Ethereum 2.0's 'Lock Up' Will Drive DeFi Innovation

Oct 16, 2020 at 15:10 UTC.The "Summer of DeFi" might be over, but a looming event will give DeFi engineers a great incentive to crank up their "Lego" innovation model and build more decentralized finance products: the Ethereum 2.0 upgrade.

With thousands of Ethereum 2.0 validators expected to stash more than 500,000 ether in a restrictive multi-year lockup, there will be significant demand for a creative solution that unlocks the value of those funds without undermining the upgrade mission.

As markets arise in the new instruments, their price signals will indicate how people think this massive Ethereum protocol change is performing.

As discussed during CoinDesk's invest: ethereum economy conference this past Wednesday, "Phase 0" of Ethereum's migration to a proof-of-stake blockchain involves having 16,384 validators each commit to place 32 ETH in a soon-to-be-announced deposit contract.

Those tokens will then be "Staked" to secure and govern a new parallel Ethereum blockchain known as Beacon, which will function as a live environment for testing the proof-of-stake system to which all of Ethereum will eventually migrate.

The key point is that the locked ETH cannot be sent back to the original Ethereum blockchain and cannot be accessed until the two systems are merged and the duplicate ETH on the legacy chain destroyed.

The current timeline for the lockup is 18 months, but given how long it has taken for this first phase of Ethereum 2.0 to start, it could well take much longer.

They are held by true believers in the Ethereum mission, who are actively interested in how it evolves, not by casual ETH investors.

Given what we know about how DeFi innovators use oracles and smart contracts to create new assets like "Wrapped" bitcoin, taking value created in one chain and use it as collateral in another, it's a solid bet that new tokenizing contracts will be used to bring liquidity to all that otherwise locked ether.

Both are somewhat dependent on how well and how efficiently Ethereum developers progress toward the goal of a full integrated Ethereum 2.0 transition.