The switch to proof-of-stake in ETH 2.0 is just months away, and analysts are optimistic about the update. This is why.

Analysts believe Ethereum is now nearing its transition to proof-of-stake, as well as improvements to gas fees that will benefit its coin — even as competing DeFi blockchains close in on it.

Proof-of-stake is finally running on Ethereum testnets after seven years of development, and it appears to be months away from final launch, according to the network's cofounder Vitalik Buterin, who spoke at ETHDenver last month.

Ethereum 2.0, in addition to requiring less computer power than "proof-of-work," claims to be faster and more secure. It is also expected to reduce transaction costs and supply, which some analysts say will benefit ether, its native token.

"I expect ethereum's transition to proof-of-stake to have a long-term favorable influence on price," GlobalBlock market analyst Marcus Sotiriou told Insider.

"This is because it should significantly reduce the cost of transactions on the Ethereum network, which is currently ethereum's biggest disadvantage."

When the network is congested, these charges can skyrocket as users fight for miners to execute their transactions. Currently, ethereum is using a surge-pricing scheme, which causes transaction fees to be highly variable.

The essential EIP-1559 protocol was added to the London hard fork upgrade in August, making the costs more predictable. EIP-1559 established a minimum base fee for transactions, which was determined by algorithms rather than through an auction.

These gas costs are "burned," or sent to an inaccessible wallet, reducing the amount of ether in circulation.

Amber Ghadder, creator of DeFi start-up AlianceBlock, believes that the next step of ethereum's evolution — the merging of its mainnet with the Beacon Chain proof-of-stake mechanism — will cause further burn.

"We've already witnessed a few weeks of deflationary supplies since November, which hasn't had a significant influence on pricing," she told Insider.

"However, the Merge, which will reduce ETH issuance by 2 ETH per block, combined with the burn, should put substantial downward pressure on supply."

The switch to proof-of-stake should help improve congestion, which is why analysts are optimistic.

"The number of transactions is closely connected with the price of gasoline. If we expect gas prices to reduce, we can expect to see a rise in smaller-sized transactions, boosting network usage and driving up pricing "Ghadder explained.

However, Ghadder does not expect any rapid boost in ethereum capacity as a result of the transition, thus its immediate impact on gas costs may be modest.

"The launch of ETH 2.0 is expected to be short-term neutral and long-term bullish," she stated.

High-powered computers compete to solve puzzles in order to create new coins in the proof-of-work system. People use proof-of-stake to put their holdings up as a down payment, allowing them to mine currencies.

Up-and-coming ethereum competitors such as solana and avalanche are based on proof-of-stake techniques. According to CoinGecko data, while solana's sol has increased 589 percent and avalanche's avax has increased 202 percent in the last year, ethereum has increased 73 percent.

DeFi, or decentralized finance, is dominated by Ethereum, which exploits the network to construct crypto apps for financial services.

However, according to JPMorgan analysts, it has swiftly lost DeFi market share to competitors, falling from nearly 100 percent at the start of 2021 to 70 percent a year later.

"With this upgrade, Ethereum is attempting to address scalability and high-cost concerns," Ed Moya, senior market analyst at Oanda, told Insider.

"It is still winning the race as the top smart contract blockchain, but the competition is growing."

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