Eth 2.0 and the VC opportunity
What does Ethereum 2.0 mean for DeFi? This is an essential question that all DeFi investors should be asking themselves right now. Ethereum 2.0 is a massive update to the Ethereum blockchain that will introduce Proof of Stake (POS) as its consensus mechanism.
Ethereum is the second-largest cryptocurrency. It has a market cap of $364 billion. Ethereum is also used for many other blockchain developments: Decentralized finance (DeFi), the metaverse, more than 500,000 ERC-20 tokens, the vast majority of NFTs (non-fungible tokens), and the future frameworks for the decentralized economy. Ethereum’s primary value proposition is that it enables DeFi. DeFi is a broad category of financial protocols built on Ethereum that offer alternatives to traditional financial products. These include lending and borrowing platforms, stablecoins, tokenized BTC, synthetic assets, etc.
Ethereum 2.0 is Ethereum’s switch from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus model. This change has been talked about a lot and is supposed to fix the problem of how much energy is consumed by network validators.
Mining has been a massive part of cryptocurrency and involves using high-powered computers to solve complicated mathematical equations. In addition to consuming a lot of energy, mining also requires a lot of computing power. The upgrade will eliminate mining and will instead encourage staking.
However, the Ethereum upgrade has not been smooth. It’s been promised for years now, and every time the community gets excited, something happens to push the date back. This has caused a lot of DeFi projects to launch on other blockchains instead. The delays stem from any number of reasons, from technical to technological, but the end result is the same: DeFi on Ethereum has been held back.
Ethereum’s dominance in DeFi is not due to a lack of alternatives but rather to its advantages. Security. Stability. Flexibility. The existence of Ethereum 2.0 will serve as a challenge to most alt-chains, offering low transaction fees, interoperability, scale, and access, and DeFi developers will have to decide whether to move their applications over or stay put on frameworks that are only seen as poorer cousins of Ethereum.
Ethereum’s upgrade to Proof of Stake is a big deal, not just for DeFi but for the whole crypto industry. It’s a move that will have far-reaching consequences.
The Biggest Upgrade to Ethereum to Date
The Ethereum 2.0 upgrade is nearing launch. The primary goal is to improve speed and efficiency and reduce fees for users of the Ethereum network. The upgrade also changes the consensus mechanism from proof of work to proof-of-stake, enabling users to have lower costs and transaction confirmations.
The current market has been dominated by TVLs, or total-value-locked transactions. While decentralized finance is a growing area, Ethereum’s complications are stifling the market and keeping retail users and institutions away. The network is likely to gain immense traction with improved scalability and fees.
As an upgrade, Ethereum is a vital step for the future of global decentralized smart contracts. Ethereum 2.0 will help ETH reduce its carbon footprint, level the playing field for investors, and empower users to have a democratic voice in its future. The future of Ethereum depends on the success of Ethereum 2.0. This decentralized financial system can open many doors to many people worldwide.
For VCs working in crypto, the PoS move will mean a massive increase in the scale and performance of Eth startups, bringing a stronger focus on DeFi and more capacity for companies to capture market share in a meaningful way as we get newly onboarded users into the vertical, who may have been turned away by environmental concerns, gas fees and slow transaction times. Ethereum 2.0 will enable more people to participate in the blockchain ecosystem. The network will attract more users and investors when the new version is launched.
With the merger creeping closer, there is a substantial opportunity for VC funding to concentrate on Ethereum as a protocol and Ethereum startups as investment opportunities; pre-merger investments are likely to be seen as early-mover advantages within the DeFi space.
When unhindered and unhampered by its current infrastructure, the network’s capacity and technology will unlock a new level of DeFi growth, and VCs must take note now and begin to position themselves for the post-merger landscape.
Ethereum’s proof-of-stake model is a big step forward for DeFi, but it remains to be seen how successful the upgrade will be. If Ethereum can execute its promise, DeFi will enter a new era of growth and opportunity. If not, DeFi may have to look elsewhere for the time being.