What is Ethereum 2.0?

What is Ethereum 2.0?

You may have heard about the upcoming Ethereum hard fork, codenamed Serenity, or simply, Ethereum 2.0. These series of updates are changes that aim to improve the speed, security, and gas costs of the Ethereum network.

ETH 2.0 has been designed to dramatically change how Ethereum will work and is essentially the next evolution for the Ethereum network. That said, you would be forgiven for not knowing all that much about what it means. So today, let us break it down as simply as we can.

Let’s get into it!

What are Forking Updates?

Before we begin, it might be handy to explain what a hard fork is. A fork in terms of cryptocurrency is a change to the protocol that runs the network. Simply put, a soft fork is more like an upgrade where those running the old patches of software are still able to connect to the new network.

Alternatively, a hard fork is essentially the creation of a new blockchain that leaves the old chain behind. These forks are incompatible, and those who do not upgrade will be left on the old network.

For Ethereum, this has happened before. You may have heard of Ethereum Classic, this is essentially ETH 1.0, and the remnants of the original Ethereum blockchain before ETH switched to its current model.

So what exactly does it do differently from the Ethereum we all know today?

Proof of Work (PoW) v Proof of Stake (PoS)

The main difference is the consensus mechanism that runs the protocol. Currently, Ethereum runs on a Proof of Work model similar to Bitcoin. Generally, this is considered the most secure consensus mechanism. Yet also the slowest and most energy-intensive. However, Ethereum believes they have found a better solution.

Ethereum 2.0 is moving to a Proof of Stake model that aims to replace miners with validators. The main difference here is under PoW a majority of miners need to agree before a consensus is reached. Whereas under PoS a validator is selected based on how much they have staked.

Ethereum 2.0 Validators

Under Proof of Stake, a validator is chosen to confirm the transactions within a completed block. In the same way whoever has the most hashing power under the Proof of Work system is most likely to be the one receiving the reward, under PoS it is most likely to be the person who has staked the most.

Now, this may sound unfair as it sounds like the richer you are the better your chances of receiving the reward, but this is already happening under PoW as one ASIC miner isn’t competing with a warehouse full of them.

Proponents of Proof of Stake will point out that under PoW the rich can enjoy the luxuries of economies of scale, whereas PoS favours those who have been investing the longest.

Those wanting to become a validator now would need to pay roughly 160’000 AUD for the 32 ETH required, whereas anyone who bought in around March 2020 would only have needed to invest $5300 to meet the same amount.

Proof of Stake also claims to be more decentralised as well as more secure. That is because PoW mining pools are making the system more centralised.

For example, if the three largest Bitcoin mining pools agreed to team together they would control more than 51% of the network and could start forging illegitimate transactions (in what is called a 51% attack.)

Under PoS, however, to perform a 51% attack you would need to stake 51% of the total market cap. At the moment this would equal $300 billion.

To become a validator your deposited ETH is treated as a security deposit. To ensure validator compliance, those caught putting through fraudulent transactions will have their stake forfeited.

As long as the staked amount is higher than the transactions fees they would receive for putting through a false transaction the risk to reward ratio strongly favours the network.

It is for these reasons supporters of the new system claim it to be more secure than PoW.

But what else do you need to know about Ethereum 2.0?

Ethereum Scalability Fixes – What is Ethereum Sharding?

With Ethereum 2.0 also comes sharding. Sharding is the process of running many (in this case 64) parallel sidechains to the mainchain to massively increase scalability. Essentially this breaks down the larger database into small, more manageable ones that run simultaneously.

The main benefits of sharding from a user’s perspective are lower gas fees. That is because with the multiple sidechains running there will be less congestion on the network. The less congestion, the less aggressive competition is to be on the next processed block.

Will this affect the price of Ethereum?

Any update can affect the price of a cryptocurrency, be it positively or negatively. However, Ethereum 2.0 isn’t releasing all at once. Before any updates go live, they are issued on the testnet first.

Even on the testnet, the updates are released in parts to ensure they work as intended and to make sure they do not disrupt how the Ethereum protocol works as a whole.

Ethereum 2.0 Phases For Release

Between now and ETH 2.0 we can expect to see seven different phases come into effect. Phase 0 has already begun, after launching in December of 2020. With phases 1 through 3 scheduled to go live in Q1 or Q2 of 2022.

The final phases, the ones involving sharding, are also scheduled for 2022. Although anyone who knows a little about Ethereum knows they will not release anything until they are 100% sure it is working as intended.

If this 2022 date for the final phases becomes delayed, do not be too surprised. However, I’m sure we can all agree it’s better to get it right than to release a broken product that only damages this exciting new network they have created.

In conclusion

To summarise as concisely as possible, Ethereum 2.0 are gradual updates that are slowly being phased into existence. Its main aims are to increase scalability, reduce transaction costs, and increase the speed of the overall network.

They aim to achieve this through changing their consensus mechanism to Proof of Stake. They will also be launching an additional 64 sidechains to tackle the congestion and high gas fees that have plagued the network during the last two bull-runs.

Elbaite hope you have found this article on Ethereum 2.0 to be informative. Elbaite also hope you leave with a better understanding of what ETH 2.0 is, as well as it should be an improvement for the entire Ethereum network as a whole.

For further information regarding Ethereum and Ethereum 2.0 token, go to their official website.

Elbaite is the cryptocurrency exchange designed for Australian traders seeking safety, security and simplicity. Make an account today to start your Ethereum investment journey!

Disclaimer: The information on this website is purely for information. Elbaite is not a financial adviser, and nothing stated here is to be taken as financial advice. You should seek independent legal, financial, taxation or other advice relevant to your financial situation before making any investment decisions.

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