Research: Ethereum 2.0 will be “extremely complicated,” making delays “likely”
Over the past few weeks, the hype surrounding the Ethereum 2.0 upgrade has increased at a dramatic clip.
Due to the launch of the “Topaz” testnet for Ethereum software, which has seen success thus far with strong adoption and use by the ETH enthusiast community, it has become a high possibility to some that the blockchain upgrade will roll out within the coming months.
This is mostly speculation: exact dates for the upgrade have been hard to come by. But Ethereum Foundation co-founder Vitalik Buterin indicated in February that developers will spend the “next few months” refining the upgrade for a launch sometime this year. Similarly, researcher Justin Drake once proposed a July launch, which would line up with Buterin’s vague idea for a timeline.
? Milestone! 100k slots at Topaz testnet! ?
?3200 finalized epochs
?@prylabs controls less than 53% of the network
?Some nodes with 300 peers pic.twitter.com/LDZxiC8a0r
— Terence Tsao (@terencechain) May 1, 2020
Although ETH holders have been waiting for 2.0 for years, this timeline is too optimistic, according to a May 4 report from BitMEX Research on the efficacy of the upgrade.
The reason: the transition from Ethereum 1.0 to 2.0 has “proven more complicated than expected.”
What is Ethereum 2.0?
Before we delve into BitMEX’s piece on the upgrade, some context must be given regarding the details of the development.
The ‘Cliff’s Notes’ version is that Ethereum 2.0 is a new version of Ethereum that will implement and work with technologies like Proof of Stake, sharding, and more to exponentially increase the speed, transaction throughput, and decentralization of the network.
At Token2049’s Ethereum Asia Supermeetup in March 2019, Buterin explained the upgrade with the following:
[It is] a way to bring technical improvements, like PoS and sharding, together to improve the Virtual Machine, Merkle Trees, the efficiency of the protocol, and a whole bunch of small technical things that you have never heard of.
To accomplish this shift from the current iteration to 2.0, the new network will actually operate side-by-side with the old one, meaning there will technically be ‘two’ Ethereum mainnet chains running at the same time.
This forced bifurcation is due to the fact that Ethereum 2.0 is still in its first phase (“phase zero”), which basically tests how staking works in a real-world situation compared to traditional cryptocurrency mining.
Furthermore, due to how the new network is structured, smart contracts and cryptocurrencies based on Ethereum will need to adapt to properly operate with the new chain.
It won’t go as expected: BitMEX Research report
In their report, BitMEX’s research team acknowledged the need for Ethereum 2.0 over the current iteration, writing:
“Some members of the Ethereum community have expressed concerns to us that Ethereum technology is now five years old and falling behind, and they want something new. Ethereum 2.0 therefore satisfies a need in a community keen on trying new ideas.”
Despite the community support, the rollout could be quite difficult.
The researchers explained that due to the compatibility issues that could arise with Ethereum 2.0’s data structure and old smart contracts based on the original virtual machine, it may take “many years” before a “significant part of the Ethereum ecosystem” can make a switch to the new chain.
And this “many years” prediction is if nothing goes wrong.
Baked into BitMEX Research’s conclusion is that something will go wrong, causing even more delays:
“Ethereum 2.0 is exceptionally complicated. With so many committees, shards and voting types it seems reasonably likely that something will go wrong and that there will be significant further delays.”
Ether could boom due to the upgrade
When Ethereum 2.0 arrives — if it arrives — analysts expect the market for ETH to be irrevocably changed for the better.
David Hoffman, co-lead of the Ethereum media publication Bankless, explained in a recent newsletter that the introduction of staking will cause a large decrease in the amount of ETH available to be bought on the open market.
Bankless’ other lead and Hoffman suggested that upwards of 10 to 30 percent of the cryptocurrency could be zapped from the circulating supply due to demand for staking. This favors price appreciation, the duo argued.
Ether’s price is going to appreciate.
This is a forward looking statement about the value of an asset. Why am I able to say this with confidence?
Because Ether has its own native scarcity mechanisms
– ETH in DeFi
– ETH staked
– ETH burnt
Meanwhile, money printer go brrr https://t.co/dMxkASYzAp
— DavidHoffman.eth (@TrustlessState) April 13, 2020
Angel investor and professor Adam Cochran has taken this one step further.
He said in an extensive Twitter thread that alongside causing a negative supply shock due to staking demand, ETH 2.0 will cause other economic effects that will catalyze growth in the asset:
- ETH’s supply may actually start to decrease: Although not yet implemented, there’s an upgrade proposal that says ETH should be burned when transactions take place. This would only exacerbate the supply-demand dynamics in favor of bulls. This is a popular proposal that has garnered the support of some developers.
- Fundamental demand for ETH will increase: Due to Ethereum 2.0 making the blockchain much faster and adaptable, Cochran expects for the demand for ETH as a form of gas to increase: “With the release of ETH 2.0, we’re going to seeETH drastically increase its tx/s and therefore its commercial and consumer viability. Gas clogs, high transaction costs, long wait times in dApps all go away, even in a busy market.”
His analysis led him to the conclusion that there’s a good likelihood Ethereum 2.0 will create “the largest economic shift in society.”
It’s already happening, investors are accumulating Ethereum
Cochran’s and the Bankless duo’s thesis has seemingly already been proven correct.
Although accumulation is likely taking place for a swath of reasons, April data from research platform Glassnode indicated that there has been a 14 percent increase in the number of Ethereum wallet addresses holding over 32 coins, the staking minimum as aforementioned:
“How many potential ETH 2.0 validators exist? Currently, there are 116,351 Ethereum addresses that hold 32 ETH or more – up almost 14% within the last year.”
More broadly, both miners and “whale” addresses have been accumulating ETH at a rapid clip over the past few months. Cochran sees miners accumulating coins as a clear sign that they’re bullish on Ethereum 2.0, and have thus started to build a stash of ETH to benefit from staking.