Bitcoin was the beginning of cryptocurrency, but Ethereum laid most of the foundations for the incredibly large and diverse crypto ecosystem that we know today. However, many of these foundations are now old and inefficient. Ethereum is struggling to compete against up-and-coming projects like Solana. Ethereum 2.0 is a huge network update that will help it perform to its potential within the latest era of cryptocurrency. This article will explain what Ethereum 2.0 is and discuss the big changes and benefits of the upgrade.
What is Ethereum 2.0?
The Ethereum network currently processes around 1.3 million transactions per day. This is a huge number, which positively reflects the adoption and demand for the Ethereum network. But it still pales in comparison to established payment networks such as Visa, which processes around 150 million transactions per day.
This is not really a fair comparison, as Ethereum was never intended to be a payment platform, but rather a platform for smart contracts and decentralized applications (dApps) to be built upon. For this reason, the original design of the Ethereum blockchain did not anticipate a need to handle the amount of volume it is currently experiencing. The result of this is that transaction times are long and fees can be very expensive.
Ethereum 2.0 is a massive overhaul of the Ethereum protocol that aims to solve some of the core issues with the original protocol and make Ethereum “more scalable, more secure, and more sustainable”.
What are the big changes in Ethereum 2.0?
It’s difficult to overstate just how huge this upgrade is. The Ethereum community is essentially rebuilding the Ethereum network from the ground up. They are not just taking the car in for a paint job, they are replacing the engine and the other internals as well!
Proof of Stake
The biggest and most ambitious change in Ethereum 2.0 is the shift away from the Proof of Work (PoW) consensus mechanism towards Proof of Stake (PoS). This stage of the upgrade process is known as “the merge”.
On a PoW blockchain, computers from around the world contribute computational power to verify transactions and mint new coins. PoW is extremely secure, but it requires a phenomenal amount of computing power, and therefore energy, to maintain. This is the consensus mechanism that Bitcoin and Ethereum 1.0 both use. By contrast, the PoS mechanism randomly selects a user who has staked some of their cryptocurrency to create the block instead. PoS is very energy efficient, but it can be difficult to implement, especially on an existing protocol like Ethereum.
In fact, Ethereum’s transition from PoW to PoS is unprecedented. It has never been done before in crypto. If it goes well, it could provide an inspirational roadmap for other PoW blockchains to make a similar transition.
Sharding is a scaling method that splits a blockchain into many different partitions or “shards”. Each shard contains the blockchain’s state and transaction history and can be processed in parallel.
Think of it like the box office at a cinema during the release of a popular film (Figure 1). If only one person were working at the box office, they would only be able to process one movie ticket at a time. However, if they open several more registers, they could process several movie tickets at once, with each worker accessing the same information about the movie, the ticket price, and the number of seats left. This is an oversimplified example, but this is one easy way to understand sharding.
Sharding technology has already been employed successfully in existing blockchains, such as Polkadot. For Ethereum 2.0, the implementation of sharding will create 64 new chains on the Ethereum network that will drastically help spread the transaction volume. In essence, this will take the huge amount of data that is currently stored on Ethereum nodes and separate it into smaller pieces, which will be stored on an ever-expanding number of new databases. This will vastly increase the transaction capacity of the Ethereum network.
Did You Know?
An ambitious, long-term goal of sharding is that it will allow everyday users to run an Ethereum node on personal devices, such as a mobile phone. This will vastly increase network participants and make the Ethereum blockchain even more secure and decentralized.
The Beacon Chain
The Beacon Chain is a foundational component that coordinates the expanded network of shards and stakers. It provides the infrastructure for PoS to be used on the Ethereum blockchain. The Beacon Chain also lays the foundations for sharding to be integrated into the network. Eventually, the Beacon Chain will be responsible for randomly selecting the stakers (users that have ETH staked) who will validate each of the shard chains. This will ensure a high level of security on every chain. It will be almost impossible (one in a trillion chance) for stakers to collude and take control of a shard.
Can I stake my ETH?
While staking is not available directly on the Ethereum network, you can already stake your ETH in a staking pool using a number of third-party platforms. If you have at least 32 ETH you can run your own validator node on the Ethereum 2.0 network, which helps secure the network while earning staking rewards. This can be set up using the Eth2 launchpad.
It is important to note that although you can earn rewards on your staked ETH now, you won’t be able to receive your rewards or withdraw them until the PoS and sharding updates are officially released. Take this into consideration before staking ETH.
You can stake your ETH now; however, you will not be able to receive or withdraw your staking rewards until the Ethereum 2.0 upgrade is complete.
The benefits of Ethereum 2.0
The Ethereum 2.0 upgrade will significantly improve the transaction speed of the network. The current speed is approximately 15 transactions per second (TPS) and the average block time is between 13-15 seconds. Networks like Solana currently process 50,000 TPS and have an average block time of 400ms. The Ethereum 2.0 upgrade will ensure that Ethereum can compete with these networks in terms of technical performance. It is estimated that the upgrade will increase the transaction throughput of the Ethereum network to approximately 100,000 TPS.
Lower gas fees
As a result of the faster transaction speeds, the network is likely to be far less congested, which means that users won’t have to pay such high gas fees to prioritize their transactions. Currently, the average gas fee on Ethereum can range anywhere from $3 to $70 depending on network congestion. It’s impossible to say how much lower the transaction fees will be, but if Solana is anything to go by the transaction fees will be far less than a dollar.
As mentioned above, the PoW consensus mechanism that Ethereum currently uses is incredibly energy-intensive. The Ethereum Foundation claims that once the network makes the transition to a PoS system, the energy usage of the Ethereum network will be reduced by an extraordinary 99.95%. Not only is that good news for the environment, but it is also great for the bottom line of validators and stakers.
Moving to a Proof of Stake consensus mechanism from a Proof of Work consensus mechanism will reduce the Ethereum network’s energy usage by 99.95%.
When is the Ethereum 2.0 launch date?
The Ethereum 2.0 upgrade is launching in several phases. The first phase, the Beacon Chain, went live on December 1, 2020. The second phase, known as “The Merge”, will introduce the PoS consensus mechanism to the Ethereum network. This is expected to launch in the latter half of 2022. The final phase, which will integrate sharding into the Ethereum protocol is expected to release sometime in 2023, but there is no confirmed release date yet.
How will Ethereum 2.0 affect the price of ETH?
It is difficult to say how the upgrade might affect the price of ETH. There are so many factors that affect the price of an asset, such as market cycles, regulations, news, rumors, and more. That said, historically speaking, solid assets such as Bitcoin and Ethereum have often seen an increase in price after big or important updates. Keep all of this in mind and remember to do your own research before you invest in Ethereum or any other asset.
Ethereum 2.0 is a huge overhaul of the Ethereum protocol that aims to make Ethereum faster, cheaper, more secure, and more energy-efficient. This should have a positive ripple effect for the entire Ethereum ecosystem.
Ethereum 2.0 is a huge overhaul of the Ethereum protocol that will vastly increase its speed and energy efficiency, while also significantly reducing fees. This article has looked at what Ethereum 2.0 is and discussed the big changes and benefits of the update. If you would like to learn more about Ethereum, staking, or consensus mechanisms, there is heaps of great content on Swyftx Learn.