Ethereum 2.0 Meets December 1 Launch Deadline. Here’s What Will Happen Next

Ethereum 2.0 Meets December 1 Launch Deadline. Here’s What Will Happen Next

We had previously reported that Ethereum 2.0 had been struggling to meet its target of 524,288 ETH in deposits, which it needed to hit by November 24. Back on November 17, the total was just under 100,000 ETH, and it remained under 300,000 ETH up until November 23.

Then something ‘magical’ happened, as they say. With the total staked at 291,232 ETH at 0300 (UTC) on November 23, the amount jumped to 536,096 ETH by 0200 on November 24. In fact, there was a 26% jump to this amount in only four hours, suggesting that some big players within the Ethereum ecosystem resolved to fill the shortfall in lieu of wider participation.

Source: Dune Analytics

Needless to say, prominent members of the Ethereum community welcomed this news with a fair amount of excitement.

524288 pic.twitter.com/N66EmtW0Ih

— vitalik.eth (@VitalikButerin) November 24, 2020

Source: Twitter

Ethereum’s price also responded by rising energetically. It peaked at about $618 at 0510 on November 24, having risen from a price of $560 at 0300 on November 23.

Source: CoinGecko

In other words, it’s possible that part of the reason for ethereum’s rally on November 22 and 23 was that potential validators were buying up ETH in order to stake it with Ethereum 2.0’s beacon chain. (It’s also possible that PayPal has been buying up various cryptocurrencies — including ethereum — in order to fill its reserves as it prepares to offer crypto services.)

Either way, it’s clear that most of the ethereum staked with ETH2’s contract came from bigger actors within the Ethereum ecosystem. There have been, as of writing, only 2,025 unique depositors, despite the contract needing deposits from 16,384 addresses to launch. Similarly, the 20 biggest depositors account for 33.5% of the 708,224 ETH currently transferred to the contract.

Centralization or Decentralization?

This leads to one of the biggest concerns surrounding Ethereum 2.0: the potential centralization of staking. If a relatively small number of large validators dominate the Ethereum 2.0 staking process, then this may introduce a variety of risks, including the (remote) possibility of a 51% attack. Less alarmingly, it may include the risk of larger validators gathering most of the staking rewards for themselves, something which could increase the inequality of ethereum distribution.

These risks will be quite real during the initial phases of Ethereum 2.0’s rollout. Back in July, ConsenSys published an article warning that a “lack of liquidity in Phase 0 and Phase 1 might cause unpredictability and centralization.” In particular, the authors suggest that the lack of on-off ramps between the Ethereum 2.0 beacon chain and the Ethereum mainnet could cause “a high concentration of validators” to use a small, centralized number of exchanges or markets to trade the ethereum they received for staking. This use of a small number of platforms for offloading ethereum could create single points of failure.

ConsenSys has warned about the possibilities of centralization in Ethereum 2.0 before, while members of the cryptocurrency community have criticized the minimum threshold of 32 ETH (currently $19,200) needed to become a validator.

These warnings aside, Ethereum 2.0 should in theory be more decentralized than Ethereum 1.0 — or Bitcoin — in the long run. Compared to a proof-of-work consensus mechanism, which requires the ownership/use of increasingly powerful computing hardware, proof-of-stake requires only the ownership of cryptocurrency.

Indeed, according to the “are we decentralized yet?” data resource, four entities control over 50% of Bitcoin’s mining power, while only three control over 50% with Ethereum. Ethereum 2.0 will surely improve on this, even if the current threshold of 32 ETH prices out many a casual holder of ethereum.

The Future

However, this scenario is still a long way off, since even if Ethereum 2.0’s beacon chain will be launched on December 1, this doesn’t mean the process of transition to proof-of-stake will be complete.

Far from it, because this process has four phases, with Phase 1.5 — due for late 2021 or early 2022 — being the phase when the present Ethereum mainnet merges with the Ethereum 2.0 beacon chain.

This means that the new Ethereum 2.0 beacon chain will operate in parallel with the current Ethereum mainnet, potentially having an effect on ethereum prices.

For example, the locking up of ethereum in ETH2’s contact will reduce overall circulating supply, which may result in higher prices. On the other hand, validators may end up selling the ethereum they receive as a reward for staking, which will increase supply, although probably not as much as staking decreases it (since the maximum reward for staking is likely to be about 20%).

Regardless, the eventual transition to Ethereum 2.0 will likely be a big boost for Ethereum, making it much more scalable and — as a result — much more useful to the companies building apps and platforms on it. In turn, greater demand for Ethereum itself will result in greater demand for ethereum, which should push up prices over the long term.