How Will Ethereum 2.0 Affect DeFi?

How will ETH 2.0 affect Defi

With all the promise of being the platform for the web 3.0, or the world computer, is it fair to say Ethereum hasn’t delivered?

It does host thousands of dApps, is the bedrock of the DeFi space and is the platform for tens of billions of dollars in crowdfunding. Not bad for a fiver-year old start up.

But with Ethereum 2.0 on the doorstep, and a gradual move onto proof of stake, how will the transition and staking on Ethereum 2.0 affect DeFi?

Ethereum 2.0

Like any technology, Ethereum was created in several stages. We have seen many stages implemented, but with Ethereum 2.0 coming we are about to see the biggest changes to the network.

The first stage of Ethereum 2.0 is known as Phase 0, and this will introduce the Beacon chain, which is a proof of stake chain, and will run alongside the proof of work Ethereum main chain.

how will ethereum 2.0 affect defi

The Beacon chain will be a testnet for the proof of stake, and will require 16,384 validators to stake 32 ETH each, meaning a total of 524,288 ETH will be needed to stake just to launch the Beacon chain.

Phase 1 will then introduce 64 shard chains, which will all be separate but interopable Ethereum chains, alongside the Beacon chain and Ethereum main chain.

Phase 0 and Phase 1 will build the foundation of Ethereum 2.0 and the congestion and scalability problems that are plaguing the Ethereum network now, should be erased as both phases are rolled out.

Once these phases are fully functional we will see the merge of the Ethereum main chain into the Ethereum shards, and the main chain will transform into a proof of stake chain and become a shard.

How Will Ethereum 2.0 Affect DeFi?

Until the merger of the blockchains, the proof of work model will continue to be supported and developed to ensure the platform for dApps and DeFi runs smooth. But how will Ethereum 2.0 affect DeFi?

DeFi is a billion dollar industry and growing, and it can’t afford any major disruptions, so the applications on it will likely move conservatively.

Jack O’Holleran, the CEO of the Skale Labs – the company that developed Ethereum-based Skale Network, explained that the shift to Ethereum 2.0 will take time for DeFi applications, as most will probably wait until the merger of the chains and then take time to transition to suit them.

DEFI

When Ethereum 2.0 is fully functional it can only be a positive for the DeFi space, however. With multiple shard chains all running, the Ethereum network transaction speed and throughput will increase considerably.

Every shard chain will host its own community, and keep track of its own history, but will all be connected to the main chain.

They will all be interoperable and users will be able to send ETH and other DeFi tokens across chains seamlessly.

Any application on any certain chain will be able to communicate with other application, and as long as they work together the transaction of any token will be seamless, very cheap and fast.

There will be less congestion for the whole network and the staking model should introduce lower transaction fees.

How Will Staking Affect DeFi?

It’s claimed that staking on Etheruem will benefit the Ethereum eco-system at large, but there can be no doubting, staking is similar to part of the DeFi industry, so will this not affect DeFi?

Basically, Ethereum stakers will hold their ETH in a staking wallet and earn interest for their troubles. Therefore, won’t staking eradicate part of the DeFi industry?

Ledger Nano X - The secure hardware wallet

Not according to the communications director at DappRadar, Jon Jordan. He claims, ‘staking and lending aren’t mutually exclusive actions’, and that ‘the value set to be held in Ethereum staking would never have gone into DeFi.’

What’s more, ETH staked will likely be a long term strategy for most investors/stakers, who will likely be looking to make a passive income.

Bringing it All Together

Ethereum 2.0 is almost upon us. The speed, security, and innovation this is set to unleash will benefit everybody, including the DeFi industry.

No doubt many in the DeFi space are in it for the profits, but there’s no reason this won’t continue.

In fact, as Ethereum grows, and DeFi grows along with it, it should usher in more interest, and more ways for people to make money.

Ethereum 2.0 is a giant step forward for the Ethereum community, and the DeFi space will be one of the biggest benefactors.

Author: Pablo Clarke

Leave a Reply

Your email address will not be published. Required fields are marked *

Like what you're reading? Please share it...

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on telegram
Share on reddit
Share on email
Share on vk
Share on tumblr

When I came up with Ethereum, my first first thought was, 'Okay, this thing is too good to be true.' As it turned out, the core Ethereum idea was good - fundamentally, completely sound

As an Amazon Affiliate, Ethereum Nexus may earn from qualifying purchases