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Ethereum 2.0: Learn the truth about Lego Money, Sharding, PoS and TPS

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Ethereum (ETH), launched in 2015, is currently the second-ranked cryptocurrency by market capitalization. Like cryptocurrencies such as Cardano (ADA) and Kusamo (KSM), it has very high developer activity.

Recently, some crypto analysts believe that Ethereum seems to be outdated, but in fact, the developer activity of the Ethereum network is very high, which means that the network will still maintain its rapid development. In addition, it is currently preparing for a series of major changes.

These changes will make it easier for people to use Ethereum for transactions. Once successful, it may bring new impetus to Ethereum (currently trading at $385)-in my opinion, success is a foregone conclusion.

The increasing usage of DeFi (decentralized finance) is pushing Ethereum to the next stage, the so-called Ethereum 2.0 or ETH 2.0 stage. This will usher in a new era of Ethereum. Therefore, the fundamentals of Ethereum price are also further bullish.

Since April, Ethereum has been optimistic, partly because of the above developments. At the same time, the long-term technical analysis of ETH also shows the future upward trend of Ethereum. Next, we will learn more about the meaning of ETH 2.0.

DeFi transactions soar

Fundamentally speaking, decentralized finance DeFi is the opposite of centralized finance. Centralized finance is subject to the central bank and intermediary agencies, while DeFi refers to automatically executed contracts or agreements, which are executed through smart contracts and do not require intermediaries such as banks or lawyers.

It conducts transactions through online blockchain technology. As mentioned above, since transactions are conducted peer-to-peer, there is no need to resort to any platforms of other companies or institutions.

DeFi transfer is also called “Lego Money” because it can be separated, and then the parts can be recombined to create something different, such as another batch of different orders.

Another unique feature of decentralized finance is that smart contracts are publicly available and highly interoperable. These financial smart contracts, decentralized applications (DApps), and protocols are all built on Ethereum in the form of a decentralized network, or mainly run on Ethereum.

Lending, as an important function of DeFi, can be achieved by locking Ether Dai. Since its price against the US dollar is fixed, Ether Dai is a very stable currency. The most popular platform is MakerDAO.

Holders can lend or borrow working capital, and pay or receive annual interest. Although it may sound unsafe to provide online loans to the other party in a completely anonymous manner, DeFi is actually very safe, because most loans made in this way are secured loans, which means it The value of the collateral must be higher than the value of the loan.

Decentralized finance also provides a 2-Layer payment channel network. The Layer 1 payment network provided by Ethereum and Bitcoin can realize instant payment transfers.

However, the ability of the blockchain to process transactions is very limited, so the number of transactions within a specific time is also limited. The second layer (Layer 2) payment channel is built on these existing blockchains. Compared with the single first layer payment channel, although its security has been reduced, the transaction speed has been greatly improved. This is also the result of a trade-off between speed and safety.

Therefore, the second layer channel is very suitable for daily small retail transactions, which also makes DeFi more and more popular.

Ethereum 2.0

As DeFi transactions increase, the availability of the blockchain network for such transactions decreases. As of November 2020, its total transaction volume has exceeded 11 billion US dollars. Since most DeFi is built on the Ethereum blockchain network, the increase in contracts also leads to an increase in processing time and costs.

In response to the popularity of DeFi transactions, Ethereum brought the Ethereum 2.0 hard fork, which took the crypto market (or at least part of the market through Ethereum) to another new level.

Sharding/Scaling

Bitcoin’s high pricing limits its expansion. To some extent, Ethereum also has similar problems. But in ETH 2.0, this problem can be solved by sharding. Fragmentation is a way of processing data, which can improve scalability, make it more efficient and have a wider range of applications.

In the next few years, compared with Bitcoin, the price of Ethereum will be more favored by traders because its usability in daily life will be greatly improved. In ETH 1.0, data must be verified by all participating nodes, which lengthens the entire processing process-the slowest participating node shall prevail.

Sharding can divide data into smaller batches, and each node will be processed separately.

From Proof-of-Work to Proof-of-Stake

As we all know, if someone wants to obtain cryptocurrency, they must go through the process of mining, and this process is very long and requires a lot of time, energy and energy. This is the so-called Proof-of-Work (PoW), which means that the reward is determined by the mining workload.

The reason why the mining process is so complicated is to prevent others from attacking the network. After all, the attack requires too much energy and the hardware cost required for the operation is too high. However, this has also greatly reduced the work efficiency of the entire system, but ETH 2.0 will solve this problem, because Ethereum has realized the transition from proof of work to proof of stake (Proof-of-Stake, PoS).

The PoS process is simpler and requires less energy, so its cost is lower. But the reduced complexity also makes it more vulnerable to attacks. However, this can also be solved by increasing costs.

In short, the PoW mining process is more difficult, but it will reward miners who find the correct answer; while the PoS mining process is relatively simple, but it will punish miners who find the wrong answer. This means that the attacker will pay for every attempt and failure of his own. Therefore, for the hacker, the attack is not worth the loss, thereby improving network security.

Transactions Per Second (Transactions Per Second, TPS)

When making payments or receiving funds through the encrypted market, transaction speed is very important. Although Ethereum 1.0 is one of the most popular blockchain networks, it still cannot compete with mainstream competitors in terms of transaction speed.

In contrast, the current Ethereum network can process 3,000 transactions per second, while Visa can process 15,000 transactions per second. With the launch of ETH 2.0, its transaction speed will increase exponentially. Ethereum’s Vitalik Buterin mentioned in his introduction to Eth 2.0 that in the first phase of implementation, its transaction speed will be increased to 100,000 TPS.

This will cater to the increasing demand for DeFi transactions and increase the availability of Ethereum. All of this-higher transaction speeds, small-batch payment capabilities, and simpler network access procedures, all paint a bright future for Ethereum.

Now, the August high of $440 is within reach. If the crypto market can maintain the upward momentum since April, it is likely to achieve another breakthrough. Once this position is breached, the next target will be $500. Although we need to continue to pay attention to the dynamics of the entire crypto market in order to finally determine its ups and downs, overall, the price forecast for Ethereum is still bullish.

Source: Block Base Camp

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