Why I’m Watching Ethereum in February

The cryptocurrency recently upgraded its platform.

Jennifer Saibil

Key Points

  • Ethereum recently launched the first phase of what was previously called Eth2.0.
  • It now supports a proof-of-stake validation system, which it says is better for several reasons.

Cryptocurrency has been volatile lately along with the stock market. Ethereum (CRYPTO:ETH), for example, is up 77% during the past year, but down 3% in the past month. Bitcoin, on the other hand, is down 6% over the past year, and up 5% over the past month.

This is partly in reaction to changing and uncertain macroeconomic trends, such as inflation and interest rates. It also could be related to uncertainty about cryptocurrency in general. There are now more than 10,000 different crypto coins available to trade or buy, more than double the amount just one year ago, worth about $1.6 trillion. That’s about the same as the entire gross domestic product of Canada for an investment that for the most part doesn’t have any underlying assets.

A person and a child making stacks of coins.

Image source: Getty Images.

I would add two caveats to that. One is that about 40% of all crypto value belongs to Bitcoin, which is gaining credibility as an alternative currency. Two is that some of the more popular coins have demonstrated real-world utility. In that regard, Ethereum comes out on top. And it recently launched the first of several upgrades to its platform to make it even more useful, which is why I’m watching it this month.

Ethereum upgrade: Phase 0

Ethereum has been so successful that it hasn’t been able to keep up with the demands of its users. It’s fairly slow as far as cryptocurrencies go, with the ability to run about 15 transactions per second (TPS) versus Solana‘s more than 700,000 TPS. There are now nearly 3,000 dApps, or or decentralized applications, running on Ethereum, ranging from decentralized finance (DeFi) apps to crypto wallets, non-fungible token (NFT) marketplaces, and more. The figure trounces the rest of the crypto industry.

In response to the increasing number of users, Ethereum’s developers announced an upgrade to make the network much faster and user-friendly. The first part of this multiphase upgrade to what it called the Beacon chain just went live, and it allows users to validate transactions through a proof-of-stake (PoS) system.

Previously, Ethereum only allowed for a proof-of-work (PoW) protocol, which involved solving complex puzzles with large, costly computers to create new Ether tokens. PoW is how Bitcoin works as well. This process uses a lot of power, and many newer crypto coins have developed other validation methods that are more sustainable and secure.

The PoS method involves users staking their Ether to validate transactions, and it’s cheaper and more energy-efficient because users just need a laptop. The system is also supposed to make transactions more secure, since an attack would require a tremendous amount of Ether — the native digital currency on the Ethereum blockchain.

This is the first phase of the Ethereum Beacon chain upgrade. Ethereum has changed the name of this upgrade from Eth2 to “the consensus layer.” Since the PoS model is so new, and leads into the next phases, it’s something to watch.

What’s up next?

There are two more phases to the full upgrade, and the next one will launch in 2023. It involves scaling the Ethereum network through sharding. This means adding nodes to the blockchain, which will offer a tremendous amount of scalability and will support thousands of transactions per second. It adds what Ethereum’s developers say will be cheaper and more secure areas of storage. Imagine a long chain, which is the blockchain, with blocks being added in a row as Ether is validated. With sharding, each block has many shards (or nodes) added to create a much larger network.

Phase three is the execution phase, or what developers call “action and agency.” This will add more functionality to the shard chains, such as cross-shard communication.

It will be important to watch what happens now that the platform is moving over to the PoS system. Ethereum should begin to work more efficiently, and continue to be a dominant player in cryptocurrency, powering more dApps in the crypto revolution.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Donovan Larsen

Donovan is a columnist and associate editor at the Dark News. He has written on everything from the politics to diversity issues in the workplace.

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