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What is Ethereum 2.0 and Why Does It Matter?

The long-planned upgrade to the Ethereum network aims to solve problems with the network’s scalability and security. In its first phase, the blockchain “world computer” will move to a proof-of-stake consensus mechanism.

It’s been a long time, but the first phase of Ethereum 2.0 has finally started going live.

The multi-stage upgrade aims to address the scalability and security of the Ethereum network through many changes to the network’s infrastructure — most notably is the transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model.


What is Ethereum 2.0?

Ethereum 2.0, also known as Eth2 or “Serenity,” is an upgrade to the Ethereum blockchain. The upgrade aims to improve the speed, efficiency, and scalability of the Ethereum network so that it can handle more transactions and reduce congestion.

Ethereum 2.0 is launching in several phases, with the first upgrade, called the Beacon Chain, having gone live on December 1, 2020. The Beacon Chain introduces native staking to the Ethereum blockchain, a key feature of the network’s shift to a PoS consensus mechanism. As the name suggests, this is a separate blockchain from the Ethereum mainnet.

The second phase, called The Merge, is scheduled for the first or second quarter of 2022 and will merge the Beacon Chain with the Ethereum mainnet.


The final phase is the Shard Chain, which will play an important role in scaling the Ethereum network. Instead of settling all operations on one single blockchain, shard chains spread these operations across 64 new chains.

This also means that in terms of hardware, it is much easier to run an Ethereum node as there is less data that needs to be stored on a single machine.

Shard Chains are not expected to launch until 2022, but it is unclear when exactly.

How does Ethereum 2.0 differ from Ethereum?

While Ethereum 1.0 uses a consensus mechanism known as proof of work (PoW), Ethereum 2.0 will use a proof-of-stake (PoS) mechanism.

How is proof of stake different from proof of work?

With blockchains such as Ethereum, there is a need to validate transactions in a decentralized way. Ethereum, like other cryptocurrencies like Bitcoin, currently uses a proof-of-work consensus mechanism.

In this system, miners use the machine’s processing power to solve complex mathematical puzzles and verify new transactions. The first miner to solve a puzzle adds a new transaction to the data of all the transactions that make up the blockchain. They are then rewarded with the network’s native cryptocurrency. However, this process can be hugely energy-intensive.

Proof of stake is different in that instead of being miners, users can stake the network’s native cryptocurrency and become validators. Validators are similar to miners in that they verify transactions and ensure the network isn’t processing fraudulent transactions.

These validators are selected to propose a block based on how much crypto they have staked and how long they’ve staked it for.

Other validators can then attest that they have seen a block. When there are enough validators, the block can be added to the blockchain. Validators will then be rewarded for the successful block proposal. This process is called forging or minting.

The main advantage of PoS is that it is much more energy-efficient than PoW, as it separates the energy-intensive computer processing from the consensus algorithm. It also means that you don’t need a lot of computer configuration to secure the blockchain.


How will Ethereum 2.0 scale better than Ethereum 1.0?

One of the main reasons for upgrading to Ethereum 2.0 is scalability.

With Ethereum 1.0, the network can only support about 30 transactions per second; This causes delays and congestion. Ethereum 2.0 promises to process up to 100,000 transactions per second. This is achieved through the implementation of shard chains.

Do you know?

The current Ethereum setup has a blockchain consisting of a single chain with consecutive blocks. This is secure but very slow and not efficient. With the advent of shard chains, this blockchain was split, allowing transactions to be processed on parallel chains instead of consecutive chains. This speeds up the network and can scale more easily.


How will Ethereum 2.0 be more secure?

Ethereum 2.0 has been designed with security in mind. Most PoS networks have a small set of validators, which makes for a more centralized system and decreased network security. Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized — and therefore secure.

However, according to Lior Yaffe, co-founder of Jelurida and a leading core developer of the Ardor and Nxt blockchains, there is a potential vulnerability centered on the level of participation rates in the network.

Security audits of the Ethereum 2.0 code are being carried out by organizations including blockchain security firm Least Authority and Quantstamp.

The Ethereum Foundation is also setting up a dedicated security team for Ethereum 2.0 to research possible cybersecurity problems in cryptocurrency.

Ethereum 2.0 researcher Justin Drake has stated that the research will include “fuzzing, bounty hunting, pager duty, cryptoeconomic modeling, applied cryptanalysis, formal verification, and key verification.” 


How is the Ethereum 2.0 upgrade going to take place?

After a series of testnet launches, Topaz, Medalla, Spadina, and Zinken, the full implementation of Ethereum 2.0 will take place in three phases: Phase 0, 1, and 2 (developers like to count from zero). Phase 0 launched on December 1, 2020, with the other phases set to arrive in the following years.

Phase 0 is when applying Beacon Chain; This network stores and manages a register of validators and implements the PoS consensus mechanism for Ethereum 2.0. The initial Ethereum PoW chain will run alongside it so there is no disruption to data continuity.

Phase 1, scheduled for Q1/Q2 2022, will be the time to bring the Ethereum mainnet merge with the Beacon Chain and officially end PoW on the network. Users who staked Ethereum on the Beacon Chain will then be assigned validator roles.

Phase 2 will introduce Shard Chains to the network, with an expected launch of 64 shards (enabling 64 times more throughput than Ethereum 1.0) though at launch they won’t support accounts or smart contracts.

The previous roadmaps all lined up the Merge after the Shard Chains launch, but due to the interoperability of each upgrade, the roadmap later decided to flip these launch events.

“Originally, the plan was to work on shard chains before the merge – to address scalability,” reads documentation from the Ethereum Foundation. “However, with the boom of layer 2 scaling solutions, the priority has shifted to swapping proof-of-work to proof-of-stake via the merge.”

When was Ethereum 2.0 Released?

The Ethereum 2.0’s Beacon Chain, the first phase in the Ethereum 2.0 release, went live at 12:00 noon UTC on December 1, 2020.

Speaking during the Ethereum 2.0 livestream, Danny Ryan, lead researcher at the Ethereum Foundation, noted that “Key to the health of this thing is we see participation over two-thirds.”

With the confirmation of the Beacon chain’s launch, there are over 21,000 active validators on the network at the time of writing, with each stage recording a success rate of over 80%.

The initial beacon chain will exist separately from the current Ethereum mainnet, before the mainnet “docks” into the proof-of-stake system.

The first eligible block was placed at position 1, and the block validator signed the block with a cryptic message: “Mr F is here”.

The successful launch was celebrated by broad swaths of the Ethereum community, including Ethereum co-founders Vitalik Buterin and Joseph Lubin.

The launch followed a tense month of preparation too, in which certain criteria had to be met.

Following the release of the deposit contract on November 4, 2020, there needed to be 16,384 validators on the network on November 24, each stake 32 Ethereum, for a total of 524,288 ETH.

Initially, the pace of staking was slower than expected, with a Twitter poll conducted in early November revealing that half of those polled did not intend to make the deposit by the deadline; just 21.3% stated that they either had staked, or intended to stake, 32 Ethereum.

Among the reasons given was the cost – 32 ETH was over $19,000 at the time. The community rallied when Vitalik Buterin committed 3,200 Ethereum, worth over $1.9 million, and DARMA Capital allocated $50 million of its own holdings so that institutions and individuals could contribute to Ethereum 2.0. while remaining liquid.

With a potential delay to the launch looming, at the eleventh hour a late surge of validators committed to staking.

Just 24 hours before the deadline, only around 50% of the target had been reached; fortunately for Ethereum 2.0, by November 24 enough validators had staked to commit to launching the beacon chain.

Today, there are more than 230,841 validators, according to Eth2 Launchpad, an Ethereum analytics platform.


The future for Ethereum 2.0

Ethereum co-founder Vitalik Buterin has outlined a roadmap over the next 5 to 10 years for Ethereum 2.0.

He said that over the last two years there has been a “solid shift from ‘blue sky’ research, trying to understand what is possible, to concrete research and development, trying to optimize specific primitives that we know are implementable and implement them.”

The bulk of the challenges is now “increasingly around development, and development’s share of the pie will only continue to grow over time,” according to Buterin

In June 2020, Buterin noted that Ethereum 2.0 will need to rely on current scaling methods such as ZK-rollups for at least two years before implementing shard chains.

August 2021 saw the London hard fork implementation of Ethereum and Ethereum Improvement Proposal 1559 (EIP-1559) which changed the way transaction fees work on the network. EIP-1559 sees users who make a transaction on the network pay a base fee that’s burned instead of going to Ethereum miners, reducing the supply of ETH and placing deflationary pressure on the Ethereum network.

The London hard fork has served as something of a trial run for the next phase of Ethereum 2.0, with Vitalik Buterin expressing confidence about the next steps for the Ethereum network. Buterin told Bloomberg that the successful launch of the London hard fork proves the Ethereum ecosystem is “able to make significant changes,” and that it “definitely makes me more confident about the merge.” 


Can Ethereum 2.0 Affect Ethereum’s Price?

For some, the launch of Ethereum 2.0 was precisely what the cryptocurrency needed.

“Once Ethereum has scalability via layer-2 tech or ETH 2.0 all questions are answered,” Jamie Anson, founder of Nifty Orchard and organizer of Ethereum London, told Decrypt. “The firing gun will go off.”

In other words, more scalability means more applicability, hence more demand. This — at least in theory — should push the Ethereum price to new heights.

“By the time ETH 2.0 and rollups work together there will be 100,000 transactions per second capacity. That’ll mean a completely seamless experience for the next billion people,” Anson added.

Matt Cutler, CEO of Blocknative, a company focused on the complexity of mempools, is equally optimistic, especially as gas fees are expected to decrease with the launch of Ethereum 2.0.

“Our customer base sees reducing transaction fees and increasing network throughput as big opportunity areas moving forward,” he told Decrypt.

Moreover, the ecosystem taking notice of major milestones will reinforce Ethereum developer momentum. “This will have a long-term bullish impact on the price of ETH—notwithstanding the short-term volatility, which is part-and-parcel of crypto-asset valuations,” Cutler added.

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