollout.
Another source of concern is that ETH will almost certainly receive a hard fork after the move to PoS, in what Buterin called, at the Scaling Ethereum Summit, a “post-merge cleanup.”
As Investopedia remarks, any “hard fork can have a profound impact,” and almost always leads to high volatility. While ETHs Berlin hard fork earlier this year sent prices to a record high, the post-merge fork is likely to be particularly divisive, especially among high-end miners.
How Will Miners React？
ETH 2.0s full release will drastically reduce the rewards of traditional mining, likely prompting miners invested in high-end equipment to move en masse. Their most likely destination is, of course, Ethereum Classic. As angel investor Adam Cochran noted in April,
“...when we move to ETH 2.0 PoS were going to see a lot of wealthy miners shift to another PoW chain and ETC would be an easy narrative to put their wealth behind.”
Speculation has also been prompted by EIP 1559, a “proposal to reform the Ethereum fee market.” Released a few days ago, the proposal burned $174M worth of transaction fees in its first day. Though intended to ‘burn’ Ethereum‘s notoriously high fees, EIP 1559 has also courted anger from miners for slashing their revenues, even prompting a ’show of force in April, before later backing down.
Though its improvements to blockchain utility and the excellent PR of its lessened environmental impact are positive signs, ETH investors should expect volatility as updates continue and miners present further challenges to 2.0s rollout.
