What Ethereum 2.0 Signifies for the Ethereum Blockchain, Investors, and Established Miners such as BIT Mining Ltd. (NYSE: BTCM)

May 25, 2022 11:05:00
  • Ethereum 2.0 is billed as the single-largest change in the history of the blockchain
  • The upgrade, set to be rolled out in phases, will involve migration from the current proof-of-work system to the proof-of-stake protocol
  • ETH 2.0 will also cap the supply of Ether, the network’s native token, potentially triggering price increases via scarcity 
  • BIT Mining Ltd. believes the proof-of-work and proof-of-stake systems will coexist

The Ethereum blockchain has long been a victim of its own success. Having lured software developers who built decentralized applications on top of the network, Ethereum has been accounting for the vast majority of total transaction volume within the decentralized finance (“DeFi”) space. While desirable, this market share catalyzed network congestion that has continuously pushed transaction fees (known as gas prices within the crypto market) upwards, slowed the transaction speeds, and led to the rise of competing blockchains. 

According to the latest statistics from YCharts, the average Ethereum gas price was $28.80 on May 15, down from a high of $474.57 on May 1 and $81.30 a year ago. The figures represent a sharp rise from a range of between $2 and $4 in late 2020. Even at its cheapest, Ethereum was still more expensive than the Binance Smart Chain (“BSC”), whose current average transaction fee per YCharts was $0.2496 on May 15, down from $0.5072 a year ago. BSC’s frugality has seen the number of daily active users grow to 1 million as of April 2021, a figure that had grown to over 2 million by early November. 

Forced Rethink

The shortcomings of the Ethereum blockchain have forced a rethink, with the network’s developers now gearing up for the phased rollout of an upgrade named Ethereum 2.0. Also known as ETH 2.0, Ethereum Merge, or Serenity, the upgrade is designed to move the network from proof of work (“PoW”)-based functionality, which also underpins the Bitcoin blockchain, to a proof of stake (“PoS”) system used by the likes of the Cardano blockchain.

Potential Benefits of Ethereum 2.0

ETH 2.0, which has been in development and testing for several years now, aims to solve the inefficiency that has long dogged the PoW consensus. “The Ethereum merge could speed up processing and offer greater security and stability, and a 98% or greater reduction in Ethereum’s energy consumption,” writes one author in an article published by Time magazine.

“Competing protocols such as Solana and Polkadot could see added pressure from the Ethereum ecosystem, as the upgrade will allow the network to scale, bring down transaction costs, and attract additional adoption of blockchain technology,” the article continues.

Experts and observers are billing the Merge as inclusive of changes that could stop Bitcoin’s blockchain dominance, which “suffers from a variety of real-world limitations, not least of which is its inability to scale,”  an article on Computer.org reads.

The article describes the staged rollout of the upgrade expected to begin in the first half of 2022, further noting that should the stages “go without any issues, the new Ethereum 2.0 should emerge from the process in a great position to finally end Bitcoin’s long reign as the cryptocurrency king. It will be a trusted system with far fewer scalability issues and a much larger feature set than its primary competitors.”

In addition to improving scalability – thanks to a process known as sharding, which partitions a database into smaller sections that are more manageable – and performance, ETH 2.0 could benefit holders of Ether – Ethereum’s native token – as it could increase the price of the token. This is based on the fact that the upgrade will cap the supply of Ether, which subsequently will make Ether more scare. 

Potential Negatives of Ethereum 2.0

The Merge will impact miners in a big way. By ditching the PoW system for PoS, Serenity will adopt a new approach to rewarding miners, who will no longer earn from facilitating transactions by solving complex mathematical problems. Instead, the new arrangement will require them to part with an amount of Ether (stake) that will be locked in a pool, earning staking rewards based on the number of coins in the pool and a random selection criterion. The more Ether that a miner stakes, the higher the chances the algorithm will pick the miner to forge a block of transactions and earn as a result. However, large stakes may still not predispose a miner to selection.

But as an article on Livemint writes, a lot could go wrong with Ethereum 2.0 – which represents the largest change of its kind in the blockchain era. From hacks and bugs to miners creating an alternative PoW-based network that runs parallel with the PoS system or redirecting their resources to other blockchain networks. 

Built-in Mitigation Measure

However, Ethereum’s core developers have implemented kill switches that will activate as soon as they detect issues, one of which is a drop in the hash rate as miners respond to the upgrade by powering off their mining equipment or redirecting their resources to other blockchain networks. But BIT Mining Ltd. (NYSE: BTCM) believes the PoW and PoS will exist together.

“We believe PoW and PoS will coexist for a period of time after the switch,” Danni Zheng, Vice President of BIT Mining, told Livemint. And according to the article, BIT Mining is in fact expanding its staking services.

BIT Mining is a leading technology-driven cryptocurrency mining company that owns BTC.com, the world’s top blockchain browser, and has been expanding its mining operations worldwide. In a January 18 press release that provided an update on the construction and buildout of its Ohio mining site in the United States, the company celebrated achieving about 50 megawatts (“MW”) of power capacity at the site. Ultimately, the data center at this mining site is expected to have a planned power capacity of up to 150 MW. The site will not only house BIT Mining’s self-mining operations but will also host third-party miners.

The press release also featured an update on the computing power the company had deployed as of mid-January. BIT Mining had:

  • 344.7 PH/s of deployed Bitcoin computing power in North America against a theoretical maximum of 532.8 PH/s 
  • 146.8 PH/s of deployed Bitcoin computing power in Kazakhstan against a theoretical maximum of 292.7 PH/s
  • 4,800.0 GH/s theoretical maximum Ethereum computing power in Hong Kong, of which 4,747.2 GH/s had been deployed
  • About 491.5 PH/s Bitcoin computing power in aggregate with estimated daily production of about 2.56 BTC
  • Approximately 4,747.2 GH/s Ethereum computing power in total with estimated daily production of about 72.29 ETH

According to the update, additional machines were awaiting testing and deployment.

For more information, visit the company’s website at www.BTCM.Group

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