The three-fold increase in the number of long positions on the cryptocurrency indicates that the crypto community expects it to switch to the second version of the network. How will the update affect the price of altcoin, how much will you earn on its staking and what are the risks of this
The crypto community is waiting for the Ethereum network to be updated to the second version. This is evidenced by several factors. For example, on the Bitfinex exchange, according to the Tradingview service, the number of long positions on altcoin has increased by 215% since the beginning of the year, to the current value of 1.63 million ETH, and reached a historical high.
The chart of long positions on Ethereum on the Bitfinex exchange Also became more interested in the transition of Ethereum to the new version on the Internet. According to Google Trends, the number of requests for "Ethereum 2.0" is now at an absolute maximum. Since March, this figure has increased by more than six times.
Graph of requests for "Ethereum 2.0" in Google, the Importance of updating Ethereum was emphasized by the researcher of the analytical company Messari, Ryan Watkins. He is sure that the transition to version 2.0. will have a greater impact on the cryptocurrency market than halving bitcoin. Updating the coin network has a fundamental character and at the same time carries some uncertainty.
"Ethereum 2.0 is a much stronger catalyst than halving bitcoin because it is an uncertain and fundamental change," Watkins wrote on his Twitter account.
How exactly the transition of Ethereum to the new version will affect the cryptocurrency market and the price of altcoin in particular, Watkins did not specify. Therefore, answer the most important questions: why the update is needed, how it will help the coin and whether it is worth investing in it.
Why update Ethereum
One of the problems of the Ethereum network that the update should solve is scalability. At the moment, the altcoin blockchain is able to conduct up to 15 transactions per second. This indicator is more than two times higher than that of bitcoin. However, this speed is not enough for a large number of users. For example, the Visa payment system can perform up to 24 thousand transactions per second.
The development of Optimistic Rollup will help you solve the scalability problem. According to Vitalik Buterin, the Creator of Ethereum, its implementation will occur after the altcoin network is updated. This will increase its throughput to 1000 transactions per second.
Another solution to the same problem is to change the algorithm. Currently, Ethereum runs on the same Protocol as Bitcoin-Proof-of-Work. This mechanism implies that the confirmation of transactions in the cryptocurrency network occurs using the computing power of computers, that is, with the help of miners.
Using the Proof-of-Work algorithm prevents the growth of the Ethereum network bandwidth. In order for it to withstand a large load, more miners are needed. And the growth of their number slows down, since it becomes more difficult to mine cryptocurrency and, consequently, more expensive.
For this reason, the Ethereum development team is planning to switch to the Proof-of-Stake algorithm. Unlike the first, it does not require the use of computing power of computers to confirm blocks. In other words, there is no need for miners. Instead, transactions will be confirmed by validators. These are users who will keep a certain number of coins on their wallet, at least 32 ETH. This way the system will no longer need expensive hardware.
The main solution to the scalability problem will be to implement sharding. Now the Ethereum network is a shared database. After the update, the blockchain will be divided into Autonomous, interacting blocks — shards, each of which will process its own transactions and smart contracts. In December 2018, Buterin stated that this method will make the altcoin network work more efficiently by "a thousand times".
Updating against centralization
Another problem with the old algorithm is the risk of centralization. In the first few years of bitcoin's existence, a desktop computer was sufficient for mining it. Over time, the complexity of mining has increased, and now this process requires the purchase of expensive equipment and access to cheap electricity. Moreover, the difficulty of mining BTC is likely to continue to grow. In this regard, miners in the future will have to constantly update devices to maintain their profitability.
These conditions have eliminated small participants from the infrastructure. Now bitcoin mining is mainly engaged in on an industrial scale. This leads to the centralization of the industry. For example, according to the Coinshares service, in December, 54% of the hashrate of the first cryptocurrency network was in the Chinese province of Sichuan.
Due to the fact that Ethereum, like bitcoin, runs on a Proof-of-Work algorithm, altcoin also has a risk of centralization. For example, in April, more than 50% of the computing power of the coin network was provided by two mining pools.
The solution to the problem with centralization is to replace miners with validators. To become them, it will be enough to hold 32 ETH and install a special client. From a technical point of view, this is easier than buying mining devices and maintaining their functionality, as well as looking for access to cheap electricity. According to the developers, this will give Ethereum mining a "mass character"
What the validators will get
Validators will confirm transactions in the new Ethereum network. For their work, they will be rewarded in the form of passive income, this function is called stacking. At the moment, the annual return from stacking is unknown. According to the project roadmap, this amount will vary from 1.81% to 18.1%.
The profitability of the stack will depend on the number of validators. The more of them, the smaller the amount is supposed to be as a reward. In this regard, it can be suggested that users who become validators at an early stage will be able to get the most profit. However, there will be costs. The roadmap notes that the cost of validating transactions based on" rough calculations " will be about $180 per year.
One of the developers of the project, Justin Drake, predicted that on average, the validator will receive an income of 5% per year. At the current altcoin rate of $200, the user will need to invest $6,400 to become a validator in the new project network. In this case, taking into account Drake's calculations and estimated expenses, the annual profit from stacking 32 ETH at a constant price of the coin will be $140 ($6400*5% — $180).
Project prospects
The Ethereum 2.0 update will lead to technical improvement and development of its network, according to Viktor Pershikov, a leading analyst at 8848 Invest. Switching to a new algorithm and implementing sharding will significantly scale the product. Thanks to this, ETH will be able to hold the first place in the altcoin rating, since there are currently blockchain platforms that compete with Ethereum in terms of bandwidth, network efficiency and the number of dApps applications.
Pershikov clarified that thanks to the update, Ethereum will be able to compete not only with other cryptocurrencies, but also with DeFi projects. They are currently firmly occupied a niche in which the main profit is generated by stacking.
Yuri Mazur, head of data analysis Department CEX.IO Broker, added that the launch of the updated platform will give more advantages for developing projects and speeding up transactions. For this reason, it is likely that the platform will secure the status of the most popular platform for deploying new projects. In addition, Ethereum will penetrate deeper into the market of decentralized Finance. The amount of commissions for transfers will also be reduced. All this in the future will allow Ethereum to compete, perhaps even with Bitcoin.
"Updating the network is primarily about expanding the number of users. Today, most blockchain projects are created on the Ethereum platform. Here is a simple example: 213 projects working in the field of decentralized Finance are now officially registered. Of these, 199 are developed on the Ethereum platform. The transition to the updated platform 2.0 will attract even more partners who will use the blockchain for their projects, speed up transactions and make them almost free. Therefore, Ethereum 2.0 can potentially become a real competitor to Bitcoin, " Mazur suggested.
Mazur added that the Ethereum update will allow It to gain certain advantages over its main competitors EOS and TRON. Today, these tokens are actively used by exchanges for stacking. The annual return on them is 1-3% and 7-9%, respectively.
Anatoly Radchenko, managing partner of United Traders, noted that at the moment it is difficult to talk about the success of Ethereum 2.0, since the idea, although good, is still at an early stage of implementation. However, the transition to the second version, which will consist of three phases, may not happen this year or next.
However, there are prospects. Radchenko stressed that the Ethereum blockchain has already become the basis for the infrastructure of decentralized Finance, decentralized exchanges, landing, stacking and other products. In addition, most stablecoins, including Tether (USDT), which recently entered the top 3 cryptocurrencies by capitalization, also work on the basis of ETH. Thus, Buterin's platform can become the main one for the "financial system 2.0", the expert admitted.
Negative side
Despite a number of advantages, updating Ethereum carries the risk of significant negative consequences, Mazur warned. Earlier, it was reported that the US securities Commission (SEC) recognizes ETN as a security if the coin switches to the Proof-of-Stake algorithm. In addition, this will change the approach to mining, which is why most retail miners will simply leave the market. Today, ETN is the most popular coin for mining at home.
Mazur noted that competition from EOS and Tron cannot be written off. First, the majority of gambling — related projects are deployed on these platforms-80%. The Ethereum ecosystem accounts for only 20%. Secondly, there are many tokens created on the Ethereum platform that are completely useless or dead. But the very fact of their presence overloads the system, which causes failures. If this problem is not resolved in the near future, then Ethereum may lose its position in the market, the expert admitted.
You also need to consider the risk that the price of Ethereum may fall. To receive passive income for storing ETH, you will not only need to have 32 coins, but also block them through a special transaction. You will not be able to withdraw your blocked funds immediately. The cryptocurrency withdrawal process will take at least 18 hours. This period may be extended if multiple users request the return of tokens at the same time, as stated in the project roadmap. Accordingly, if ETH starts to fall in price, it will be impossible to sell it immediately. Thus, there is a risk of losing some of the capital and all the income received from stacking.
Ethereum update-growth driver?
Pershikov continued that updating Ethereum will lead to an increase in its investment attractiveness and, as a result, the price. It may go up to $500. Over the past year, there has been a gradual increase in the number of wallets with a balance of 32 ETH, and the volume of coin trading is also growing. In addition, if we compare ETH with the main competitors of the project, such as EOS, in terms of cost since the beginning of January, it is clear that investors in the crypto market have a more popular cryptocurrency Buterin. This suggests that the technological development of the project is the fundamental reason for the current and future growth of the exchange rate, the analyst believes.
"In the coming year, I expect the price of ETH to rise to the levels of $400 and $500, with prospects for continued growth until the end of 2021. In this case, the profit will bring not only the more expensive token, but also its stacking. This will open up broad investment prospects for those who prefer a buy and hold strategy instead of actively trading futures on ETH, primarily I am talking about institutional market participants. The combination of these parameters makes buying ETH an excellent investment opportunity right now, " Pershikov shared.
Another opinion was voiced by Mazur. According to his estimates, the Ethereum exchange Rate will balance around $190-210, but it is unlikely to rise above this mark. The expert also noted that the price of altcoin is unlikely to reach its historical maximum of $1432, at least not in the next 1-2 years.
Radchenko believes that the price of Ethereum can rise after the blockchain is updated and the stacking function is added. Users will start transferring coins from the first version of the network to the second in order to block them for passive income. In this regard, the supply of cryptocurrency will decrease and, as a result, the demand will increase.
Useful, promising, growth-oriented
Updating the Ethereum network will increase its technical characteristics, namely, speed up and reduce the cost of transactions, as well as make it more secure from centralization. In addition to this, it will be possible to receive passive income for storing cryptocurrency. This will help it take a leading position in the crypto market and compete with other tokens that have already implemented the staking function, and perhaps with bitcoin.
Most experts agreed that the price of Ethereum will grow due to the update. On the one hand, altcoin will become more expensive, as it will become a more attractive investment. On the other hand, the offer will decrease, since some of the coins will be blocked for stacking.
However, there are also negative aspects. First, there is a risk that the SEC will recognize Ethereum as a security. This may negatively affect the future of the project, which has already been confirmed by the example of Pavel Durov's TON blockchain platform. Secondly, if there is a risk that the validators will be trapped: if the price of an altcoin starts to decline sharply, they will not be able to sell the cryptocurrency in a timely manner, since it will be blocked.
Third, the digital asset market is unpredictable, highly volatile, and not devoid of fraudsters. In this regard, any investment in cryptocurrency can result in a complete loss of invested funds.
