What is Ethereum 2.0 - banks and money - banksandmoney.com

What is Ethereum 2.0?

What is Ethereum 2.0?

It’s been in the works for a long time now, but Ethereum 2.0 is finally on its way, and we couldn’t be more excited. Also known as ETH2 or “Serenity,” this massive update aims to address the Ethereum network’s scalability and security as it switches from the Proof-of-Work (PoW) system to Proof-of-Stake (PoS).

Proof-of-Work (PoW) vs. Proof-of-Stake (PoS)

What does a Proof-of-Stake system mean? How does it differ from Proof-of-Work?

What is Ethereum 2.0 - banks and money -banksandmoney.com
What is Ethereum 2.0 – banks and money -banksandmoney.com

Problems with the PoW system

In a PoW system, miners use high-end computer hardware and processing power to solve complex mathematical puzzles and verify new transactions. The first miner to successfully solve the puzzle adds a new transaction to the blockchain and is then rewarded with a newly-minted coin. We see this type of consensus mechanism in cryptocurrencies like Bitcoin (BTC). Although they’re incredibly secure, POW systems often have problems with scalability and accessibility as in the case of Bitcoin mining.  

Let’s start with scalability. Since PoW blocks are mined sequentially, there is a maximum capacity for each block (block size). This means that it can only process a limited amount of information in a given amount of time. Once that capacity is reached, the remaining transactions will have to wait for the following block and so on, causing delays or lag times in transaction speeds. 

On the accessibility side of things, entry barriers to becoming a PoW miner can be pretty high. You’ll need to purchase and set up all the necessary hardware (which isn’t cheap) and to earn considerable returns from the rewards, you’ll need to live in a region with lower electricity costs to make up for the energy that you’ll be using. 

How PoS can change the game

Instead of using miners to add blocks to the chain, transaction validators stake their crypto for the right to verify a transaction. These validators replace miners as individuals who maintain the blockchain and verify its transactions. As a result, they’ll also be the ones to receive the block rewards. 

Transaction validators are selected to propose a block based on how much crypto they hold and how long they’ve held it. Only these validators can attest that they’ve seen a block. Once a block gets enough attestations, only then can it be added to the blockchain. The process of choosing the next block is called forging or minting

Broadly speaking, PoS replaces the two primary components of PoW—miners and electricity—with validators and stakes. Because of this, the main advantage of PoS is that it’s far more energy-efficient than PoW since validators don’t need a lot of computing power to secure the blockchain.

The accessibility of PoS also means that there’s a lower entry barrier for Ethereum mining. You won’t need the most powerful computer to become a transaction validator. All you need to do is stake crypto.

Ethereum vs. Ethereum 2.0 

By this time, you’re probably wondering how Ethereum 2.0 works and how it differs from the Ethereum we have today. ETH2 aims to bring changes that’ll address scalability, throughput, and network security. 

First, let’s talk about scalability and throughput. Right now, the Ethereum network can only support around 30 transactions per second. It may sound like a lot, but with the prices of crypto rising, the network can often get congested. Ethereum 2.0, on the other hand, promises up to 10,000 transactions per second. To achieve that goal, it’ll be making use of something called shard chains

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Shard chains are a scalability mechanism that will drastically improve the throughput of the Ethereum blockchain. It’ll do this by “splitting” up the blockchain. Currently, the Ethereum blockchain is a single chain made up of consecutive blocks. Although this makes it incredibly secure and makes information easier to verify, miners have to verify transactions sequentially—meaning that it may affect the ability to process transactions quickly, especially in times of high activity. 

By “splitting” up the blockchain, the data processing responsibility is divided among many nodes. This means that transactions can be processed in parallel rather than consecutively. 

Next, let’s talk about security. Ethereum 2.0 has been devised with security in mind. Many of the PoS networks we see now will usually have a small set of validators—meaning that the system is more centralized (thus, less secure). However, ETH2 will require a minimum of 16,384 validators, meaning that it will be more decentralized and secure. 

The ETH2 roadmap

The rollout for Ethereum 2.0 launched in December 2020, starting with the first of its three phases: Phase 0. This stage of ETH2 saw the Beacon Chain’s implementation, which stores and manages the registry of validators. Later down the line, it’ll implement the PoS consensus mechanism but keep Ethereum 1.0’s PoW chain running to ensure continuity. 

The next phase is Phase 1, which is likely to roll out this year. This phase will see the implementation of the shard chains we were talking about earlier, which will split the blockchain into 64 different chains—and, in turn, allow parallel transaction, storing, and processing of information. 

Phase 2, although not as defined as the other stages, will involve adding ether accounts (enabling transfers and withdrawals), implementing cross-shard transfers and contract calls, building execution environments so that scalable applications can be built on top of ETH2, and bringing the ETH1 chain into ETH2 so that PoW can finally be turned off. This is scheduled to happen later this year or in 2022. 

You can think of Ethereum 1.0 as a road, while Ethereum 2.0 is a highway. Once construction on the highway starts, the road stays open for people to use. After more construction, barriers are put on the highways so that these paths are rigorously tested and inspected, all while the road remains open. Once the highway is deemed safe, the barrier is removed, and people can now experience safe and quick travel. 

What is Ethereum 2.0 - banks and money -banksandmoney.com
What is Ethereum 2.0 – banks and money -banksandmoney.com

How can we prepare for Ethereum 2.0?

While we wait for all these changes to happen, Ethereum 1.0 will be entirely usable in the meantime. There will come a time where the ETH1 chain will be part of the ETH2 chain, and even then, your ETH will continue to function just as it does now. 

As for how the price will be affected, no one can tell for sure. In theory, more scalability can mean more usage, which, in turn, can mean more demand. And if more people are using Ethereum, the price can go up. Some even speculate that Ethereum gas prices may go down after ETH2 is fully functional. 

For those who want to participate in staking, you can become a validator on the Ethereum 2.0 beacon chain by depositing ETH into what’s called the validator deposit contract on the Ethereum 1.0 chain. Before you do so, remember that in Phase 0, transfers are disabled. That means you’ll have to wait until Phase 2 to withdraw your ETH to a specific shard (at which point your stake and the rewards accrued will be entirely usable in ETH2). 

Right now, there’s nothing we can do but sit and wait until all the phases of Ethereum 2.0 are completed. Until that moment comes, let’s enjoy what we have, learn how to buy Ethereum, and give the developers some time to make sure ETH2 is ready for release. 

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