Ethereum has flown up from $127 to $570 growing up by nearly 350%. However, as we bring 2020 to a close, it looks like we are on the verge of a massive 2021. So, before we tell our Ethereum price prediction, let’s look at the main factors that will determine the price action.
The two game-changing factors that will determine Ethereum’s performance are – The Ethereum 2.0 upgrade and DeFi.
Smart contract expert Joseph Chowbest describes the difference between ETH 1.0 and ETH 2.0 as the same between a road vs. a highway. ETH 2.0 will greatly improve the scalability, throughput, and security of the whole network without eliminating any data history or transaction records.
The most significant change that ETH 2.0 will be bringing in is the transition from proof of work POW to a proof of stake POS blockchain. Proof of work is a secure yet highly wasteful process that has prevented ETH blockchain applications from scaling up. With POS, ETH2 will be able to turn the entire mining process virtual. Instead of relying on their processor’s strength, proof of stake will depend on the stake that a user locks up in the platform. More the stake, more their “hashing power.”
Along with this change in consensus, ETH 2 0 will be introducing innovations like sharding, zk-rollups, etc. Shard chains, in particular, are an exciting innovation that should scale up Ethereum exponentially.
Ethereum 2 0 will be launched using four phases – Phase 0, Phase 1, Phase 1.5, and Phase 2.
- Phase 0: During this stage, Ethereum will be launching the beacon chain and trigger the pos implementation. The beacon chain starts the proof of stake implementation and gets launched when – 524 288 ETH tokens are staked on the deposit contract, and the number of registered validators have crossed 16,384. Each validator must stake 32 ETH into the deposit contract to successfully participate in the system.
- Phase 1: During this stage, the main blockchain gets partitioned into 64 shard chains that run parallel to each other. The processing power of the network is channeled across these shard chains simultaneously.
- Phase 1.5: Between phases 1 and 2, the original POW chain gets merged with the beacon chain to create a hybrid consensus system. The original POW chain becomes one of the 64 sharded blockchains.
- Phase 2: Following the POS transition, ETH 2.0 will bring in other features like roll-ups and additional layer-2 fine-tuning.
Ethereum 2.0 currently has over $1 billion worth of Ether (ETH) for the first time. The blockchain has witnessed an increase in deposits, as the number of ETH rose from 98,000 last month to the current 1.5 million ETH.
Ethereum currently runs on the same protocol as Bitcoin – proof-of-work (PoW). This is how PoS works:
- Miners solve cryptographic puzzles to “mine” a block to add to the blockchain.
- This process requires an immense amount of energy and computational usage. The puzzles have been designed in a way that makes it hard and taxing on the system.
- When a miner solves the puzzle, they present their block to the network for verification.
- Verifying whether the block belongs to the chain or not is an extremely simple process.
While PoS provides an immense amount of security and stability to the system, it has three major issues:
- First and foremost, proof of work is an extremely inefficient process because of the sheer amount of power and energy that it eats up.
- It’s slow and makes the underlying protocol extremely unscalable.
- People and organizations that can afford faster and more powerful ASICs usually have a better chance of mining than the others. Theoretically speaking, these big mining pools can simply team up with each other and launch a 51% on the bitcoin network.
Ethereum will be improving upon their protocol by going up from PoW to PoS. ETH will be using the Casper protocol to implement its PoS mechanism. This is how PoS under Casper would work:
- The validators stake a portion of their Ethers as stake.
- After that, they will start validating the blocks. Meaning, when they discover a block which they think can be added to the chain, they will validate it by placing a bet on it.
- If the block gets appended, then the validators will get a reward proportionate to their bets.
- However, if a validator acts in a malicious manner and tries to do a “nothing at stake”, they will immediately be reprimanded, and all of their stake is going to get slashed.
- As you can see, Casper is designed to work in a trustless system and be more Byzantine Fault Tolerant.
- Anyone who acts in a malicious/Byzantine manner will get immediately punished by having their stake slashed off. This is where it differs from most other POS protocols. Malicious elements have something to lose so it is impossible for there to be nothing at stake.
Ethereum will leverage the ETH 2.0 updates and consolidate its position as the DeFi market leader. To understand why this is a major thing, let’s show you two numbers.
The first thing that we are going to be looking into is the total market cap. As you can see, throughout 2020, the total market cap rose from $191.50 billion to $672.75 billion. That’s a 250% rise in valuation.
On the other hand, let’s look at another number. This is a chart that shows the total value locked up in DeFi applications. As per the DeFi Pulse chart, the amount locked in DeFi contracts has risen from $675 million to $13.43 billion. A staggering 1,900% increase.
So, what does this tell us?
The global DeFi market cap is increasing at a rate much faster than the global cryptocurrency market. This shows that the DeFi space is growing almost exponentially. Now, why is this the case?
Well, DeFi apps, for better or for worse, are the most powerful and prevalent use cases of DeFi applications of the blockchain technology today. The top 3 use cases of DeFi are currently as follows:
- Borrowing and Lending.
- Monetary banking services.
- Decentralized marketplaces.
#1 Borrowing & Lending
Open and decentralized borrowing and lending are the most popular applications in the DeFi ecosystem. The lack of intermediaries reduces counterparty risk, making borrowing and lending cheaper, faster, and more available. Decentralized borrowing and lending have the following advantages over the traditional credit system:
- Instant transaction settlement.
- Ability to collateralize digital assets.
- No credit checks.
- Potential standardization in the future.
#2 Monetary banking services
Monetary banking services are a natural use case of DeFi applications. Issuance of stablecoins, mortgages, and insurance all fall under this category. The issuance of stablecoins has become a significant point of discussion in the crypto industry. Stablecoins are digital tokens which are intended to provide measurable stability and security. In layman’s terms, their value remains constant and stable.
#3 Decentralized Marketplaces
This is another fast-growing sector in the DeFi space. Decentralized exchanges (DEX) are probably the most promising applications here. In a regular exchange, you have to trust an intermediary (the exchange) to hold your funds for you. In a decentralized exchange, you’ll be able to connect with other peers and transact directly. Since the maintenance involved is drastically reduced, DEXs typically have lower trading fees than centralized exchanges.
Apart from the DEX, other projects involved in the space include the creation of derivatives, synthetic assets, decentralized prediction markets, and many more.
- Traditional finance relies immensely upon intermediaries. However, DeFi applications do not require any third-parties. This lack of intermediaries makes the applications a lot more frictionless.
- As the DeFi applications are decentralized and not controlled by a centralized entity, it removes single points of failure and is resistant to censorship.
- Since the underlying framework and blueprint has already been established, application creation can be pretty straightforward.
- DeFi applications are a lot more accessible worldwide. Traditional finance relies upon intermediaries, who may not make their services available in low-income territories.
Now, what does all this mean for Ethereum’s price action?
Ethereum’s je ne sais quoi is that it’s a programmable protocol. The more applications that developers build on the Ethereum protocol, the more users it attracts. As per Metcalfe’s Law, this increasing utility is going to have a very positive effect on Ethereum’s valuation. The growing network activity leads to increased ETH transaction fees and strong demand for the coin.
Through 2020, the number of institutional investors investing in Ethereum has risen by a huge amount. Michael Sonnenshein, managing director at Grayscale Investments LLC, a crypto-based trust has gained immense attention due to their investments, said in an interview with Bloomberg:
“Over the course of 2020, we are seeing a new group of investors who are Ethereum first and, in some cases, Ethereum-only. There’s a growing conviction around Ethereum as an asset class.”
According to Sonnenshein, before 2020 investors would overwhelmingly start with Bitcoin, but in the past 12 months, the second-largest crypto asset by market cap has been capturing a loyal following of its own.
So, why are investors flocking into Ethereum when they could just invest in BTC? Well, it’s simple – DeFi. DeFi is the hottest sector in the cryptospace and Ethereum is undoubtedly the market leader.
Grayscale manages around $14 billion worth of assets in its portfolio. While their Bitcoin Trust remains the most popular offering with a weekly average of $39.5 million worth of investments in the last 12 months, its Ethereum Trust has also gained plenty of popularity. Sonnenshein revealed that there has a been a surge in capital allocation from the big players:
“Grayscale Ethereum Trust has garnered the attention of a new segment of Ethereum-focused institutional allocators. During 3Q20, over 17% of inflows into the Grayscale Ethereum Trust came from new institutional investors.”
During Q3 2020, the Grayscale Ethereum Trust has received weekly inflows of $15.6 million, compared with Q2’s net inflows of $10.4 million and Q1’s inflows of $8.5 million. According to Sonnenshein, the number of investors asking for exposure to Ethereum is growing by the day:
“Over the course of 2020, we are seeing a new group of investors who are Ethereum-first and in some cases Ethereum-only. There’s a growing conviction around Ethereum as an asset class.”
Ethereum reached an all-time high of $1,432.88 on January 13, 2018. After the bear market of 2018 and 2019, ETH has surged up over 2020. Throughout this year, the smart contract leader’s price has risen by 500%, going up from $125 to $630. So, is ETH going to reach $1,000 and beyond?
Technical analysis says that it will.
Ethereum is on the course of charting a W-pattern in the monthly chart. If the price fulfills this pattern, then the price is on course of reaching $1,100. That’s a 75% rise from its current position.
The price of Ethereum over the next 5 and 10 years will mostly depend on the progress made in adoption and DeFi development. However, the outlook is definitely very positive. Brian Schuster, the head of Founder Solutions at Ark Capital LLC, predicts that in 10 years, ETH will reach a rather lofty $100,000 per coin.
Dan Morehead, the CEO of Pantera Capital, believes that ETH will reach six figures in 10 years. Finally, Nigel Green, the founder of deVEre Group, believes that Ethereum will go from $2500 to $100,000 during the bull market that will come after the ongoing one.