In the last few articles, we have seen that the second largest cryptography in the world will undergo an important transformation in the way its network works. The change in the consensus algorithm for the Proof-of-Stake (PoS) aims to make the network capable of processing more transactions and more efficient in terms of energy consumption. However, all aspects of the network will be affected from the way the blocks are created to add to the chain or the way the validation rewards are attributed. But how will ether (ETH), the network's native cryptograph, be affected?
This new algorithm for the Ethereum chain revolves around a concept known as Staking (Participation). This staking is the participation that each validator delivers to the network and for which it is rewarded. That is, stakeholders who want to make the network more secure deliver a predefined amount of their assets to the network and receive rewards in the form of a percentage of that asset. In the case of Ethereum 2.0, the asset will be ETH. The launch of this new chain is the culmination of 6 years of work and the achievement of the initial vision of the project's founders.
We saw in the previous article which phases for the launch of this new way of operating Ethereum. In phase 0, a new chain called “Beacon Chain” will be launched that acts as the backbone of the new system. Phase 1 starts a process known as sharding (fragmentation), which consists of creating 64 chains of blocks that will form the system and “report” to the beacon chain the state of each address in itself. Phase 2 represents the implementation of DApps and the beginning of the use of smart contracts. In the last phase, the 3, is destined to the finishing touches and improvements.
In order to start the first phase, it is necessary to add a sufficiently large amount of Ethereum, above which it is believed to become unprofitable for possible attackers to try to take over the network. This is a security measure defined by the development team to protect the network, as well as assets, applications and users who depend on it. A user has to put 32 ETH into play to become a validating node. And 16 384 nodes are needed to launch the new network. Thus, the limit is defined at 524 288 ETH. At the time of writing this article the value of ETH is 350 dollars, which means that more than 180 million dollars have to be delivered to the network. And each validator will have delivered over $ 11,000 to keep the network more secure. Getting this amount will be a first sign that the community believes in this change. There are some networks used (beaconscan.com) to test the code that have already managed to gather more than 43,000 validators, however the ETH used is not real ETH. Therefore, the expectation for the real moment continues to grow.
The network is being built with incentives to attract the necessary validators for its start-up. It is estimated that the initial validators can receive about 20% per year on the ETH they deliver to the network. This value is adjustable according to the total amount present in the network to keep it safe. As there are more ETHs working for the network, the rewards decrease. If the number of validators decreases, the rewards increase, thus attracting more users to work for the network. When the amount of ETH in the network is around 10 million, it is expected that the validators will receive about 5% of their participation in the network.
Until phase 2, in which the two systems are integrated and become one, there will be an increase in the creation of ETH. This is because the two systems will be creating their tokens independently. The proof-of-work ethereum continues to reward its miners for the work done and the participation proof system attributes the rewards to the validators selected to create the blocks. This increase in the supply of ETH may cause a drop in the value of the asset. On the other hand, being a sign that the change to the new system is going well, it can be understood as a strengthening of the fundamental ETH indicators and causing the price to rise. The crypto market is extremely recent and still highly speculative - even when we talk about the biggest assets in the segment. So we can and must try to understand what can happen, but this is an unprecedented event with cutting edge technology. Making predictions for this period is a very risky game.
What we can see is that after this phase in which the two systems came together, the supply will be reduced sharply. The calculations we have point to an inflation rate that varies between 0.10% and 0.45%, depending on the number of validators. Currently, with the proof-of-work system, Ethereum has an inflation rate of 4.5%. In other words, the inflation rate will be reduced by 10 times! Therefore, although there is a temporary increase in the creation of new tokens, the emission will be drastically reduced with the activation of the new system.
As mentioned, the objective of this important change is to make the network capable of supporting a much larger number of transactions. Now, if the network is really capable of doing so, it will become more appealing for programmers and applications to use, starting what the community expects to be the new phase of the decentralized Internet. If all of this is confirmed, we will see the emergence of new online solutions that will use this platform as a base. Therefore, the demand for the base asset is expected to increase considerably. If we add this to the decrease in supply mentioned above, we can expect that the value of ETH is destined to rise considerably.
However, I emphasize that all that is written here is my personal opinion and not an investment recommendation. Criticize everything you read or hear about investments and understand how this recommendation applies to your investments.
