The cryptocurrency market has been revolving around Bitcoin for many years. However, it is Ethereum that took the blockchain technology to the next level by fostering hundreds of new blockchain networks and their native tokens. And, the upcoming Ethereum 2.0 is expected to revolutionize its predecessor.
Ethereum introduced the concept of smart contracts and decentralized applications (DApps) to the broader community. Today, it hosts many blockchain projects, including those booming under the Decentralized Finance (DeFi) umbrella. Now, the platform co-founded by Vitalik Buterin is facing a significant transformation to stay on top of the league. That’s when Ethereum is starting to gradually transition to Ethereum 2.0, and the new platform will be totally different.
Ethereum 2.0 is an essential upgrade implemented by the blockchain platform. During the upgrade process, the current Proof of Work (PoW) consensus mechanism will be replaced by the Proof of Stake (PoS) algorithm. Besides, it also involves other structural changes, but the transition of Ethereum PoW to PoS is what most Ethereum believers are looking forward to the most.
What Distinguishes Ethereum 2.0 From Ethereum?
Ethereum 2.0, also known as Serenity, is promoted as an improved version of Ethereum. Thanks to the PoS algorithm, it will be more scalable and flexible. Still, the Ethereum Foundation doesn’t want to compromise decentralization to achieve more scalability potential. Thus, the new platform aims to find the ideal balance between the two.
To achieve this, Ethereum 2.0 will implement a unique architecture called sharding, which refers to a network of parallel channels working together. Each shard will have its own set of account balances and smart contracts. The method to achieve maximum decentralization will be implemented in the final phase of the upgrade.
Why Does Ethereum 2.0 Use Proof of Stake?
In the first years, Ethereum did a great job of handling millions of users’ transactions and smart contract settlement. However, the demand for Ethereum services has expanded significantly on the network, which results in inevitable congestion. To understand how vital Ethereum is, try thinking about the fact that 96% of all DeFi projects are running specifically on its platform. And with over 850,000 unique DeFi users on the platform and over a million Ethereum wallet users, it’s clear to tell that the Ethereum network is in dire of an upgrade.
The high demand also resulted in spiking fees on Ethereum, which surged about 600% from August to September 2020. In the end, the need for scalability forced Ethereum to adopt PoS instead of the current PoW. Hence, here’s the Ethereum 2.0.
The Difference Between PoS and PoW
The concept behind both the Proof of Stake and Proof of Work consensus mechanisms boils down to how network participants, called nodes, are validating transactions on their respective blockchains and maintaining the normal state of the platform.
In PoW, which was first introduced by Bitcoin in 2008 (in fact, the PoW concept was developed well before Bitcoin), nodes can become so-called miners to validate new transactions from the Mempool by solving complex mathematical puzzles. Participants need to devote computing power to win the competition and obtain the right to validate the next block. In exchange for their effort, miners receive a reward in the form of newly generated Bitcoin or cryptocurrencies that uses PoW consensus.
PoS came later as an alternative to PoW, as it tried to solve Bitcoin’s main issues related to scalability and energy consumption, among others.
Unlike PoW blockchain, PoS networks involve no miners, as most such projects launch with pre-mined tokens. The validation of new blocks in PoS systems is known as “forging”. While the validators are the nodes participating in the block creation. So, to become a validator, the nodes have to lock a portion of the native token. Usually, the more tokens they stake, the higher the chance to become the next validator. The same approach will be applied in the upcoming Ethereum 2.0 upgrade.
Reasons Why Ethereum 2.0 Uses PoS
As mentioned, Ethereum has expanded rapidly in the last few years, and it needs an upgrade to meet demand and avoid congestions. The PoS consensus mechanism seems to be the ideal solution for now, but the results are highly dependant on its implementations.
Ethereum is a global platform, and it plans to grow even further, which leads to the urgent need for more scalability. Ethereum 2.0 pledges to be capable of handling up to 100,000 transactions per second. For comparison, today, it can deal with only up to 15 transactions per second on average. In general, these significant differences can only be achieved through the implementation of the sharing model.
Benefits of Using PoS Consensus
Besides the most evident benefit of scalability, PoS blockchains are energy-efficient. That’s because validators don’t need to use computing power to solve puzzles.
As of today, the total annualized electricity consumption to run Ethereum transactions reaches almost 12.6 TWh, which compares to the total power consumption of Georgia, according to Digiconomist. Even though it’s more than six times less than the energy consumption of Bitcoin, it still requires a lot of power that intrinsically doesn’t produce anything other than fueling transactions that could be handled differently.
What Is the Transition Like for Ethereum 2.0?
The Serenity upgrade means the total transformation of the entire infrastructure of Ethereum. Obviously, the only way to do this is to stick to a gradual approach.
Thus, Ethereum 2.0 is launched in three phases that include an interim phase. Earlier this year, the platform launched a series of testnet networks, including— Topaz, Medalla, Spadina, and Zinken. The goal was to visualize how the future platform will look like and what problems it might encounter. Indeed, there were several issues to address in most of those trials. These issues include the incident whereby the six servers on Medalla’s Testnet were reported with the issue on the time and date as being one day into the future. Keeping the server being wrong by four hours.
The launch of Ethereum 2.0’s mainnet is scheduled to take place at the end of 2020. And Ethereum confirmed the Ethereum 2.0 launching date by announcing its launch date on December 1, 2020.
Here are the main phases as described by the Ethereum Foundation:
It will deploy in December 2020. The initial phase aims to implement the Beacon Chain, which introduces the PoS mechanism and stores and manages the registry of validators. It’s worth mentioning that the current PoW network will run simultaneously with Beacon Chain to ensure the transition’s continuity.
While the Ethereum 2.0 Phase 1 is scheduled for 2021 and will see the integration of shard chains. Initially, the network will launch with 64 shards that won’t support smart contracts and accounts. Next, there will be an interim Phase 1.5, when the Ethereum mainnet will become a shard and adopt PoS.
Finally, the third phase is expected to launch by the end of 2021 or the first half of 2022. This phase will see shards supporting smart contracts and becoming fully operational, along with accounts, transfers, withdrawals, cross-shard transfers, and contract calls. The current Ethereum Virtual Machine (EVM) will be replaced with Ethereum WebAssembly (EWASM).
Is Ethereum 2.0 Better in Terms of Scalability?
If the upgrade is implemented successfully, Ethereum 2.0 will perform much better – this is what the Ethereum Foundation promises, and there seems to be no doubt about that. The sharding model will do everything. In the best-case scenario, Ethereum can handle about 30 transactions per second, and the leap to 100,000 is incredible indeed.
What Are the Impacts of the Ethereum 2.0 Upgrade?
The crypto community has been reacting well before the launch of Serenity. Here is how the network will be impacted, and what the implications today are:
Ethereum 2.0 Impacts on ETH Price
The price of ETH reacted positively to the upcoming upgrade. Still, the latest rally has to do with the general bullishness led by Bitcoin and the DeFi boom, which depends very much on Ethereum as a host network for most DeFi projects.
All in all, ETH/USD surged from about $130 at the beginning of the year to over $600 as of mid-November. At the beginning of September, ETH/BTC peaked at 0.39 on Medalla’s launch and other ETH 2.0 news. However, the pair has retreated as Bitcoin came stronger. Naturally, the future of Ethereum with this upgrade is believed to remain on the bright side. Of course, how the crypto market reacts are also highly dependant on the actual application.
Security on Ethereum Network
The upcoming Ethereum 2.0 network has been developed with security in mind, though we cannot know how safe it will be for users. Some experts argue that PoS systems are even more centralized than PoW networks.
However, Ethereum will rely on shards and will require a minimum of 16,384 validators to run the network. Third-parties hired by the Ethereum Foundation still verifying the security issues.
One of the interesting elements of Ethereum 2.0 is the possibility of staking. However, don’t expect to get involved right away because there is a threshold that requires you to hold no less than 32 ETH to become a validator.
That’s over $19,000 per node, which is a lot for the average person. However, you will still be able to stake by using the services of a reliable staking pool. As of now, it’s showing an upward trend in terms of the total number of deposits in Ethereum staking.
What Are The Risks Ethereum 2.0 Carry?
The testnet trials had to fix several bugs here and there, but Serenity developers are generally satisfied with the results. Some users are worried about potential failures during the Ethereum 2.0 update, such as a security breach due to code vulnerability or a network split. However, developers are confident that such concerns don’t exist. Anyway, given that the code is fresh, scammers are looking to exploit the vulnerabilities on the upcoming upgrade.
Another significant risk relates to the staking process. The risk of whether locking up 32 ETH for staking is worth it remains unknown. That is especially when users choose to mine with third-party services.
When Is the Ethereum 2.0 Launch Date?
The deposit contract for the Ethereum 2.0 Beacon Chain genesis was created on November 4. While the genesis block should be confirmed on December 1, 2020. At the time of writing, 16,384 validators have transferred 524,288 ETH into the deposit contract.
What’s Next After Ethereum 2.0?
Ethereum’s evolution doesn’t cease at Phase 2. Co-founder Vitalik Buterin revealed that there would be more upgrades to meet the demand of users. He shared a roadmap on Twitter, presenting his vision for the next 5 to 10 years.
In conclusion, Ethereum is experiencing a continuous improvement to adapt to the crypto community’s ever-changing needs.
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