After five years, the long-awaited Ethereum 2.0 is finally here. The crypto community joyfully celebrated the new network’s launch in December 2020, and ETH is now back to its ATH. But what is Ethereum 2.0, and why does it matter?
Ethereum was a major success in 2015. Vitalik Buterin and his crew have introduced a revolutionary smart contract ecosystem to the blockchain industry, which soon enough turned into a universe of its own within the crypto market.
Every developer wanted to build a decentralized application on Ethereum, and the only way to do so was by crowdfunding via token sales. Almost instantaneously, Initial Coin Offerings (ICOs) began an investment craze that catapulted crypto to new heights.
Cryptocurrency veterans have thoroughly enjoyed this period. But even in 2015, they knew that Ethereum still had a long way to go before reaching its full potential. A blockchain dedicated to both smart contracts and dApps can only serve so many users, and at one point, it will reach a bottleneck that stumps all future growth.
In order to get rid of this limitation, the Ethereum Foundation announced that they plan to migrate from Proof of Work to Proof of Stake. The new network upgrade redefines how nodes validate blocks while bringing scalability to an unprecedented level at the same time.
We strongly believe that Ethereum 2.0 is the second biggest thing after Bitcoin. Because of that, we wrote an article that explains everything that you need to know about this next-generation PoS blockchain network.
What is Ethereum 2.0?
You already know everything about Ethereum, but what about Ethereum 2.0? The technical details might be a bit complicated, but the new network’s mission is pretty straightforward.
Ethereum 2.0 is based on Proof-of-Stake, a consensus mechanism in which nodes validate transactions and blocks by staking tokens. In this case, anyone can participate in the network and run a node by depositing and locking 32 ETH.
Each node has a chance to be selected by the network, which gives it the right to propose a block. While the process is a bit randomized compared to Proof of Work, users who hold a larger amount of assets still have a higher chance to win. If the node successfully completes the task, the node’s owner earns money both for proposing the block and verifying it.
Developers have spent years trying to figure out how to implement Proof of Stake in a way that is practical. The Ethereum team created and scraped roadmaps on a regular basis, which left them with a bad reputation that still haunts them to this day.
However, things had changed for the better in 2019 when the Ethereum Foundation finally discovered a solution that works. Not only did they have to think of how to create Ethereum 2.0, but they also had to devise a plan of how to launch the new network without killing the old one.
Before learning about the intricacies of Ethereum 2.0, let us first explain one myth that is commonly talked about.
Does Proof of Stake scale Ethereum?
Most within the community believe that Proof of Stake is the sole reason why Ethereum 2.0 is faster than its predecessor, but that couldn’t be farther from the truth.
While PoS provides a suitable environment for a faster blockchain network, sharding is the core technology that scales them. The question is: What does Proof of Stake do, and how does it improve Ethereum?
Proof of Stake is a concept created by Sunny King and Scott Nadal, two developers and Bitcoin enthusiasts who believed that PoW is too expensive and wastes energy.
At the time, miners only spent $150,000 for power consumption on an annual level. However, King and Nadal knew that the figure would rise exponentially in the future. To prevent the problem from plaguing blockchains, the two have proposed PoS as a solution.
As we already know, PoW miners validate blocks by solving complex mathematical problems. Miners need powerful computers to solve these problems and to increase their chances of earning a block reward.
To improve their mining farms, miners require both quality and quantity.
On the one hand, quality computer hardware spends more power. On the other hand, the miner must have multiple such rigs in order to stay competitive. The final result? A power-hungry node that consumes much more power. And guess what? Blockchains increase mining difficulty each year, which means that projects like Bitcoin need more energy each year.
PoS is simple in this regard as it completely eliminates the problem. To validate blocks, you must stake virtual tokens and do nothing else. The node does not require any special computer hardware since staking is not a power-hungry process.
Nodes may be capped at 32 ETH, but that is not necessarily a bad thing. A blockchain increases its security levels by gathering a large number of nodes. Since Ethereum 2.0 focuses on the number of nodes rather than their size, sustainability is ensured.
PoW nodes make money by mining blocks with their computer hardware. In order to mine at a profitable level, miners have to run their farms in a very specific environment that meets multiple requirements. Take a look and see for yourself if mining is profitable in your country:
Power. Miners must host mining farms in regions where electricity fees are incredibly low. Notable examples include Russia, Ukraine, China, Iran, Pakistan, and a few other countries in Eastern Europe. Miners outside these countries profit considerably less and sometimes do not even break even.
Space. Professional mining farms take an enormous amount of space. If a miner wishes to own a large farm, he has to spend thousands of dollars (if not more) on renting the adequate area. This is yet another limitation as the activity is restricted to those living in, usually remote, places where rent is cheap.
Regulation. Do you live in a country that has banned or severely regulated mining? Are you heavily taxed for earning money by mining? Tough luck! If you cannot move, you are in a terrible position and will most likely not remain profitable for a long time.
As we can see, Proof of Work is not the best solution. It imposes severe limitations and remains exclusive to only a small number of people. Apart from being bad, the issue leads to the question of: Is PoW even decentralized?
Sure, everyone can use the network. But now that mining difficulty has increased drastically, not everyone can become a miner. Many believe that this fact alone removes a fundamental aspect of blockchain networks: decentralization.
You can already see how this is a non-existing problem for stakers on Ethereum 2.0. As long as you have the money to own 32 ETH, everybody can stake no matter where they live.
What is sharding?
Now that we have explained in what ways PoS helps, it is time to learn about sharding and how it scales Ethereum 2.0.
Sharding is a scaling mechanism that splits a blockchain network into multiple parts called shards. This enables the blockchain to process and validate multiple blocks of transactions instead of approving one block at a time.
In order to prevent manipulation, Ethereum 2.0 periodically moves validators from one shard to another. Moreover, Ethereum uses the famous beacon chain to coordinate blocks and manage communication between shards.
According to Buterin, sharding will result in an average network throughput of 100,000 transactions per second. However, users will have to wait months before Ethereum integrates sharding in Phase 1.
Since shards increase the number of nodes that process data on a network, Ethereum’s security will improve as well. The team’s central ethos is that having more nodes is a better solution compared to increasing node sizes.
Ethereum 2.0 will have a total of 64 blockchain networks after finishing the sharding upgrade. For now, it is uncertain whether shards will execute code (smart contracts) as well.
Here is why Ethereum 2.0 did not launch instantly
Developers have made numerous plans that organized the migration of Ethereum to Ethereum 2.0 over the course of the past few years. By the time they were decisively ready to start actively working on the PoS network, it had become clear that the original blockchain’s size is a real problem.
With great power comes great responsibility! How do you migrate the second biggest blockchain without disrupting the entire market? Being a major hub for almost all of the industry’s smart contracts and dApps, making a sound and safe decision was not that easy.
In 2020, the Ethereum Foundation realized that they only have one smart choice: rollups.
The main idea is to launch Ethereum 2.0 in phases while ETH1 runs just as it would usually. Both networks work side-by-side until the moment arrives that Ethereum 2.0 can finally launch.
Ethereum 2.0 roadmap
There is a long time left before we say bye to ETH1 and hello to ETH2. While Ethereum developers have no fixed schedule that tells us when each phase launches, we at least know what these phases will do once they arrive.
Phase 0 of Ethereum 2.0 rolled out in December 2020. A deposit contract that was published a month earlier collected 524,288 ETH, the sum necessary to launch the project’s first stage.
Why 524,288 Ether specifically? Considering that each node must stake 32 ETH, we have a final number of 16,384. This is the number of validators required to keep Ethereum 2.0 decentralized and secure, according to the developers.
The data of each validator is stored in the Beacon chain, an essential part of the network that coordinates and manages the entire Ethereum 2.0 blockchain. As we have previously mentioned, this is the same entity that controls shards.
Aside from marking the official start of Ethereum 2.0, Phase 0 is not special in any way. The network cannot host dApps, execute smart contracts, or process transactions. It is merely a hub that allows the Ethereum foundation to slowly roll out future updates.
At the time of writing, the launch of Phase 1 has not been announced. A majority of users expect that Ethereum will launch the next phase by Q2 2021.
In this stage, developers plan to add the sharding mechanism. Ethereum 2.0 will be divided into 64 separate chains called shards. They will run in a way that is interoperable and scales the entire network.
By that moment, developers should also make a decision on how to execute smart contracts. The most likely result? Leave the task to shards. However, the Ethereum Foundation states that the possibility is still being debated by the community and that there are other options on the table as well.
Nothing is ever sure with the developers at Ethereum. The team mentioned the (unconfirmed) possibility of adding another stage between Phase 1 and Phase 2. During this stage, Ethereum 1 would merge with the PoS network and convert into a blockchain shard.
Essentially, such a move lets Ethereum exist without stopping or going offline at any point of its existence. All of the data from the original network would seamlessly migrate to Ethereum 2.0 without any break in continuity. The team calls this upgrade ‘the docking’ and expects it to happen in either 2021 or 2022.
Another vital thing to note is that the docking will not force ETH investors to swap their tokens for a new cryptocurrency. Ether will stay the same despite moving to a completely new environment.
However, it is suspected that Phase 1.5 will not happen at all. The community expects that Ethereum will merge with Ethereum 2.0 during the last phase.
The deeper we go, the less defined Ethereum’s future is. By the time of Phase 2, Ethereum 2.0 should implement sharding and dock ETH1 into ETH2. During this particular phase, we expect developers to finally add smart contract functionality. The latest version should be fully functional and retain all of the core features that Ethereum 1 has.
But is this really the last update for Ethereum 2.0? Not at all. The end of Phase 2 marks the start of a new smart contract and dApp ecosystem. The Ethereum Foundation still wishes to improve upon the new blockchain network and bring innovative features.
Ethereum 2.0 is the second biggest thing in the blockchain industry after Bitcoin. The new Proof-of-Stake network brings scalability at a level never seen before with any other major blockchain network. Crypto enthusiasts have waited for this moment for years, and in 2021 we are at last closer than ever to the final launch of Ethereum 2.0.
Will the wait be worth it? Experts suggest that a network capable of supporting up to 100,000 transactions per second will create a boom in the entire market. After finding out that blockchain platforms are indeed faster and cheaper than banks, people from all countries and backgrounds will start joining the revolution.
Ethereum 2.0 and decentralized finance (DeFi) will slowly but surely do the same for this decade that Bitcoin did for the last one. Will you be there to experience the second wave of blockchain evolution in all of its glory?
About The Author:
The Shrimpy Team
The Shrimpy Team is comprised of highly experienced content writers who analyze and research the latest market trends, delivering content suitable for both beginner and veteran crypto investors.
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