World's second largest cryptocurrency to get upgrade today

Ethereum (the cryptocurrency itself is technically called ether) trades at ₹44,605.49 (USD 606) at present, almost 5 times its value at the start of this year at ₹9,625. However it is still a long way off from its peak of ₹88,125 reached on 12th Jan 2018. Ethereum has a market cap of 70 billion USD compared to Bitcoin's 360 billion USD.

Bitcoin at its heart, depends on miners. Miners are entities which solve complex mathematical equations in order to get the chance to validate the bitcoin blockchain (the record of all transactions in it). Validating the blockchain generates transaction fees for miners. This is called ‘proof of work.’ However this requires large computational power and hence electricity, bringing the system in for criticism from environmentalists and also raising the cost per transaction. It also opens the system to capture by large organised mining companies.

Ethereum 2.0 will move from this proof of work system to ‘proof of stake.’ In this system, entities to validate the blockchain will be chosen by ‘staking.’ Instead of solving puzzles, those who hold larger quantities of ether and hold it for long periods will have a higher chance of getting selected as validators and hence generating fees from the validation. Anyone with 32 ETH (ether) can offer to stake, a process that currently locks up one's money for 1-1.5 years.

"The shift to Ethereum 2.0 starting today will take 2-3 years. The main benefit will be a fall in the cost per transaction, charged by miners/validators. This is currently 700-800 rupees for a bitcoin transaction and 150-200 rupees for an ethereum one. It will also allow ordinary people to earn some returns on their ethereum by participating in this new process of validation (staking). These returns will fall over time as the amount of ethereum staked goes up but is currently in around 18%. We at Bitbns will soon launch a staking pool to allow our users to get some returns from staking," said Gaurav Dahake, founder, Bitbns, a Bengaluru-based cryptocurrency exchange.

“Ethereum 2.0 has also hugely increased the number of transactions that can be processed per second. This coupled with the lower cost of transactions positions it to complement rather than supplement bitcoin. Bitcoin will be more seen as a store of value and ethereum, as a medium of transactions," said Ajeet Khurana, former CEO a large Indian cryptocurrency exchange.

Unlike other cryptocurrencies ethereum offers a technological platform on which smart contracts can be built, for instance loan agreements. These contracts can be created by computer code without the intervention of courts or legal authorities and execute themselves (for instance, by automatically seizing collateral).

According to experts, a drop in the cost of transactions of ethereum in the 2.0 shift can give a major impetus to such contracts. For now, Indian cryptocurrency exchanges are creating staking pools to attract users. "We will organise a staking pool by mid-December. This will allow small investors, even those with less than 1 ETH to participate in the returns from staking," said Arjun Vijay, co founder of the Chennai based Giottus Cryptocurrency Exchange.