Ethereum 2.0: Making Sense of Lego Money, Sharding, PoS, and TPS

Ethereum (ETH) which was launched in 2015, and is the second most valuable cryptocurrency in terms of market capitalization, is known for its high developer activity, alongside certain other cryptos like Cardano (ADA) and Kusamo (KSM).

Until recently, some crypto analysts considered Ethereum to be outdated, but the fact that the Ethereum network has a high developer activity means that the Ethereum network will keep progressing, and currently, it is preparing for some major changes.

These changes will make Ethereum easier to use for transactions, and it will probably give Ethereum (currently trading at $ 385) a boost if the new developments are successful - and in my opinion, they will be.

The increased use of DeFi (decentralized finance) is pushing Ethereum towards the next stage, or the Ethereum 2.0 or ETH 2.0 phase, as it is called. This will start a new era for Ethereum, so fundamentals point to further gains, according to the Ethereum price prediction.

Ethereum has been bullish since April, partly due to these developments, and the long-term technical analysis of ETH also points higher for Ethereum. So let’s have a look at what ETH 2.0 means in detail.

Soaring DeFi Transactions

Decentralized finance DeFi is basically the opposite of centralized finance, which is subject to central banks and intermediary institutions. DeFi refers to automated enforceable contracts or agreements, which are carried out through Smart Contracts that don’t require intermediary institutions such as a bank or a lawyer.

They use online blockchain technology for the transactions. As mentioned, these transactions are entirely peer-to-peer, which means that they do not require a platform from a company or any other institution.

DeFi transfers are known as “Lego Money”, since they can be separated and then individual parts can be put together again to create something different, like a different batch of orders.

Another unique feature of decentralized finance is the fact that smart contracts are publicly accessible and very interoperable. These financial smart contracts, decentralized applications (DApps) and protocols are built on Ethereum, or run mostly on Ethereum, as a decentralized network.

Lending and borrowing is an important feature of DeFi. This can be done by locking Ether Dai, which is a stablecoin since it is fixed to the price of the US Dollar. At the moment, the most popular platform for locking in Ether, in exchange for DAI, is MakerDAO.

This enables the holder to lend or borrow liquidity, and pay for or receive an annual interest fee. While online lending to another party with total anonymity might sound insecure, this is not the case for DeFi, as most lending through this method is secured lending, which means that the collateral is higher than the borrowed value.

Decentralized finance also offers 2-Layer Payment channel networks. The Layer 1 payment network, which is offered by Ethereum and Bitcoin, allows instant payment transfers.

But the blockchain capacity to process transactions is quite limited, so the number of transactions for a specific amount of time is limited. Layer 2 payment channels are built on top of these existing blockchains and increase the speed of the transactions considerably, compared to the Layer 1 payment channels on their own, although the security decreases. But that is a trade-off between speed and security.

This means that the Layer 2 channel payments are great for small everyday retail transactions, which is making DeFi increasingly popular.

Ethereum 2.0

As the DeFi transaction increased, the blockchain networks became less reliable for such transactions. These transactions amounted to a total of more than $ 11 billion as of November 2020. Since most of the DeFi is built on the Ethereum blockchain network, the increase in contracts increases the processing time and costs.

To counter this increase in the popularity of DeFi transactions, Ethereum has come up with Ethereum 2.0 hard fork, which takes the crypto market, or at least the part of this market that goes through Ethereum, to another level.

Sharding/Scaling

Bitcoin is priced quite high, and that is a problem for scaling it. That was sort of a problem for Ethereum as well, but with ETH 2.0, this problem will be taken care of through sharding. This is a way of processing the data, which improves the ability to scale, making it more efficient and adaptable for the broader public.

For traders, according to this system, the Ethereum price prediction for the coming years is positive in comparison to Bitcoin, since it will be much more usable in everyday life. With ETH 1.0, the data has to be verified by all participating nodes, which makes the process lengthy - as slow as the slowest participant.

The sharding process will divide the data into smaller batches and each node will be processed separately.

From Proof-of-Work to Proof-of-Stake

As we know, if someone wants to acquire cryptocurrencies, they have to go through the mining process, which is lengthy and requires a lot of time, and also consumes a lot of energy. That’s called proof-of-work, meaning you get rewarded for the job of mining.

Mining is a complex process. This is to discourage anyone from attacking the network, since it would require too much energy and would be too costly to operate the hardware required for the job. That is a rather inefficient system, but ETH 2.0 will eliminate the problem, since Ethereum will shift from the proof-of-work PoW to the proof-of-stake PoS.

The PoS process is much less complicated and requires less energy, thus making it cheaper. But the lower complexity also makes it vulnerable to attacks. However, this problem is taken care of by increasing costs if you fail to get the answer right.

So, while the PoW makes it difficult to mine but rewards the miners for finding the right answer, the PoS makes it easier to participate but punishes you for finding the wrong answer. This means that attackers will have to pay for every try-and-fail attempt, and as a result, hacking is not worth the trouble, which results in increased security.

Transactions Per Second (TPS)

The transaction speed is important when making payments or receiving funds through the crypto market, and despite being among the most popular blockchain networks, Ethereum 1.0 still falls short of mainstream competition.

For comparison, the current Ethereum network processes 3,000 transactions per second (TPS), while Visa processes 15,000 TPS. With ETH 2.0, the transaction speed will increase exponentially. As Ethereum’s Vitalik Buterin put it in a presentation of the aspects of Eth 2.0, the transaction speed will increase to 100,000 TPS in Phase 1 of the implementation.

This will respond to increasing DeFi transactions and will make Ethereum even more usable. All these steps, higher transaction speeds, the ability to pay with smaller batches/scaling and the easier access procedure to the network, all paint a bullish picture for Ethereum.

The August high at $ 440 is within reach, and will probably be broken soon, if the crypto market keeps up the bullish momentum that it has demonstrated since April. If this level gets broken, the next target will be $ 500, although we must keep an eye on the crypto market as a whole, to get the general feel. But overall, the price prediction for Ethereum remains strongly bullish.