Ethereum has seen a remarkable surge in value in 2020, climbing from below $100 during March’s market meltdown to over $700 before the troubling year ran its course. By the time 2021 arrived, there was no stopping Ethereum, with the price of ETH crossing $1,000 for the first time since 2018.
Buoyed by Bitcoin’s incredible record run and a positively received Beacon Chain launch on Dec. 1, the versatile smart contract network is quietly enjoying a consistent string of positive developments that has seen it climb close to its all-time high price despite a November hiccup with the Infura outage that resulted in an unexpected hard fork.
Here are a few: a successful upgrade by the development team, an upsurge in innovative new crypto sectors that rely on Ethereum (think DeFi and decentralized exchanges like Uniswap), institutions flowing into the market, and to some extent, the buoying effect of Bitcoin's stellar run.
There are various yardsticks that individuals use to determine whether Ethereum has performed well or not. Investors consider the price of Ether and whether it has netted them the targeted returns on their investments.
The platform’s development team wants to meet its targets on its roadmap and increase the scalability, decentralization and security of the blockchain. Enterprises and private developers are focused on the viability of building their decentralized apps (DApps) on Ethereum's blockchain.
All these seem disconnected from the surface. A closer inspection shows in fact that they are all somehow connected and fueling each other, like spinning cogs in a big machine.
Here of some of the recent good news that could act as catalysts in 2021 to push Ethereum to even newer highs.
Institutional Investment and Bitcoin’s Rising Tide
Ether's price is a reflection of the broader cryptocurrency market sentiments and the growth of the Ethereum network’s use cases such as DeFi, creating bullish momentum in the market. It could have been called FOMO if this was 2017 or prior bull runs. But it feels different this time.
Institutional capital is flowing into the market. Smart investors are no longer watching from the fringes wondering if the market is a bubble waiting to pop like in 2018.
With companies such as payments firm Square Inc., publicly-traded business intelligence firm MicroStrategy buying BTC worth over $1 billion in 2020 and investment firm Ruffer's Multi-Strategies Fund allocating a portion of its treasury to Bitcoin, there is a real sense that this industry is now more appealing to sophisticated investors.
Although this crypto upswing has been driven by Bitcoin’s halving and its increasing appeal as a safe haven asset when viewed against the weakening U.S. dollar, it has seen established altcoins such as Ether and Litecoin piggyback on it. Bitcoin’s rising tide seems to be lifting the other leading altcoins with it.
Ethereum 2.0 Pulls Off a Successful Launch
Ethereum is one of the most actively used distributed ledgers in the world. The blockchain can only handle a throughput of 15 transactions per second (TPS), a far cry from VISA's capability of 1,600 TPS and Mastercard's 5,000 TPS.
Due to Ethereum's underlying architecture, the blockchain cannot achieve scalability, decentralization and security at the same time without sacrificing one of the key components.
The platform previously underwent several upgrades to improve on it. But none has been as important as the Serenity upgrade, also known as Ethereum 2.0.
Serenity aims to scale the platform's throughput from 15 TPS to tens of thousands of TPS, miles ahead of what centralized platforms such as Mastercard can handle. To achieve this, the workload would be divided into separate sidechains running in parallel but sharing a common consensus. The upgrade will be completed in three phases due to the complexity of the process.
The first stage, known as Phase 0, went live on Dec. 1, 2020 when the Beacon Chain was created and the platform began its transition from a proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS). Phase 1 will focus on the creation of shard chains and linking them to the Beacon Chain. The importance of the transition cannot be overstated, as it will see Ethereum migrate from miners to validators, making it more decentralized and secure.
The network's inability to scale to a higher thorough-put led to the development of competing blockchain platforms — such as Tron — with similar smart contract capabilities and the promise of scalability. However, Ethereum has remained the smart contract platform of choice despite its limitations. Serenity's successful launch is a major milestone for the Ethereum community. Make no mistake — the “staking game” has begun.
Ethereum 2.0 Staking
Ethereum 2.0 staking refers to depositing an amount of Ether to maintain the protocol and receive interest in return. Generally, staking involves depositing your cryptocurrency in a wallet to participate in the operation of its associated blockchain and earn rewards. Staking can be done by anyone on a blockchain with a PoS consensus mechanism.
With the Beacon launch, Ethereum 2.0 staking can now be done, if users stake a minimum of 32 ETH and run a validator node. The node does not need to be a specialized machine as those used in PoW mining. A laptop or any consumer-grade computer will suffice. However, validators who are frequently offline will be penalized.
Just like there are mining pools, there are also staking pools. A staking pool is a group of parties that combine their resources to take part in staking. Cryptocurrency exchanges such as Binance and Kraken already run big staking pools.
Etherscan data shows that there is more than $1.3 billion locked up for Ethereum 2.0 staking — it's barely a month since the Beacon Chain went live, and more than $1 billion has already been staked. This shows that people have faith in Ethereum and are willing to lock their funds in exchange for operating the network. This is bullish for the network.
DeFi Continues to Scale
Decentralized finance, or DeFi, was the hottest term in cryptocurrency for the majority of 2020, rewarding early investors with exponential returns. As the vast majority of DeFi applications are built and managed on Ethereum as ERC20 tokens, the sector's growth has also fueled Ethereum’s rise.
The DeFi boom led to network congestion on the Ethereum blockchain, causing miners to charge exorbitant high gas fees to validate transactions.
The sound of network congestion may sound counter-productive for the platform, but it is also a sign that there is a lot of activity on the chain. It also forces developers to push the envelope to come up with novel solutions to address the scalability challenges.
There is currently more than $20 billion locked in DeFi. The majority of DeFi applications are built on Ethereum's blockchain network. There is no need for a rocket scientist to see that the network is in demand, and has been chosen over its competitors.
A cryptocurrency fund is a portfolio made up of different digital assets and managed by one or a group of individuals. Investors buy the funds and reap their profits when the fund grows. The funds expose investors to digital assets, giving them a chance to invest in digital assets even without holding them.
Here are two of the biggest Ethereum funds in the market right now.
- 3iQ, an investment fund manager exposing investors to digital assets, raised more than $76 million after its Ethereum Fund listed on the Toronto Stock Exchange (TSX). The U.S. exchange Gemini, founded by the Winklevoss twins, will hold all the ETH in the fund.
- The Grayscale Ethereum Trust enables investors to be exposed to ETH's price movements without the challenges of buying and storing the digital asset. The digital assets are held in an offline wallet by Coinbase Custody Trust Company. Grayscale’s managing director has recently commented on the growing number of ETH-only investors.
Ethereum in 2021
It is a no-brainer that Ethereum has bright 2021 prospects.
The second stage (or Phase 1) of the road to Serenity, is expected to be shipped sometime in 2021, which should have a very positive price impact on Ether if it goes smoothly. By building on the success of the Beacon Chain launch, the protocol should be able to continue with its upgrade without threatening hassles.
Expectations are high that the DeFi boom will continue unabated on the Ethereum chain once Bitcoin’s current pump runs its course. This will be more so as the network makes the timely upgrade to be more scalable.
All these technical developments are good for the chain and its adoption. Coupled with increased security provided by the migration to PoS and more ETH being locked away for staking purposes, Ethereum’s trajectory in 2021 remains on course for the stars.