Understanding Ethereum 2.0 and Why It Matters

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Ethereum, a popular open-source, public, blockchain-based distributed ledger popular for its smart contract functionality enabling developers to build blockchain applications that execute in a trustless environment, is undergoing a major upgrade.

Ethereum is also the second-largest cryptocurrency by market cap, which makes this upgrade quite relevant, regardless of where you live or what digital asset you hold.

Ethereum powers the largest volume of decentralized applications and dominates the Decentralized Finance (DeFi) space. 99% of total Ethereum transaction volumes belong to the DeFi ecosystem.

Ethereum 2.0 is officially scheduled for December 1, 2020 launch and is now here with us!

But, why does Ethereum 2.0 matter?

First, let’s take a step back.

 

SEE ALSOAlmost 1% of All Bitcoin is Held in Ethereum – Here is How DeFi is Eating Up Bitcoin

The concept of smart contracts and decentralized applications (DApps) describes how real-world contractual obligations can be programmed and executed with just pieces of code on a blockchain.

In short, Ethereum contracts can hold value and unlock it only if specific conditions are met.

Ethereum 2.0, also known as Eth2 or Serenity, is simply an upgrade to the Ethereum blockchain as we know it.

The upgrade aims to achieve 3 key objectives:

  • Enhance the Ethereum blockchain speed
  • Improve the blockchain efficiency
  • Enable scalability of the Ethereum network

When completed, the Eth2 upgrade is expected to process more transactions and ease bottlenecks currently evident on the Ethereum blockchain.

In order to achieve the above, Ethereum will switch its infrastructure from a proof-of-Work (PoW) consensus mechanism to a proof-of-stake (PoS) model. This is the major update that defines Ethereum 2.0.

While PoW mechanisms, used by the bitcoin network, use computer hardware processing power run by miners to verify transactions, they tend to be quite energy intensive. PoS however moves away from miners as transaction validators to a staking model where validators are selected to propose blocks based on how much crypto they hold and how long they’ve held it for.

The main advantage between PoS and PoW is that PoS is far more energy-efficient as it decouples the network away from the use of computer processing power to validate transactions.

Ethereum 2.0 is expected to drastically improve the network’s efficiency. Currently, Ethereum 1.0 can only support around 30 transactions per second, resulting in huge and expensive delays and congestion, as evidenced by high gas fees on the network. Eth2, on the other hand, promises up to 100, 000 transactions per second, thanks to a concept known as sharding.

The upgrade is also expected to make the network more secure. Unlike most PoS networks which require a small set of validators, most notably EOS with only 20 block producers, Ethereum 2.0 will require a minimum of 16, 384 validators. As you can imagine, this makes the network even more decentralized, hence, more secure and less prone to manipulation.

The above changes to the Ethereum network are expected to dramatically change the network. As a result, the process will have to be done in phases to ensure nothing breaks along the way.

Here is a timeline of the rollouts:

  • Phase 0 (2020) – Implementation of the Beacon Chain which includes deploying PoS consensus mechanism (Casper)
  • Phase 1 (2021) – Integration of PoS shard chains making the network 64x faster while not supporting smart contracts
  • Phase 1.5 (2021) – The Ethereum mainnet officially transitions to PoS and to becoming a shard
  • Phase 2 (2021/2022) – Sharding is fully functional and compatible with smart contracts and the ability to now build smart, scalable DApps on top of Ethereum 2.0

When Phase 0 is complete, there will be two active Ethereum chains – the current Eth1 PoW main chain and the Eth2 Beacon chain. At this point, users will only be able to send ETH from Eth1 to Eth2, but not the other way round. A Beacon Chain client is needed for you to interact with Eth2. During this phase, Eth1 will live and remain uninterrupted, and will operate concurently with Eth2, even past Phase 2 implementation.

Phase 2 is where the functionality of the entire system will start to come together as execution environments for DApps start to come alive and as Eth1 is de-emphasized. During all this period, validators on both chains will continue to get paid.

It will take around two years for the complete roll-out of ETH 2.0. During this time, it is planned that access to ETH 1.0’s data will be provided through an independent shard chain.

Phase 2 is also the time when sharding happens. Sharding is the process of splitting a database horizontally to spread the load – it’s a common concept in computer science. In an Ethereum context, sharding will reduce network congestion and increase transactions per second by creating new chains, known as “shards”.

After the two chains dock, this will signal the end of proof-of-work for Ethereum and start the era of a more sustainable, eco-friendly Ethereum. At this point Ethereum will have the scale, security and sustainability outlined in its Eth2 vision. This is expected to fully be completed in 2022.

In short, despite the need to bootstrap this new chain, the Beacon Chain is the foundation of the entire Ethereum 2.0 ecosystem.

By the November 24, 2020 deadline, Eth2 was triggered and ready for the December 1, 2020 launch following the successful ETH deposits for 16, 384 validators.

To qualify, the 16, 384 validators were required to stake 32 ETH each (approx. $17,000 as of this writing) and lock it up for two years, which is an expensive undertaking locking out small holders. Once a validator public key reaches a balance of 32 ETH upon deposit, it is automatically registered as an active validator and entered into the queue for activation.

Sharding will eventually let you run Ethereum on a personal laptop or phone. So more people should eventually be able to participate, or run clients, in a sharded Ethereum.

Will the Ethereum 2.0 launch affect the price of Ethereum? There is no doubt that the scalability of the network will mean more usage, and thus, more demand. In theory, this should propel the price of Ethereum to greater heights and is expected have a long-term bullish impact on the price of ETH.

However, beyond the price of ETH, the biggest impact of Ethereum 2.0 will likely be increased network throughput and how this will open up opportunities and what’s possible on top of Ethereum.

 

RECOMMENDED READING: Here is a List of 16 Wallets to Store Your Ethereum (ETH)

 

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