1. Ethereum 2.0 – What is it?
Since Ethereum’s inception in 2015, a lot has changed in the cryptocurrency market, with many newer and more innovative ecosystems emerging. We have had interesting trends like ICOs, DeFis, NFTs that have shown the pros and cons of the network. Scalability (number of transactions per second) and high transaction fees are the main problems with Ethereum, which ETH 2.0 aims to solve.
Ethereum 2.0, also known as Serenity, is nothing more than an update to the Ethereum 1.0 network that will change it in many ways. After the update, transaction speeds will increase from around 30,000 to 100,000 per second.
Its main goal:
- Increase the blockchain’s capacity
- Reducing fees.
- Balancing the network.
- Switching from Proof-of-Work to Proof-of-Stake consensus.
- Changing scaling technology.
Hard Fork London – the beginnings
We won’t go very deeply into the topic. There is a separate lesson prepared for this update. However, for you to know the complete genesis of Ethereum 2.0, you need to know its origins. On August 5, 2021, Hard Fork London took place. It was also nothing more than an update to the network that included proposals to improve it-it affected the way Ethereum’s transaction mechanism worked. How? It changed the method of calculating the amount of ETH required for a transaction and determining where that ETH goes. In the crypto world, this was called the base fee. Currently, this fee is burned from the supply of ETH.
The second important change was the introduction of a tip – a priority fee. The tip is given to the miner to prioritize your transaction in the block. In the context of the ETH 2.0 update, EIP 1559 (Hard Fork London) has many benefits.
At the beginning of the lesson, we mentioned to you what the main objectives of this update are. It takes place in three phases. The so-called phase 0 has already come into operation. It is in this phase that the “Beacon Chain” was introduced on 1 December 2020. Interesting name, right? ☺ It is a tracking chain, basically a new blockchain that the current Ethereum chain will connect to. Beacon introduces PoS and prepares Ethereum for staking and shard chain. We can call it a test chain for the upcoming new version of Ethereum.
The second phase is The Merge – the merger (June 2022). This is the official transition to the Proof-of-Stake consensus. This is when we will see Ethereum merge with Beacon Chain. As an exciting aside, we’ll tell you that the developers of the network are calling this merger “docking”. With docking, ETH holders will be able to stack their coins and earn rewards. In our opinion, this is one of the most important steps. PoS, like Santa, will bring with it much lower transaction fees and make them faster. The Merge also has an impact on the amount of ETH burned and emitted.
The Merge is currently in the testing phase on the Kintsugi test network. Unlike previous developers, Kintsugi is open to the entire community.
Sharding-a solution to the Ethereum problem?
Phase three, for a change, is often called “phase 2” and implements sharding. This enhancement will divide the network into 64 sub-chains, called fragments (shards). Each of these fragments will account for 1/64th of the network load. Beacon Chain, the backbone of Ethereum 2.0, will act as the synchronization authority for all these shards. This will keep the chain’s data and states up to date across all fragments.
Ethereum will be able to increase its scalability and transaction capacity.
Don’t be discouraged by the rather complicated language. If something is unclear to you, take a look at our other lessons and articles. ☺ Meanwhile, we’re moving on. Ready?
Ethereum 2.0, and network scalability
When you invested in ETH, you surely noticed that the scalability and capacity of the network is very low. Ethereum 2.0 plans to increase it with sharding. Newer PoS cryptocurrencies are already using this method. Sharding allows you to increase bandwidth without risking network security and decentralization. They will then be easier to manage. Additionally, more transactions can then be processed simultaneously, thus increasing throughput and speed.
Interesting fact – the PoW consensus stored an entire copy of the transaction history, thus taking up a lot of space in the network of computers. So, you already know why the PoS consensus is a better solution.
ETH 2.0 versus DeFi
Let’s optimistically assume that ETH 2.0 will be successful. It will then solve virtually all the problems faced by the legacy network. You know from previous lessons that a huge part of decentralized finance is built on top of the Ethereum ecosystem. Currently, the Ethereum network handles about 30 transactions per second. Version 2.0 is expected to transform the system to scale to 100,000 transactions per second.
Miners versus ETH 2.0
Well, we cannot leave them out. The introduction of the update won’t suddenly make them unnecessary for us. In the current version of Ethereum, transaction fees are high because they are entirely controlled by miners. The PoS consensus will eliminate this problem, but let’s ask ourselves – what will happen to them then? We’re already running with an explanation ☺
Ethereum has “drawn” from Bitcoin. So, it uses the energy-intensive process of mining the cryptocurrency. Miners solve cryptographic puzzles and acquire ETH. With ETH 2.0, this way of mining will become a thing of the past. Miners’ debates over the legitimacy of ETH 2.0 have been brewing for some time. Not everyone agrees with the introduction of the new consensus model. Proof-of-Stake requires far less electricity to sustain itself. The 2.0 system is to be sustained by users staking their tokens. Fraudulent attacks will be minimized by a penalty system that will reach rogue nodes.
One of Ethereum’s main developers has stated that chain merging will lead to the shutdown of ETH mining altogether. Not all miners agree with this. Some of them, mainly those with a wealthy wallet, will be able to continue mining ETH and hold the cryptocurrency with the hope that its price will rise.
Staking in ETH 2.0
Although the network is not yet available, you can stake ETH in the test version. However, keep in mind that your funds will be blocked until the release of ETH 2.0. What does this mean? That you can stake; however, you will not be able to withdraw your money. It is worth noting that staking on the Ethereum test network is complicated, expensive and very risky. We suggest that more technically advanced users use this solution. You can compare it to playing with leverage. To start staking in Ethereum 2.0, you need to own as much as 32 ETH.
Some exchanges allow ETH users to stake a smaller amount of ETH, however take away the user 15% commission from the rewards.
As you can see, the update is crucial for the network. It introduces many important changes. However, as it happens with developers, it slips in time. Vitalik Buterin himself admitted that ETH 2.0 is technically more difficult than they expected. Well, all that remains is for us to keep our fingers crossed for them and stay tuned for new information on the subject.
Bitcoin has given us an insight into what the future of financial autonomy without a central authority might look like. What about Ethereum? Ethereum shows us that we can program this future as we wish and adapt our reality to the limitless possibilities of the digital world.
- The Ethereum Foundation has decided not to use the nomenclature “ETH 1” and “ETH 2” in the update descriptions. They will be replaced by “execution layer” and ”consensus layer”.
- The name change is intended to reduce confusion around the update.
- The Arrow Glacier update is expected to delay the so-called difficulty bomb, a mechanism that makes Ethereum mining difficult.
- Arrow Glacier is expected to disappear after ETH transitions to PoS.
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