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Effect of ETH 2.0 Update on Price – Will it be a Surge or Collapse?

By Edward Moon | Analysis From Moon | 12 May 2020

Ethereum development team has been working day and night on Ethereum 2.0, which promises a seamless transition of the platform from the Proof of Work to Proof of Stake consensus protocol. Last month, Ethereum developers were successful in launching and testing Ethereum 2.0 Topaz testnet, which attracted 20,000 validators after the genesis block was mined.

Discussing the launch of this major update, Ethereum cofounder Vitalik Buterin recently said that the annual issuance of ETH 2.0 would be reduced to less than half of its current 4.7 million a year. He also shed light on why it was necessary to make a move towards the Proof of Stake model. He said:

“One of the reasons why we’re doing Proof of Stake is because we want to greatly reduce the issuance. So in the specs for ETH 2.0, I think we have put out a calculation that the theoretical maximum issuance would be something like 2 million a year if literally, everyone participates.”

This is the second major Ethereum 2.0 blockchain upgrade, which will aim to adjust the block size to mitigate the volatility in the transaction fees. This will enable Ethereum to cut down the processing time as well as predict transaction fees with far greater precision. But what effect will it have on the price of the second largest cryptocurrency? Well, investors, enthusiasts, and gurus are torn on this subject.

Predicting the Price Swing

Many investors and industry experts believe that locking up almost half of the annual ETH 2.0 supply will naturally result in an increase in demand, which will drive the price up. According to Adam Cochran, new and existing investors and crypto traders will flock to capitalize on the opportunity of earning handsome steady returns leading to a shortage of supply of ETH in the market. Omni Ross, who works as a chief blockchain scientist at eToro, more or less echoed Cochran's sentiment, albeit with a few reservations of his own. He said:

“Compared to commodities that have real-world demand, the changing demand-profile for the asset class, driven by new investors getting into crypto, may drive new demand.”

The price factor is also crucial for people betting on crypto prices. For instance, AlphaPlay is a blockchain platform that facilitates betting between players on real-word cryptocurrency rates. AlphaPlay is selling ERC20 tokens for its Alpha Gambling Loyalty Program that runs from April 26 to August 8, 2020. The service is giving for token owners 6% of all platform revenues in lieu of bonuses, and 90% of the turnover can be won by anyone as jackpot prizes. Remaining 4% is going to the active users who will remain engaged and continue to play with their friends.

Being a fair betting website that sources its data from one of the most trustworthy crypto exchanges, i.e., Binance, AlphaPlay is bound to witness the impact of price in terms of how its players choose to bet. 

What’s the Other Possibility?

Although not many agree with the perspective, but it is a fact that major update always brings uncertainty, which can keep investors and crypto traders at bay for quite a while. In a pandemic-hit financial environment, the general attitude of all investors has leaned on being particularly cautious and for a good reason. This could be a factor in drying up the demand, at least in the early go, which can have a negative impact on the price.

And given the unpredictable and time-consuming rollout plan of ETH 2.0 combined with an irreversible path towards the big update could drive investors and traders towards a more cautious and circumspect approach. This early caution could provide to be detrimental to the demand, and in turn, the price of the token. 

There is also a concern among some Ethereum loyalists that moving from Proof of Work to Proof of Stake consensus model can lead to centralization driven by the wealthiest validators, who will then get to define the path forward of the blockchain and its token. According to Pedro Febrero:

“There is no way to recoup Eth from stakers. The more Eth you own and stake, the more influence one has, and the more network power is associated with your stake. The issue here is that after a few stakers own over 33% of the entire stake, it's hard — or near impossible — to take that power away from them.”

Final Word

It is clear that the ETH 2.0 update is a major shift with numerous advantages as well as drawbacks. On the one hand, ETH will become more consumer-friendly by cutting down the processing time and stabilizing transaction fee, which will help the platform acquire sustainability and security it needs to take off. While on the other, there are uncertainties within the rollout plan and concerns that ETH 2.0 will turn into a centralized platform that defeats the purpose of a blockchain.

This will be a battle of what comes out on top - fears or hopes. And that will be the true deciding factor of whether the price of the token witnesses a surge or a major collapse.

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Edward Moon
Edward Moon

Crypto trader and analyst.

Analysis From Moon
Analysis From Moon

Analysis From Moon

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