Why does Ethereum have intrinsic value?

Ethereum is moving from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) governance mechanism in the foreseeable future, resulting in a faster and more efficient blockchain.

The Ethereum network has seen a significant increase in transaction volume and size since DeFi and NFTs swept through the finance and art worlds. Such traffic has often created systemic bottlenecks with significant increases in fees that have rendered the blockchain unsustainable.

In order to bring Ethereum into the mainstream and support an increasing number of transactions, the need for a fundamental transformation arose. The upgrade from PoW to PoS will make Ethereum more scalable, efficient and sustainable while ensuring its fundamental decentralization.

The upgrade occurs only in the backend within a technical framework without affecting the way users transact and hold assets across the network. Ethereum’s roadmap envisages the following three phases for completing the upgrade:

Phase 0, also known as the Beacon Chain

This update is already live and brings staking to Ethereum. It lays the foundation for future upgrades and will coordinate the new system.

The Fusion

The mainnet Ethereum, the current network, has to merge with the Beacon Chain at some point and this is expected to happen in 2022. The merger will enable staking for the entire network and will mark the end of energy-intensive mining.

splinter chains

Shard chains are expected to be introduced in 2023. However, sharding is a phased upgrade to improve Ethereum’s scalability and capacity. Shard chains enable Layer 2 solutions to offer low transaction fees while improving network performance.

Sharding is the process that allows smaller groups of nodes to process transactions in parallel without having to reach consensus across the network. Ethereum 2.0 promises to bring transaction speeds up to 100,000 transactions per second (TPS) through the use of shard chains, as opposed to the current 30 TPS.

The transition from Ethereum to PoS has sparked heated debate within the crypto community. While some of the resulting benefits are clear, including scalability and sustainability due to a more energy efficient system, many worry that decentralization could be compromised due to their implementation.

The PoS validation process can trip over large holding validators that can have undue influence on transaction verification, compromising the true nature of decentralization. Critics of the transition also see sharding as a threat to network security. Since fewer verifiers are needed to secure the multiple and small shard chains, there is a higher risk that they will be exposed to more malicious actors.

How will Ethereum 2.0 affect the intrinsic value of Ether?

Many crypto experts believe that 2022 will be a pivotal year for Ether’s price. The digital currency has seen an extraordinary surge from just $0.30 to a high of $4,800 in 2021 since its inception in 2015, including highly volatile moves along the way.

By moving to ETH 2.0, will Ether keep up with its massive growth? While it’s impossible to predict an asset’s price based on technical or fundamental analysis, crypto investors unanimously believe that ETH 2.0 will impact Ether’s intrinsic value, and much will depend on the smooth implementation of the upgrade.

As with any significant transformation, the initial deployment of ETH 2.0 could be a direct cause of volatility. Until the upgrade is thoroughly tested, approved, and effective across the network, experts predict months of uncertainty that will inevitably impact ETH’s price.

In the longer term, the transition to a more sustainable and efficient PoS will benefit Ethereum adoption for users and businesses building on the platform. However, the way and timing of all this will play out is one reason for hesitation from investors, who are showing signs of caution in their allocation until there is a more accurate outlook.

Much will depend on the resulting upgrade success in demand and functionality, and whether the renewed platform can maintain its leading position among all other innovative network competitors.