If you are looking for a major catalyst that may drive the price of Ether (ETH -1.74%), the native cryptocurrency on the Ethereum network, then look no further than Ethereum 2.0. Ethereum 2.0 is a set of upgrades currently in progress on the Ethereum blockchain that would make the network more scalable, secure, and sustainable. These upgrades have actually been in development since 2014 and represent a major transition for the world's second-most popular cryptocurrency. Let's take a look at what Ethereum 2.0 is and when the updates may go live.
The problem with the current network
For those completely new to the world of cryptocurrencies and blockchain, Ethereum is a decentralized network powered by the digital ledger blockchain technology that can be used to conduct digital payments. It differs from Bitcoin (BTC -0.65%) in that code can be built and programmed onto Ethereum's blockchain network to create smart contracts and decentralized apps that run constantly, and that can't be manipulated or controlled by a third party.
Ethereum 2.0 upgrades will attempt to greatly improve this network. As Ether and Ethereum have grown in popularity, the network has gotten more clogged by transactions. Currently, it can handle 15 to 45 transactions per second, which sounds impressive, but is proving not nearly enough to handle all of Ethereum's users from across the globe. The high demand is also driving up transaction fees.
A big initiative of Ethereum 2.0 is to make the network more scalable so it can handle all of the activity on the network. Currently, Ethereum, like many other blockchain networks, is powered by nodes, which are any device connected to the blockchain -- including servers, computers, and cellphones. Nodes are interconnected and are constantly exchanging data so the network stays up to date. But the nodes on the Ethereum network are currently experiencing too much volume and the programmers working on the upgrade have determined that making the nodes bigger wouldn't be practical.
Introducing Ethereum 2.0
To ease some of the pressure, developers are turning to a concept called sharding that will create 64 new chains on the Ethereum network to further spread the volume. This will essentially take the massive amount of data currently being stored on Ethereum nodes and break it into smaller groups that will be stored on more databases, which will ease pressure on the current system and allow for more transactions per second. The sharding part of the process is very important and will also make the network more secure and sustainable. Sharding will eventually enable ordinary users to operate Ethereum on a personal device, increasing network participants and making the Ethereum blockchain more decentralized because there will be more users. The more users and the more nodes, the more complex it will become for hackers to take hold of a large part of the network.
With more network participants, Ethereum 2.0 is also planning to move away from the energy-intensive mining of tokens to a process called staking. A big part of cryptocurrencies has always been a concept called mining, in which people trying to obtain new tokens use high-powered computers to solve complex math equations very quickly. As the demand for crypto has increased, miners have had to use an incredible amount of computing power and therefore energy to mint new tokens. Sharding will help do away with mining. Instead, Ethereum will turn to staking, a process in which Ether owners store a certain number of tokens away in a crypto wallet on their own personal device, and then use those tokens to validate and forge new Ether tokens. The transition to Ethereum 2.0 could make the network nearly 100% more energy efficient.
Lastly, once all of these upgrades are in place, Ethereum will be able to do a wide rollout of smart contract execution. Smart contracts are programmed and automated contracts that can't be retroactively changed and that run without needing to be carried out by some sort of third party. For instance, a smart contract could be set up to execute a lease between a landlord and a tenant, where a contract is signed and then money from the tenant is automatically released to the landlord every month, without the usual friction in these relationships.
Where is the process at?
While it has been in research and development since 2014, Ethereum 2.0 has actually been making some headway. In December of 2020, the Beacon Chain went live, which introduced the staking concept. However, the Beacon Chain can't really be used until the other parts of the transition go live -- hence it is called "phase 0" of the plan.
The next phase will be merging the Beacon Chain into the current Ethereum blockchain network, known as the mainnet. When this happens, mining Ethereum tokens will officially end and staking will become the primary way to create new tokens. This is supposed to happen in 2021, but may not happen until 2022. When it does happen, the Beacon Chain will have full functionality.
The last part of the transition, which is expected to be rolled out in multiple phases, is the adding of the shard chains to give the Ethereum network more capacity to handle all of the demand and increase transactions per second. That is expected to happen sometime in 2022, although it is not currently known when. The launch of the Beacon Chain did represent a major milestone and the Ethereum developers do seem to be motivated and on their way to completing the full transition, but it has been a long road and there is still a good deal of uncertainty around the timing.
Will it be worth the wait?
If executed properly, Ethereum 2.0 could be a total game changer. It will create a network that could potentially process 100,000 transactions per second. It will also create a much more sustainable network without the energy-intensive mining and introduce smart contracts to the broader world, increasing Ethereum's real-world utility. Furthermore, Ethereum co-founder Vitalik Buterin has said that new-token issuance should be greatly reduced under Ethereum 2.0, which could increase demand. Given all these factors, Ethereum 2.0 should be well worth the wait.