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ICO investment: Ethereum 2.0-proof-of-stake testnet is live.

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Ethereum’s latest upgrade to a proof-of-stake testnet blockchain is live, according to a medium post by Preston Van Loon, co-founder of sharding development firm Prysmatic Lab.  The major upgrade of its consensus algorithm will witness a switch from proof-of-work (POW) based algorithm to a proof-of-stake (POS) based protocol. But what implications does this change have? And how will miner be affected? But before I get into that a little bit of history is needed.

Ethereum, The DAO and Ethereum classic

Ethereum is an open-source blockchain platform that has smart contract functionality enabling developers to build Decentralized applications on its platform. Proposed way back in 2013 by Vitalik Buterin, the project really didn’t take until 2014 when development was funded through an Initial Coin Offering-having raised $18 million.

In 2016, DAO or Decentralized Autonomous organization which is a set of smart contracts developed on Ethereum’s platform raised a whopping $150 million by launching an ICO, according to InWara’s ICO database. DAO helped the developer community realize a fatal flaw with smart contracts on a public blockchain.

The downside of deploying smart contracts on a public blockchain is that security risks and bugs are visible to everyone but cannot be fixed quickly. Although now there are smart contracts upgradability patterns, earlier a hard fork that made the contract invalid was the only way possible.

This was problematic for DAO as almost $50 million was siphoned off by an unknown hacker-exploiting a security risk in a smart contract. A Hard Fork to DAO was proposed to nullify the security risk as well as reappropriate the stolen funds, essentially reversing transactions. The subsequent debate between crypto-community members whether or not the funds should be reappropriated lead to the Hard Fork and formation of Ethereum Classic.

Ethereum 2.0- POS

The newly proposed proof-of-stake (POS) consensus algorithm would reward nodes for validating transactions by holding Ethereum. In return for validating transactions, the nodes will be consequently rewarded or penalized depending on performance. Incentivizing nodes to curb the fraudulent activity. Ethereum 2.0  is expected to be completed by the end of 2021.

The new test net is also expected to implement sharding techniques to increase the scalability of Ethereum blockchain, something that quintessential for creating a truly global impact. But more importantly what ramifications will this shift from mining to validation have?

Periodic graph of No of transactions and Mining profitability

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The average number of transactions has steadily increased from February from ~400K to an average of ~680K during the month of April. On the other hand, mining profitability has observed erratic behaviour with sudden dips and surges, according to InWara’s crypto price data API.

According to Anthony Sassano (sassal0x), the co-founder of EthHub, an increased validator reward for Eth2.0 stakers was put forward, that is going ensure overall network issuance of 1% at 30 million ETH staked.

However, if the utility and other overhead costs of running a validator on Ethereum and the annual profit margin could go down to a net yield of just 0.8%. according to global token strategist for Consensys Collin Myers. Although a low yield, it is still a positive one which is expected to rope in more validators.

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