After many months of troubles and delays, Ethereum’s 2.0 upgrade may finally be ready for launch in the coming months. The upgrade will change the Ethereum blockchain to a proof-of-stake (PoS) consensus model, a considerable change that will affect all aspects of the network. The upgrade is planned in stages, with the ‘Phase 0’ stage launching the Beacon Chain – the blockchain on which the initial proof-of-stake model will begin running. Following this will be the launch of Phase 1, which involves ‘sharding’, or using compatible chains simultaneously to facilitate increased volume.
So what should Ethereum holders expect in the coming months?
One of the main benefits is the much-hyped introduction of staking on the new Ethereum network, which provides a method of passive income for anyone holding at least 32 ETH tokens. In order to join staking, users need to install and run a validator node and deposit at least 32 ETH, although you could also join a staking pool with other stakers if you don’t have the 32 ETH. Once you’ve installed a validator node or joined a staking pool, you can just sit back and earn interest on your ETH.
Another much-needed advantage will be solving the problems of scalability and congestion that have mired the network since its launch. Proof-of-work (PoW) networks like Bitcoin and Ethereum have faced criticism due to their inability to provide sufficient transaction speed and volumes, a huge hurdle for mainstream adoption. Ethereum 2.0 hopes to address this issue by ‘sharding’ the network – splitting the processing power across many nodes running in parallel, thereby greatly increasing the speed.
So what’s the catch?
Any kind of change comes with risks and an upgrade of this nature is particularly risky. There has already been mention of potential problems, with Skale CTO Konstantin Kladko posting a tweet early this month calling out ‘fatal flaws’ in the way ETH2 has been implemented. Details suggest that these flaws may result in early stakers losing up to 50% of their investment but Ethereum founder Vitalik Buterin dismissed the claims, ensuring that the high returns would be worth the risk.
Security is another risk, with a high potential for hackers to try to take advantage of any vulnerabilities during the upgrade. Even if the network remains entirely secure, scammers could try to take advantage of investors looking to convert their ETH tokens to ETH 2.0.
Interest around DeFi, or decentralized finance, has exploded recently, giving an extra boost to Ethereum. DeFi is basically a blockchain-based system of providing financial services, like loans, without the need for third-party intermediaries. The majority of DeFi tokens currently run on the Ethereum blockchain, meaning a rise in their value should push up the value of Ethereum too.
The most popular of these DeFi lenders, Compound, only launched a few days ago but the price of its COMP token has skyrocketed by 125%. Now, popular crypto exchange Coinbase has announced it will host the token, and several other exchanges, including, FTX will start listing it. Other DeFi projects like MakerDAO, 0x, and Kyber Network have also exploded in popularity.