On November 4th, Ethereum’s founder, Vitalik Buterin, tweeted that the ETH2 deposit contract had been released. Ethereum 2.0 is the protocol’s largest update since its inception. It is a paradigm shift which will change the Ethereum network allowing it to become the “world computer”.
How will Ethereum 2.0 differ from 1.0?
Unsure about what Ethereum 1.0 is and how it works? Check out this article on our website.
Just like Bitcoin, Ethereum 1.0 uses Proof of Work (PoW), an energy intensive procedure, as a consensus mechanism for verifying transactions. It will switch via a hard fork to using the Proof of Stake (PoS) mechanism which instead of using miners to verify transactions, uses as validators users who have “staked” (locked) at least 32 Ether into Casper (Ethereum’s new PoS consensus protocol). These users will get rewarded in Ether for their contribution.
In addition to the change from PoW to PoS, Ethereum 2.0 will incorporate sharding, which will allow for the network to be divided into multiple sub-networks (shards), all running in parallel and enabling dramatic increase of throughput volumes.
Ethereum 2.0 phase 0 (“Beacon Chain”) will be launched on December 1st, 2020, as long as there are 16,384 validators who have jointly locked-in the necessary 524,288 ETH in the staking deposit contract. The shard chains upgrade or phase 1 which will greatly increase the scalability of the network and this second upgrade is expected in 2021. Phase 2 which will dock or merge the Eth1 mainnet with the Eth2 beacon chain and shard chains will launch in either 2021 or 2022.
Why We Need Ethereum 2.0
The main reason for these upgrades is to increase scalability and energy efficiency.
Scalability is the key to Ethereum as the Ethereum network is the base layer upon which the large majority of DeFi (Decentralized Finance) projects are being built. If DeFi is going to become a real challenger to traditional finance, the scalability of Ethereum has to increase by several orders of magnitude as it currently can only handle about 15 TPS (transactions per second), ahead of Bitcoin which can handle about 7 TPS, but far behind VISA which can handle 65,000 TPS. Not only this, but transaction fees in the Ethereum network will become prohibitive if it is to absorb increased amounts of transactions, as occurred during the peak of the DeFi hype in September 2020, when the Ethereum network became clogged and fees skyrocketed as shown in the chart below.
For Ethereum to attain its ambition of becoming the technological platform that enables the decentralization of the financial world and the “world computer” that Vitalik Buterin envisioned back in 2014, it needs to evolve; that is why we need an Ethereum 2.0.
Through the anticipated upgrades, Ethereum 2.0 is expected to increase the network’s transaction speed up to 100,000 TPS, surpassing not just any other known cryptocurrency blockchain network but also traditional financial institutions.
What has been the market impact of the announcement?
- Current price (Nov 12, 2020): $460.46
- Major Support / Resistance levels: Support: $438 / Resistance: $460, $475
- Change in price (since ETH 2.0 announcement): +21%
- Change in price (since Jan 1, 2020): +303%
- Change in price (since March 2020 bottom): +333%
The above chart shows the 2020 performance of Ethereum, measured in US Dollars. It includes daily candlesticks, with orange bars representing support/resistance levels, volume and RSI (Relative Strength Index) indicators at the bottom.
The day of the announcement of the Eth2 smart contract, November 4th, the price of Ethereum rose by 4% and has, since then, continued to gain 21%. However, for the past few days, the price has found a resistance level at $460 which has not yet been able to decisively break higher.
The next significant resistance is the $475 level (September 2020 highs) which has also been met but has encountered a price rejection earlier today (Nov 12). The price is currently consolidating and the next few days and weeks are probably going to be less bullish than the previous two weeks.
It is important to note that the price of Ethereum is increasingly correlated to the price of Bitcoin, so that a strong bullish (or bearish) move in Bitcoin can cause Ethereum to move in the same direction.
On the other hand, the current price is above the 20, 50 and 200 moving average, meaning that the trend is still intact. The current relative strength index is in the mid-60s, which means that the price action has cooled down from being overbought, showing that there is a possibility for the price to continue its ascent. A decisive break above $475 would result in Ethereum reaching a 3-year high and would be very bullish with eyes on the $500 level which can lead to an increase in crypto investors’ FOMO!
On the longer horizon, a successful launch of Ethereum 2.0 could set up a series of future catalysts for the price of Ethereum as the announcement of each new stage of the network upgrade might be a trigger for further price gains for the digital currency.
As more Ethereum is locked-in or staked, the supply of available ETH tokens will be reduced while the demand is expected to continue to increase if the Ethereum network solves its capacity problems, continues to grow and be used for more dapps or decentralized applications.
What are the risks?
For the Beacon Chain upgrade to launch, it needs the 524,288 ETH to be staked by 12:00 UTC on December 1st. Eight days after the staking deposit contract was announced and with 18 days left until the deadline, just 11% of the total amount has been staked.
Staking these Ether means that they will not be able to be withdrawn or used until at some point between Phase 1 and Phase 2 of Ethereum 2.0, which may take years. Should the Beacon Chain fail to attract sufficient deposits by December 1st, the launch will be delayed until the 16,384 32-ETH validator deposits have been obtained which may cause a decline in the price of Ethereum.
We have to take into consideration that Ethereum is no stranger to technical errors, network bottlenecks and controversies. Updating via a hard fork to a whole new consensus with new technical specifications can result in potential price declines if large vulnerabilities are discovered or if the network is not able to successfully handle the transition.
Looking at the macro context, Ethereum is the most correlated with Bitcoin, at the moment, since its inception, with a monthly correlation of over 0.75. If Bitcoin continues on an upward trend, it is likely that Ethereum will follow suit.
In the short term, the current consolidation of the price below the resistance level of $460 and $475, as well as the uncertainty regarding the launch of the Beacon Chain due to the possibility of not attracting sufficient deposits, means that the price forecast for the next weeks is neutral with a negative bias. However, Ethereum 2.0 is a highly promising and ambitious upgrade to the Ethereum network. Were it to achieve its technical goals, the forecast for Ethereum price would become very bullish for the medium and long-term.
- CyBorg Predictor - A machine-learning algorithm that forecasts the movements of assets like Ethereum for the next 24 hours
- SwissBorg Indicator - A market-trend indicator that combines popular technical indicators
- Community Sentiment - A sentiment indicator based on the number of app users buying or selling
- Support/Resistance - Current price levels between which a price is ranging, where a break could signal a new trend
Download the SwissBorg app today to analyse what Ethereum will do next!
Disclaimer: The information on this analysis is not targeted at the general public of any particular country. It is not intended to be distributed or used by residents of any country where such distribution or use would contravene any local law or regulatory requirement.
Any analysis, opinion, commentary or research-based material is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks if you are at all unsure. No representation or warranty is made, express or implied, that the materials are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our Analysis (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.