Ethereum 2.0: The transformation that could overtake Bitcoin

Ethereum 2.0: The transformation that could overtake Bitcoin

Ethereum 2.0

The second most valuable cryptocurrency in the world, Ether, has reached historical price highs ahead of a major upgrade to its underlying platform, Ethereum. Ether currently has value added of just $ 500 billion (£ 363 billion). This is still just under half of the largest cryptocurrency, bitcoin.

But could this update, a critical step towards a much greener and faster version of the current system, put ethereum on the path to becoming the dominant platform on the internet and making ether number one?

First of all it is important to understand the difference between bitcoin and ethereum. Bitcoin is a system that allows people to exchange value without the need for banks. It is based on a technology known as blockchains, which are online ledgers whose transactions are verified and recorded by a decentralized network of computers known as validators.

These validators are incentivized for their work by receiving freshly minted bitcoins as a reward, in what is known as "mining". To make it more attractive, bitcoin is relatively scarce - there are only around 18 million coins and the protocol is such that there can never be more than 21 million.

Ether vs bitcoin by total value (market cap)

ETHVSBTCbymarketcap © Provided by Firstpost Key: bitcoin = orange, ether = blue. via Trading View

Ether works in a similar way to bitcoin, but ethereum is different. It is a global hostless software platform, upon which developers are building thousands of blockchain-based applications.

This means that all of these applications can be run without being controlled by a company. Examples include cryptocurrency exchanges, insurance systems, and new types of games. At the heart of the platform is the idea of ​​smart contracts, which are automated agreements that ensure that money and assets change hands when certain conditions are met. All transactions on the platform ultimately use ether, and the success of the platform is the reason why ether has been the second largest cryptocurrency after bitcoin in recent years. The fact that the ether powers the platform, also referred to as gas fees, gives it a utility and intrinsic value that Bitcoin does not have.

Why ethereum 2.0?

However, Ethereum has several major problems. The first is that gas tariffs have become very expensive in recent years because the network has become very popular and therefore very congested. Validators prioritize users who are willing to pay the highest fees for their transactions. For example, the average transaction at the time of writing on the cryptocurrency exchange Uniswap costs around $ 44 in gas tax.

Bitcoin has comparable problems with congestion, which its developers are trying to solve by building apps like Lightning on top, which boast faster transaction speeds.

The second problem with ethereum is that, as it has become more popular, the amount of computing power used by validators has skyrocketed. It is the same problem that has brought a lot of negative publicity to Bitcoin, because it consumes a lot of electricity. Bitcoin currently uses as much energy as the entire Philippines, although its supporters argue that much of this is energy that would otherwise be wasted, such as oil rigs burning natural gas because it is unprofitable to sell. Advocates also note that the grid is shifting towards using much more renewable energy over time.

In any case, the eventual implementation of an ethereum 2.0 will solve these problems by moving the validation system of the platform from "proof of work" to "proof of mail". Without going into too much detail, proof of work is a protocol in which all validators attempt to solve complex equations to prove that each proposed transaction is valid. With proof-of-stake, not all validators need to do this energy-consuming job, because the system randomly chooses one to confirm each transaction. Many in the bitcoin community are against mail proof because it gives the largest validators the most power, potentially allowing them to corrupt the validation system if they can gain control of more than half of the network. Ethereum proponents argue that proof-of-stake has built-in checks and balances that would prevent this from happening.

Either way, ethereum 2.0 promises to reduce the energy consumption of platforms by 99.9%, making it much more sustainable. It should also solve the gas tariff problem by increasing the platforms' processing capacity from 30 transactions per second to potentially 100,000, as well as enabling more sophisticated smart contracts than before.

How it's going?

The transition to Ethereum 2.0 has been slow, full of problems that have dragged on for more than two years. In recent months, the new proof-of-stake blockchain has been running in a proof format in parallel with the existing system, allowing developers to prepare it for a merger in 2022. The next update is essentially a warm-up for this merger. Known as Altair, it introduces numerous technical changes designed to keep validators honest and make the system more decentralized. Assuming everything goes according to plan, all eyes will be on merging and then on another change known as "chunking" which will greatly increase the processing power of the system.

Certainly the ether price was high before the Altair update. The recent wave of bitcoin to all-time highs has helped lead the entire cryptocurrency market. But some of the price movement in the ether likely reflects people betting the upgrade will be successful, while the rest is due to speculators trading bitcoins and new money moving into space.

Ether vs the ‘eth killers’ by total value

ETHVSETHKillerbytotalvalue © Provided by Firstpost SOL = solana (green), DOT = polkadot (yellow), ADA = cardano (orange). via Trading View

In view of the merger of the two ethereum blockchains, it will be interesting to see how this affects the price of ether in relation to the so-called "ethereum killers". These are rival platforms like cardano and solana that have been very popular in the past few months in part due to ethereum issues with fees. But ultimately, the question is what will it mean for bitcoin. Bitcoiners will continue to argue that their protocol is more decentralized than proof of stake, and they have the advantage of being the cryptocurrency brands investors are most comfortable risking their money with.

The question is whether these benefits are outweighed by ethereum 2.0's greener credentials and the fact that it can handle multiple transactions. Currently, Bitcoin is worth roughly double the ether, but the conversation goes back and forth on a "flip" where the ether overtakes it. Could it happen in 2022? With bitcoin's hegemony at stake, it will be fascinating to find out.

Reference - Daniel Broby, Director of the Center for Financial Regulation and Innovation at the University of Strathclyde.

This article was republished by The Conversation under a Creative Commons license.