Ether, the digital token of the Ethereum blockchain, is the second largest cryptocurrency in the world by market value.
Jaap Arriens | NurPhoto via Getty Images
As you watched bitcoin’s price rise to all-time highs, another cryptocurrency quietly staged a comeback.
Ether, the second largest virtual currency in the world by market value, has risen about 350% since the beginning of the year. Last week, it briefly broke above $ 600 for the first time since June 2018 before plunging sharply and hit that level again this week.
Now, ether investors are keeping an eye out for a long-delayed update to its underlying network known as Ethereum 2.0, which they say will make it faster and more secure.
A key problem with the Ethereum blockchain today is scalability. In 2017, for example, the popularity of an Ethereum-based game called CryptoKitties caused the network to become heavily congested, slowing trade considerably.
But Ethereum 2.0 proponents say the planned update could allow thousands of extra transactions to happen every second. Meanwhile, investors believe it could also lead to further adoption of the ether and price appreciation.
‘Proof of mail’
To understand the transition taking place on Ethereum, it is important to first know a little about blockchain technology. Blockchain is the digital ledger originally used to record bitcoin transactions and provides the foundation for most major cryptocurrencies.
Like bitcoin, the Ethereum blockchain currently operates on a “proof of work” model. So-called “miners” with purpose-built computers compete to solve complex mathematical puzzles to validate transactions. Whoever wins that race is then rewarded in bitcoin.
On Tuesday, the Ethereum blockchain will begin the transition to a “proof of stake” model. Instead of miners, the network will rely on “stakers” who already hold some aether to process new transactions.
To validate a transaction on the new network, a staker must deposit 32 ether tokens, worth approximately $ 19,600 at current prices, in a crypto wallet using what is known as a smart contract. These are contracts on the Ethereum blockchain that are executed automatically using the code.
The stakers are then assigned ether for validating transactions, like crypto miners. This “staking” process effectively offers crypto investors the ability to earn interest on their holdings after a certain period of time.
A big theme in Ethereum right now is decentralized finance, or DeFi, which aims to replicate traditional financial products such as intermediary-free loans like banks. Some crypto evangelists say Ethereum’s ability to support apps means it could become a framework for a next-generation decentralized internet.
“In essence, the Ethereum ecosystem has made the decision to grow a little more and become a little more secure so that people, institutions and developers can continue to build more apps and financial products on top of it.” , Konstantin Richter, CEO of blockchain software company Blockdaemon, told CNBC.
What does it mean for investors?
For now, what is happening is the introduction of a parallel Ethereum blockchain known as the Beacon. This will be used to test the new proof of stake system prior to a full migration to Ethereum 2.0.
“It’s kind of like the launch,” Richter said. “The rocket is taking off. We are committed to the journey. We are still on the launch pad but all will be achieved when we land on the moon. At this point, we are launching the official end of the old Ethereum.”
Meanwhile, more and more ethers are being sidelined for a restrictive multi-year “block” period by token holders seeking to become transaction validators on the new network.
This could limit the supply of ether, potentially increasing the value of the asset if demand begins to outstrip supply. Richter also sees it is leading to innovation in the DeFi space as investors try to get some cash by borrowing against their frozen ether holdings.
Another great development that the update will introduce is something called “sharding”. This effectively divides the network into many parallel chains that can handle transactions to speed up the network.
“A fragmented blockchain can be represented as a round hairbrush where each row of bristles is a fragment that acts like a blockchain by itself and where the Beacon chain connects them all together as does the handle of the hairbrush for the bristles. “Jerome de Tychey, co-founder and president of Ethereum France, told CNBC.
“The fragments communicate with each other via the Beacon chain, which also regularly finalizes the state of the fragments. Over time the hairbrush stretches as the fragments produce blocks and so does the Beacon chain which keeps track of what is happening in the complex. Network.”
Further on, crypto experts say Ethereum 2.0 is expected to help the Ethereum network operate at scale, processing far more transactions at a faster pace and supporting apps with millions of users.
“Within five to ten years, these decentralized platforms will be on par with centralized platforms,” Richter predicts. “Then it’s gameover for centralized platforms”.