Ether, the second largest cryptocurrency in the world, hit a record high crossing $ 4,000 earlier this week and has outperformed bitcoin since the start of the year, surging more than 400%. According to analysts, the growing interest of big players such as the European Investment Bank in the Ethereum blockchain network, on which ether operates, has been a key catalyst.
Investors were drawn to the ability to create decentralized financial contracts and other applications such as non-fungible tokens, or NFTs, on this system. But the upcoming changes to Ethereum, which aim to make the network bigger and more sustainable, are also getting investors excited, as they could push the price of ether even higher.
'London' update will start destroying ether coins"
After changing how transaction payment works in April, Ethereum developers are gearing up for a major overhaul of the fee system. The changes are scheduled for mid-July, according to Ben Edgington.
In the current system, users send what are known as gas fees to miners as payment for transactions to be verified, in a sort of auction. Miners carry out transactions, and create cryptocurrencies, using the computing power of their computer to solve puzzles on the network.
But when the network is busy as it is more and more the auction system forces users to increase the amounts and estimate the appropriate fees resulting in volatility and a sharp rise in prices.
To remedy this problem, the developers of Ethereum have agreed to a major change, known as EIP-1559 in crypto jargon and to take place during an event called "London hard fork".
Under the new system, gas charges will be replaced by mandatory and automatically determined base charges, which will fluctuate depending on network congestion. Users will have the option to tip minors if they need transactions to be completed quickly.
But the most exciting part for many investors is that the grid will start to destroy or "burn" some of the gas charges. "There will potentially be more ether burned than generated for the miners," says Ben Edgington. He adds that this could lower the ether supply over time, "which is actually an advantage over bitcoin's monetary policy, which is fixed."
Ethereum 2.0 aims to increase network size and sustainability
The developers are most excited about the major changes known as Ethereum 2.0, which aim to make the network bigger and more sustainable. The first step towards Ethereum 2.0 is what the developers are calling "The Merge": a complete change in the underlying mechanics of the network, which Ben Edgington says is expected to be completed by the end of 2021 or early 2022.
Currently, computers compete against each other to solve complex puzzles to check the network and extract ether in what is called a "proof of work" system. This system secures the network because its hack would require huge and expensive amounts of computing power and energy, but it is very bad for the environment.
Ethereum will instead switch to a "proof of stake" system. This means that people can validate transactions and mine based on how many coins they hold and are willing to offer as some sort of down payment, says Ben Edgington.
Each user who wishes to verify transactions and thus obtain rewards must stake a large sum, for example 32 ethers worth more than 120,000 dollars. The idea is that anyone wishing to attack the network should earn enough ether to shell out more than the collective value of all the “stakes” to start modifying the blockchain in damaging ways.
According to Ben Edgington, around $ 10 billion has already been invested in the proof of stake network, known as the Beacon Chain, which the developers launched in December.
The developers are working hard to move the entire network to the new system, but this is not without risk. One developer described the process as "replacing an aircraft engine while it is still in flight." But they added: "The code used will have been exhaustively verified, combat tested, and rechecked."
Sharding aims to extend the network
However, Ben Edgington points out that "going to the proof of stake is not a solution of scalability" (of extensibility, note). In an attempt to expand Ethereum so that more applications such as NFTs, or decentralized finance contracts, can be built on it, developers will be creating new networks in a process known as sharding.
"It's like running 64 blockchains in parallel with the beacon chain to increase capacity," says Ben Edgington.
Simply put, creating more blockchain systems and linking them together by connecting them to the main beacon chain should expand the overall network and make it more efficient, as opposed to the current system where everything is done on a single large network.
"I expect that within a year of delivering the proof of stake, we will be able to deliver the sharding solution," said Ben Edgington. "But no one has made a strict plan for this project, or given a deadline for it. It's ready when it's ready."