The good news is Ethereum 2.0 is coming soon. The bad news? There’s an unfortunate side to this upgrade. This has led to a barrage of questions. What is Ethereum 2.0? What happens to my existing Ether? And how can I profit from this upgrade? To understand this, we need to know the fascinating way Ethereum works.
Ethereum is what’s called a general-purpose blockchain, a blockchain where other applications called dApps can be built on top. I like to think of Ethereum as the electric grid, all the wires, poles, and electrical substations. And Ether, the token, is like the electricity running through the power grid, powering the ecosystem. Transactions of ether are stored and validated on a ledger.
Now, you can think of the ledger as a huge spreadsheet containing every single transaction ever done in the history of Ethereum. And you can guess it takes a whole lot of work to keep up with that massive spreadsheet. The upkeep and validation process is called consensus. Currently, in Ethereum, the consensus is done by minors.
These high-powered computers race to solve tough math problems called hash problems. The first to solve the problem gets the right to fill out the next sheet on the spreadsheet. This is called minting a block of transactions. In exchange for minting a block, miners are then paid in Ether for their hard work. But this comes with an issue. It’s wasteful.
Imagine a Rubik’s Cube is one of those tough hash problems. You and 100 other miners are lined up, fighting to solve it as quickly as possible until one of you finally gets it. That winner gets the reward. They get to complete the block of transactions. But there’s a problem. It was expensive.
Everyone else’s hard work trying to solve this Rubik’s Cube is a complete waste of resources. This is where Ethereum 2.0 comes in. This upgrade to proof-of-stake takes out the need for strong computers and massive electricity requirements and exchanges it for locking up or staking your crypto in order to help with consensus.
At the end of the day, we have the same result. This nice, safe ledger of transactions. But the way we get there is much better. However, this isn’t the only problem with Ethereum, and it, unfortunately, won’t solve one of the biggest problems of them all, which we’ll discuss in a minute.
Due to the complexity of upgrading Ethereum, which is a whole lot like trying to swap out a jet engine mid-flight. The upgrade will happen in a few phases. Phase zero is also known as The Beacon chain. This is an entirely new proof-of-stake blockchain. You can think of it like a new brain overseeing the entire network. This has already happened.
Phase one is known as The Merge. This is next and will be massive. The shift to proof-of-stake, and merging of transactions.
Phase two is Sharding. In this phase, the database will split into 64 different channels in order to process more transactions. To make things easier, let’s say you take the same single-lane road every single day to work. Sometimes it flows just fine. Other times there are massive traffic jams and you’re sitting there frustrated because you can’t get through.
This is how Ethereum currently works, a single lane on its way to do the work. Now, imagine if your single-lane route to work could expand to 64 different lanes, allowing way more traffic to flow through. This is essentially Sharding.
Now, the question is, when in the world will this happen?
It feels like we’ve been about to upgrade for years now. Can we really trust it soon? Well, we know phase zero, the Beacon chain is already live and running. The Merge is then expected sometime in the second or third quarter of 2022, according to Ethereum co-founder Joseph Lubin. Then, Sharding, that’s going to be a while. Potentially sometime in 2023. I wouldn’t hold your breath on that one.
Now we’re going to talk about how you can profit from the upgrade. But first, what this upgrade won’t do. This is extremely important. It won’t create an entirely new coin at the merge. Ether will remain the one and only coin. However, it might see a nice little boost in price. Your existing tokens will not be invalidated. Don’t send your tokens anywhere to someone promising that they’ll send you ETH 2.0 tokens back. There’s no such thing.
Second, and this one is unfortunate. The upgrade will not reduce gas fees. But how is this possible? We’re getting rid of expensive mining fees that have to go down, right? Unfortunately, no. The upgrade will have an impact on the consensus layer. And unfortunately, gas fees are paid on the execution layer of Ethereum. Those fees that you’re paying right now will simply go to people staking Ether instead of miners as it does currently.
Now, this isn’t exactly the end of the world because layer-2 technology is getting better and better, and these services offer access to Ethereum with far lower fees already. But it does beg the question if this upgrade doesn’t fix gas fees, what’s the point? Is it even worth caring about the upgrade? Well, there are a few essential reasons.
So if the Ethereum upgrade doesn’t help with its gas, what does it do? First, it makes Ethereum eco-friendly. The transition to proof-of-stake makes the network 2000 times more energy-efficient, requiring 99.9% less energy to process transactions. That’s amazing. That also means more institutional investors will likely buy Ether as they’ll get less backlash by investing in something that isn’t bad for the environment.
The second is scalability. Remember that 64-lane highway? The upgrade will help network congestion and settlement times. Theoretically, this will allow for up to 100,000 transactions per second. Where it currently can support around 30.
The third is higher security. Now this one has a bit of debate, but it seems to mostly come down to a few misconceptions. Ethereum currently is extremely secure, but so is proof-of-stake. An argument can be made that proof-of-stake is actually more secure because if an attack happens, proof-of-stake Ethereum can simply upgrade and remove the attacker’s coin. So we understand what the upgrade is, isn’t and how it works.
But how can we actually profit from the upgrade?
The easiest method is simply holding. Let me explain. Currently, only 8.3% of Ethereum is being staked. That’s considered off the market. The higher the percentage stakes generally the better. Because there’s less ether floating around ready to be traded. Staking lowers the available supply. 8.3% is a low amount, which means there’s room to grow.
Many of the largest cryptos have 70% plus of their supply staked Ether’s price will go up if it hits those levels. Second, in the transition of proof-of-stake, fewer Ether tokens will be minted, lowering inflation. Combine this with the token burn mechanism that Ethereum enacted and we have a fair bit of upward pressure on the Ether token.
Then, of course, you can stake Ethereum yourself, which you absolutely should do if you plan to hold long term anyways, staking rates will be between 7% and 12% APY, depending on how many people stake, network fees, percentage of ETH burnt, and whether you’re a validator or not. In order to get the highest rates possible, you’ll want to be your own validator. But this is more work and you need a fair bit of Ethereum to make it happen.
In order to be a validator, you’ll have to actually run software on your computer or purchase server space, and you’ll personally validate transactions on the ledger. You will be updating that spreadsheet. The reason you make more money doing this is you’re getting paid directly from the Ethereum protocol and doing the work yourself. The downside is you need 32 ETH to make it work.
If you are interested, there are tutorials all over online on how exactly to get started. Now, most people don’t take this approach, so instead, you can stake a theme in a variety of DeFi services for a solid yield and essentially no work. Or if you’re looking for the easiest way possible, you can stick to a centralized exchange, but they tend to take much higher fees than anyone else.
Overall, Ethereum 2.0 is a massive upgrade, a shift to proof-of-stake, the eventual introduction of shards, and more accessible staking will help unlock the true potential of Ethereum. But this doesn’t solve everything. Gas fees, which we’ll have to look to layer-2 providers to solve but nevertheless there’s a ton of upwards pressure on the coin from lower network inflation to more token burning and increased popularity in NFTs like Meta’s new launch on Instagram. It really is an exciting time in crypto.