When Vitalki Buterin developed Ethereum in July of 2015, he nursed a level of uncertainty regarding the success of his innovation. Five years after, this uncertainty is dissolved as Ethereum has stamped its presence in the blockchain space, competing strongly with Bitcoin. With its novel features geared towards revolutionizing the blockchain and cryptocurrency ecosystem, Ethereum is like a wunderkind of whom we are sure of its bright future. However, before forecasting the future of this digital asset, Here Xtrgate explains in detail, let’s look at what it is.
What is Ethereum?
The primary goal of Ethereum is to be a decentralized software platform on which other decentralized applications (dApps) can be built and developed. This goal led to the development of smart contracts, the technology on which Ethereum’s uniqueness is tethered.
Smart contracts are digital agreements between two parties that are facilitated and stored on Ethereum blockchain database. When the terms of these agreements are met, the transactions are processed without the need for an intermediary or regulatory body. To fuel these transactions, Ethereum developed its currency called Ether. With this currency, Ethereum offers users a decentralized platform for conducting P2P transactions without needing a third-party.
This technology fosters trust since transactions are initiated, processed and executed by computers over a network, which ensures that once the terms of the contracts are reached and stored, they cannot be altered. These features have widened the applications of smart contracts — and Ether — as businesses, insurance companies, health sectors, and electoral processes have adopted them.
Journey so far
With this innovation, it is no surprise that Ethereum has grown to become the second-largest cryptocurrency with a market cap of $23.31B, only coming behind Bitcoin. As at the time of writing, Ethereum’s price was $209.29.
So far, Ethereum has enjoyed massive adoption around the globe, which has consequently driven up its value. Capital.com stated that in 2019, Ethereum recorded over 1.4 million active decentralized application users; a 75 percent increase from the 800,000 users recorded in 2018.
This year, 2020, Ethereum initially enjoyed an excellent bullish run: starting the year at $130 and hitting $279 by mid-February. This hike was due to two strong fundamentals — one, increasing interest and adoption of the currency; two, Enjin, the gaming company, launching its game development platform on Ethereum network. The currency rode on these fundamentals further consolidated by Vitalik Buterin’s assurance that the launch of Phase 0 of Ethereum 2.0 is in the pipeline.
However, as the Covid-19 pandemic hit the world economy, the value of Ethereum began experiencing a downturn. And the news of Cryptokitties leaving the Ethereum blockchain for theirs worsened this decline. Cryptokitties is a blockchain gaming platform and one of Ethereum’s most popular and active dApp users. Ethereum’s value further skidded down the cryptocurrency plane when Bitcoin suffered a massive price drop in March. (Since Bitcoin is king, it ultimately follows that other currencies will be affected by a shift in its value.)Plagued on three fronts — Covid-19, Cryptokitties and Bitcoin — Ethereum plummeted to $135 as of mid-March.
Where it is headed
Just like a phoenix, Ethereum is rising from its ashes. Vitalik Buterin and his team are making considerable efforts to ensure that, as much as possible, Ethereum would always be on an upward move. To do this, there are a series of developments set to be introduced between 2020 and 2021. These developments aim to improve the efficiency of Ethereum as a decentralized, transactional platform; and of Ether as not just a store of value, but a tender. Chief in this series of developments is Ethereum 2.0.
Also called “Serenity” or Eth2, Ethereum 2.0 will be an upgrade to Ethereum 1.0’s functionality and performance. It will do this through two key features: Proof of Stake and Sharding.
Blockchain transactions are verified and confirmed through a consensus mechanism known as Proof of Work (PoW). With this mechanism, miners are required to solve complex, computational problems that add blocks to the chain. Miners who successfully solve these problems are rewarded with a native cryptocurrency.It is not a very efficient mechanism as it requires expensive and heavy hardware powered by large amounts of electricity.
Due to the high energy consumed by these machines, they are prone to overheat, and require additional cooling methods. The only advantage of this high energy consumption is that it confers security to the system because a miner would have to go through more onerous computational hurdles — which comes at an increased energy cost — to attack the network.
Another issue with Proof of Work is that it is difficult to scale up. Thenextweb.com stated that Chainstack analysts reported that there were 8,933 nodes on the Ethereum network as of September 2019. This means all the transactions in a specific block would have to pass through every 8,933 nodes before verification. Also, a mined block can carry only a particular number of transactions, and although a block is mined in 14 seconds on Ethereum, there are, sometimes, large transaction situations where users would have to wait hours before transactions are processed.
For this reason, Ethereum is introducing the Proof of Stake (PoS); a new consensus mechanism that selects Ether miners — or more aptly put, validators — based on the “stake” they have on the Ethereum network. Unlike the Proof of Work mechanism which requires physical miners to mine blocks, Proof of Stake virtually selects validators to forge blocks into existence — and confirm transactions. Validators are required to stake an amount of coins into the network. The higher the stake, the higher the chances of being selected. With PoS, validators are not rewarded with coins, but rather with transaction fees.
The Proof of Stake mechanism completely eliminates the computational processesand energy consumption peculiar to Proof of Work, thus saving time and improving the efficiency of transactions. The only hardware required is a computer, a tablet, or a phone alongside internet connection, and a certain amount of native cryptocurrency, in this case, Ether.
Furthermore, PoS also has its security measure: validators (in)directly control the security. A validator that attempts to attack the system would lose a huge chunk or all of their stake and be kicked out of the network. And there are two key reasons why a validator would not attempt an attack. First, it is not worth it because the stake is higher than the reward. Second, for the validator to successfully control the network and authenticate a fraudulent transaction, they would need to have 51 percent of the circulating supply of Ether. That’s impossible! Impractical!
On scalability, Proof of Stake alone does not entirely solve the pr0blem posed by PoW. This is why Ethereum 2.0 comes with an additi0nal feature called Sharding or Shard Chains. Sharding is a mechanism that groups nodes into different shard chains so that each chain processes a block of transactions at the same time. It is expected that Ethereum 2.0 would group all the nodes on its network into 64 shard chains — this means that transaction processing would be 64x the speed, 64x the efficiency.
Ethereum 2.0 will be released in three phases: 0, 1 and 2. Phase 0 will introduce the Proof of Stake through what is called the “Beacon Chain” which would store and manage the records of validators. It is important to note that PoW would not be phased out at once; it would run concurrently with PoS to ensure that there is a continuous flow in data. Phase 0 will launch this year.
Phases 1 which will be launched in 2021 will see the implementation of shard chains. The actual launch and improvements that will accompany the third phase have not been finalized yet. It is speculated that the launch will be in 2021 or 2022 and would include improvements like more ether accounts, transfer and withdrawals across wallets and exchanges, efficient execution platforms for more dApps on Ethereum 2.0, and hybridization of Ethereum 1.0 and Ethereum 2.0 so that Proof of Work can be finally phased out.
Users worried about the safety of their data, including transaction records and coin ownership on the Ethereum 1.0 chain, need not worry because Ethereum 2.0 will not eliminate such records. There will be a seamless transition from Ethereum 1.0 to Ethereum 2.0. Also, the Ethereum 1.0 chain will not be done away with as it will be the first shard chain on Ethereum 2.0.
With the launch of Ethereum 2.0, it is anticipated that there would be an upsurge in the value of Ether despite the global economic crisis. However, uncertainty still looms as Bitcoin is currently on a downward trend, dropping as low as $8,900 on May 21 from $9,800. Therefore, traders and investors holding Ether as an asset can only hope that Bitcoin does not break through any other support, and should bounce back to an upward trend. It is not out of place to say that with the excellent improvements inherent in Ethereum 2.0, only Bitcoin stands in the way of Ether to experience a good run this year and beyond.