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Ethereum, a popular open source, public, and blockchain-based distributed ledger popular for its smart contract functionality that allows developers to build blockchain applications that run in a trustless environment, is undergoing a major upgrade.
Ethereum is also the second largest cryptocurrency by market capitalization, which makes this update quite relevant no matter where you live or what digital asset you own.
Ethereum 2.0 is officially slated to launch on December 1st 2020 and is now here with us!
But why is Ethereum 2.0 important?
First, let’s take a step back.
SEE ALSO: Nearly 1% of All Bitcoin Held in Ethereum – Here’s How DeFi Is Eating 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 update aims to achieve 3 key objectives:
- Improve the speed of the Ethereum blockchain
- Improve blockchain efficiency
- Enable scalability of the Ethereum network
Once completed, the Eth2 update is expected to process more transactions and alleviate the bottlenecks currently evident on the Ethereum blockchain.
To achieve the above, Ethereum will change its infrastructure from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model. This is the main update that defines Ethereum 2.0.
Although the PoW mechanisms, used by the bitcoin network, use the processing power of the computer hardware managed by the miners to verify transactions, they tend to be quite energy-intensive. PoS, however, moves away from miners as transaction validators towards a staking model where validators are selected to propose blocks based on how much crypto they hold and how long they have held it.
The main advantage between PoS and PoW is that PoS is much more energy efficient as it decouples the network from using the computer’s processing power to validate transactions.
In case you are afraid to bet because you are worried that your computer will go offline for a day:
The reward / penalty rules have been designed to be quite tolerant. https://t.co/My2cgw6yOT
– vitalik.eth (@VitalikButerin) November 6, 2020
Ethereum 2.0 is expected to drastically improve the efficiency of the network. Currently, Ethereum 1.0 can only support around 30 transactions per second, resulting in huge and costly delays and congestion, as evidenced by the high gas tariffs on the network. Eth2, on the other hand, promises up to 100,000 transactions per second, thanks to a concept known as sharding.
The update should also make the network more secure. Unlike most PoS networks that 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, therefore more secure and less prone to manipulation.
The above changes to the Ethereum network are expected to fundamentally change the network. As a result, the process will need to be done in stages to ensure that nothing stops along the way.
Here is the timeline of the rollouts:
- Phase 0 (2020) – Implementation of the Beacon Chain which includes the distribution of the PoS consensus mechanism (Casper)
- Phase 1 (2021) – Integration of PoS fragment chains that make the network 64 times faster without supporting smart contracts
- Phase 1.5 (2021) – Ethereum mainnet officially switches to PoS and becomes a shard
- Phase 2 (2021/2022) – Sharding is fully functional and compatible with smart contracts and the ability to create smart and scalable DApps on Ethereum 2.0
At the end of Phase 0, 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 vice versa. A Beacon Chain client is required to interact with Eth2. During this phase, Eth1 will live and remain uninterrupted and will operate with Eth2, even after the implementation of Phase 2.
Phase 2 is the time when the full system capabilities will begin to come together as the execution environments for DApps begin to come to life and Eth1 is de-emphasized. Throughout this period, validators from both chains will continue to be paid.
It will take about two years for ETH 2.0 to be fully launched. During this period, access to ETH 1.0 data is expected to be provided via an independent fragment chain.
Phase 2 is also the time when sharding occurs. Sharding is the process of horizontally splitting a database to distribute the load: it is a common concept in computing. In an Ethereum context, sharding will reduce network congestion and increase transactions per second by creating new chains, known as “shards”.
Sharding will ultimately allow you to run Ethereum on a personal laptop or phone. So more people should be able to participate, or manage customers, in a fragmented Ethereum.
After the two chains dock, this will mark the end of the proof-of-work for Ethereum and begin the era of a more sustainable and environmentally friendly Ethereum. At this point Ethereum will have the scale, security and sustainability outlined in its Eth2 vision. It is expected to be fully completed in 2022.
In short, despite the need to start this new chain, the Beacon Chain is the foundation of the whole system.
By the deadline of November 24, 2020, Eth2 was activated and ready for launch on December 1, 2020 following the success of ETH deposits for 16,384 validators.
152% https://t.co/T9ji0s4wqq
– vitalik.eth (@VitalikButerin) November 28, 2020
To qualify, the 16,384 validators were required to stake 32 ETH each (roughly $ 17,000 at the time of this writing) and lock it in for two years, which is a costly undertaking that locks down smallholders. Once a validator public key reaches a balance of 32 ETH at the time of deposit, it is automatically registered as an active validator and queued for activation.
Will the launch of Ethereum 2.0 affect the price of Ethereum? There is not double that network scalability means more usage and, therefore, more demand. In theory, this should push the price of Ethereum to higher levels and undoubtedly have a long-term bullish impact on the price of ETH.
One of the weirdest anti-ethereum arguments I see is “Vitalik said high fees are bad, but look how much ETH fees have increased in 2020 !!!”
For example … we have * multiple * huge multi-year efforts to solve exactly this problem, and the first phase of one of them will literally be launched next week.
– vitalik.eth (@VitalikButerin) November 25, 2020
However, beyond the price of ETH, Ethereum 2.0’s biggest impact will likely be an increase in network throughput and how this will open up opportunities and what’s possible beyond Ethereum.
RECOMMENDED READING: Here is a list of 16 wallets to store your Ethereum (ETH)
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