What is Ethereum 2.0? How will it differ from the current Ethereum protocol? These are a few questions being asked as the development of Ethereum 2.0 gains momentum. and the community eagerly awaits the launch of the new and improved network.
The Ethereum Foundation has been working on Ethereum 2.0 as the first upgrade to the existing Ethereum Classic blockchain, intended to increase the Ethereum network’s speed, efficiency, and scalability while boosting security and making the network more sustainable. While there is still some confusion about what exactly ETH2.0 will be, we can get a general idea of its purpose and what to expect from it.
Table of Contents
The Ethereum blockchain is a decentralized platform that enables developers to create and deploy decentralized applications. Ethereum was created by Vitalik Buterin in 2013 and has since become one of the most popular blockchain platforms in the world.
Ethereum offers several features that are not found on other blockchains, including smart contracts and programmable transactions. This makes it an attractive platform for developers who want to build decentralized applications.
In addition, the Ethereum network is also home to a large community of users who support the development of new applications. As a result, the Ethereum blockchain is likely to remain one of the most popular blockchain platforms for years to come.
Ethereum and Ethereum 2.0
Ethereum 2.0 is coming, and with it comes some big changes. One of the most significant changes in the upgrade to a Proof-of-Stake consensus algorithm. This will have a major impact on how users interact with the Ethereum network, and could potentially lead to more widespread adoption.
Benefits of Upgrading the Ethereum blockchain
Ethereum’s transition to proof-of-stake will allow for faster transactions and lower fees. With the algorithm that chooses one node over another, rather than nodes competing with each other using large amounts of power, a consensus is reached in this new system which improves upon what was before by a significant margin.
How Will The Upgrade Improve Efficiency and Scalability?
The Ethereum network has current scalability issues that can be improved through sharding; a process in which the entire network is split into multiple portions known as shards.
Each shard would each contain its independent state. This means that instead of all transactions being stored on one blockchain, there would now be many separate ones with different balances and smart contracts improving efficiency while still maintaining stability in case something goes wrong.
Shard chains provide extra, cheaper, storage layers for applications and rollups to store data which enables the ability to offer low transaction fees while leveraging the security of Ethereum and improving scalability.
What is Involved in The Upgrade Process?
From the end of 2020 to 2022 Ethereum 2.0 is rolling out in 3.5 phases:
Phase 0, which launched in December 2020, implemented the Beacon Chain, the registry of validators, and deployed the Proof of Work mechanism.
Phase 1 launched in 2021 with the first iteration of 64 shards.
Phase 1.5 is when the current Ethereum 1.0 chain becomes an Eth2 shard. At this point, validators can both enter and exit the scheme.
Phase 2 Shard Chains is scheduled for the end of 2022, and It will be an upgrade where the 64 shards will be fully functional with smart contract compatibility and other added features.
Upgrades are being built by multiple teams from across the Ethereum ecosystem. While some upgrades are separate from the Ethereum Mainnet we use today, they will not replace it. Instead, the current Ethereum mainnet will ‘merge’ with this parallel system that’s being added over time.
Introducing Ethereum 2.0
Ethereum is set to undergo a major upgrade with the release of Ethereum 2.0, also known as Serenity or ETH2. The primary objective behind this change in consensus mechanism from PoW (proof -of work)to PoS(proof-of-stake), which reduces transaction fees and make networks more sustainable while increasing their capacity for transactions.
The upgrade will more likely have an impact on Ethereum miners rather than holders, as the shift to proof-of-stake will see staking take over from mining to approve transactions.
Proof-of-Stake vs. Proof-of-Work
Proof-of-work – PoW is a consensus mechanism that requires an expedient amount of effort to prevent malicious use of computer power.
The main problem with PoW is the amount of energy needed for mining. Solving a hash takes a certain amount of energy, requiring specialized hardware. The faster the hardware, the harder the hash will have to be to solve, and therefore the total amount of power needed is ever-increasing for essentially the same task of solving a single hash. Over time the amount of energy needed to complete this task has become excessive and is now an ecological concern.
Proof of stake – PoS is a consensus mechanism for facilitators of the ETH blockchain to achieve distributed consensus.
Proof-of-stake comes with several improvements to the proof-of-work system:
- better energy efficiency – low energy requirements for mining blocks.
- lower barriers to entry, reduced hardware requirements – you don’t need elite hardware to stand a chance of creating new blocks; a laptop or smartphone will be sufficient.
- stronger immunity to centralization – proof-of-stake should lead to more nodes in the network
- stronger support for shard chains – a key upgrade in scaling the Ethereum network.
The Beacon Chain supports the entire Ethereum 2.0 system. It is a vital coordination mechanism for the new network, responsible not only for creating blocks but also for making sure those blocks are valid, rewarding validators in the network with Ethereum for keeping it secure.
The Beacon Chain is a critical component in managing proof-of-stake protocols. It not only serves as the main tracking system for all stakeholders but also ensures that each shard’s blocks are created by nominated proposers and organized into committees to vote on them at various stages throughout the consensus process.
The most important function of the beacon chain is being able to provide an open-source framework that could be utilized across many different types of application scenarios involving decentralized ledger technologies like blockchain.
With proof-of-stake in place, the next stage of Ethereum 2.0 is establishing shard chains, which will upgrade the data capacity and make it faster for all users on the network to access their information in one place without having any delays or glitches.
This new system also allows different parts/nodes within each individual’s browser (or other application) to load up differently so they don’t have a lot slower speeds than others who might be running legitimate software.
Sharding is a way to increase scalability and capacity for Ethereum by creating smaller shards that each store data. These new “shard chains” offer cheaper storage with increased security, which makes them perfect as alternative blockchain layer 2 solutions.
Features of Shard Chains
Everyone can run a node – Sharding is a great way to scale your blockchain if you want to keep it decentralized. The alternative would be scaling by increasing the size of an existing database, which means that Ethereum becomes less accessible for network validators because they’ll need powerful and expensive computers.
With shard chains, they only have data relevant to their specific shards (rather than all), so the speed is maintained while drastically reducing hardware requirements.
More Network Activity – Sharding is a great way to make Ethereum more accessible for everyone. It’s not just about increasing scalability anymore– now we’re talking societal benefits! Sharded networks will allow people with limited resources (like laptops or smartphones) to participate fully in blockchain technology without any barriers whatsoever.
This means less centralized systems which are safer because they have far fewer points where hackers can take advantage; you won’t need an expensive computer farm or be connected through high-speed hubs like internet providers if your only connection option includes mobile data plans.
As part of the upgrade, a staking model will replace the current model of mining. Proof-of-stake will be used for validating transactions and earning staking rewards on blockchains and anyone with enough currency balance looking to start staking can become a validator to earn rewards.
To become a validator on the network, users must stake at least 32 ETH. If that is too much, they can join a staking pool which will allow you to stake less and earn portions of the total rewards. Validators, like miners in proof-of-work, are in charge of arranging transactions and constructing new blocks so that all nodes can agree on the network’s state.
Some platforms are allowing Ethereum holders to stake their holdings on the testnet now however, the staked ETH will remain locked in place until the full release of Ethereum 2.0.
The Ether will of course earn staking rewards while it is locked, but stakers can not remove their ETH from the stake pool.
When there is very little ETH staked, the protocol rewards will be larger as an incentive for more ETH to come online. As an increasing amount of ETH is staked, the reward is reduced.
While staked ETH and rewards are locked in the network during an upgrade, Coinbase plans to provide a way for holders of these tokens to trade them with other assets.
What Ethereum 2.0 Means for DeFi
Ethereum has a massive decentralized financial ecosystem, but most of it is nearly unusable as it currently stands. This congestion can cause transaction fees to be larger than the money being moved by users in the first place- which isn’t ideal for anyone!
With ETH 2 .0, however; things could change drastically because if successful, this new upgrade will remove many current bottlenecks from within Ethereum itself thus making transactions faster and less prohibitively expensive.
Ethereum is a great blockchain for conducting business, but it has some limitations that prevent its full potential. For instance, there’s no way to trade small amounts of money without paying large fees on most decentralized exchanges due to their expensive operating costs.
Transaction fees are so high because they are controlled by miners, creating a conflict of interest. With PoS, these issues will essentially no longer exist.
Currently, Ethereum can only handle around 30 transactions per second. It has been alleged that 2.0 may eventually scale to as many as 100,000 transactions per second using sharding and other tactics.
What Costs Will Ethereum 2.0 Affect?
Predicting that the new upgrades could make Ethereum more affordable in producing and minting projects, it is likely the value of Ethereum will rise but the price should remain the same.
In terms of gas fees, however, they are expected to drastically decrease since the upgrades will enable the platform to process thousands of transactions per second and scale globally.
Risks Associated with Ethereum 2.0
Despite the advantages that Ethereum 2.0 offers for users and stakeholders it may also carry significant, negative consequences to those who depend on this networked currency’s functionality as well as any businesses operating within an economic ecosystem based around crypto tokens utilized by many people daily.
The potential dangers associated will depend largely upon how developers choose to implement their upgrades; however, if executed incorrectly it can cause major disruptions both financially (through loss) and personally where one’s identity has been compromised due to data being exposed.
High requirements for stakers and the need to freeze funds can create risks that are not fully understood by average users. This leads them into situations such as theft or loss of withdrawal keys when they undertake incorrect procedures while transferring balances.
There are risks to consider when shifting from Ethereum 1.0 into its newer version 2., which will allow a user to earn rewards on this new PoS-based network by staking coins – but they’re not always obvious! For instance, if the price drops significantly during or after transition; then what? Your funds cannot be sold unless someone wants them back at their previous value because there’s no way for anyone else to know how much each token was worth beforehand.
One risk with moving from Ethereum 1.0 to 2 is that you may not be able to sell your staked coins after the transition because they’ll suddenly drop in price, leaving users open for loss and unable to mitigate it without taking additional risks like buying more ETH at current rates.
Security can also be a concern (can I trust this?) which could lead to an issue of holding onto investments. Also, if ETH starts to devalue, it will be impossible to sell instantly. Thus, there is a risk of losing part of the capital and all of the income received from staking.
Ethereum 2.0, Yay or Nay?
As Ethereum 2.0 nears launch, it is important to understand the risks and benefits involved with the upgrade such as improved network performance and security but also the potential loss of investments. With a clear understanding of what Eth 2.0 entails, investors can make an informed decision about this new technology that is set to shake up the Web3 world.