Ethereum, a popular open-source, public, blockchain-based distributed ledger well-known for its smart contract functionality allowing developers to build blockchain apps that execute in a trustless environment, is undergoing a notable upgrade, Ethereum 2.0. It is officially scheduled for December 1, 2020 launch. But, why does Ethereum 2.0 matter?
Ethereum is the second-largest cryptocurrency by market capitalization, which makes this upgrade quite relevant, regardless of where users live or what digital asset they hold.
ETH powers the largest volume of decentralized apps and dominates the Decentralized Finance (DeFi) space. 99% of total Ethereum transaction volumes belong to the DeFi sphere.
The concept of smart contracts and DApps describes how real-world contractual obligations can be programmed and executed with just some codes on a blockchain.
Ethereum contracts can hold value and unlock it once specific conditions are met.
Ethereum 2.0, also known as Eth2 or Serenity, is simply an upgrade to the Ethereum blockchain and plans to achieve 3 major objectives:
- Enhancing the Ethereum blockchain speed
- Improving the blockchain efficiency
- Enabling scalability of the Ethereum network
When completed, the Eth2 upgrade will process more transactions and ease bottlenecks currently evident on the ETH blockchain.
In order to achieve those goals, Ethereum will switch its infrastructure from a proof-of-Work (PoW) consensus mechanism to a proof-of-stake (PoS) model. This is the most important update that defines Ethereum 2.0.
While PoW mechanisms, which are used by the Bitcoin network, use computer hardware processing power run by miners to verify transactions, they tend to be energy intensive. PoS moves away from miners as transaction validators to a staking model where validators are chosen to propose blocks based on how much crypto they hold and how long they’ve held it for.
The main advantage between of PoS is that it is more energy-efficient as it decouples the network away from the use of computer processing power to validate transactions.
Ethereum 2.0 is expected to improve the network’s efficiency significantly. Currently, Ethereum 1.0 can support around 30 transactions per second, resulting in massive and expensive delays and congestion, as evidenced by high gas fees on the network. Eth2, on the other hand, promises up to 100, 000 transactions per second, thanks to something known as sharding.
The upgrade will make the network more secure too. Unlike most PoS networks which need a small set of validators, most notably EOS with only 20 block producers, Ethereum 2.0 will require a minimum of 16, 384 validators. Obviously, this makes the network even more decentralized, hence, safer and less prone to manipulation.
These changes to the Ethereum network are expected to dramatically change the network. Hence, the process will have to be done in some phases to ensure nothing breaks along the way.
Here is timeline of the rollouts:
- Phase 0 (2020)– Implementation of the Beacon Chain which includes deploying PoS consensus mechanism (Casper)
- Phase 1 (2021)– Integration of PoS shard chains making the network 64x faster, not supporting smart contracts
- Phase 1.5 (2021)– The ETH mainnet officially transitions to PoS and to becoming a shard
- Phase 2 (2021/2022)– Sharding is fully functional and compatible with smart contracts and the ability to now build smart, scalable DApps on top of Eth 2.0
Once Phase 0 is complete, there will be two active ETH chains – the current Eth1 PoW main chain and the Eth2 Beacon chain. At this point, users can send ETH from Eth1 to Eth2, but not the other way round. A Beacon Chain client is required to interact with Eth2. During this phase, Eth1 will remain uninterrupted, and will operate in with Eth2, even past Phase 2 implementation.
Phase 2 is where the functionality of the whole system will begin to come together as execution environments for DApps start to come alive and as Eth1 is de-emphasized. During all this period, validators on both chains will continue to get paid.
It will take two years for the complete roll-out of ETH 2.0. During this time, access to ETH 1.0’s data will be provided through an independent shard chain.
Phase 2 is also the time when sharding takes place. Sharding is the process of splitting a database horizontally to spread the load – which is a common concept in computer science. In an Ethereum context, sharding will reduce network congestion and increase transactions per second by creating new chains, or “shards”.
Sharding will finally let you run Ethereum on a personal laptop or phone. So more people can participate, or run clients , in a sharded Ethereum.
After the two chains dock, this will signal the end of proof-of-work for Ethereum and start the era of a more sustainable, eco-friendly ETH. At this point it will have the scale, security and sustainability outlined in its Eth2 vision. This is expected to be completed in 2022.
In short, despite the need to bootstrap this new chain, the Beacon Chain is the foundation of the system.
By the November 24, 2020 deadline, Eth2 was triggered and prepared for the December 1, 2020 launch after the successful ETH deposits for 16, 384 validators.
To qualify, the 16, 384 validators were needed to stake 32 ETH each (approx. $17,000 as of this writing) and lock it up for two years, which is an expensive undertaking locking out small owners. When a validator public key reaches a balance of 32 ETH upon deposit, it is automatically registered as an active validator and entered into the queue for activation.
Will the Ethereum 2.0 launch affect the price of ETH? There is no doubt that scalability of the network means more usage, and thus, more demand. In theory, this should propel the price of Ethereum to higher heights and no doubt have a long-term bullish impact on its price.
However, beyond the price of ETH, the biggest impact of Ethereum 2.0 will be increased network throughput and how this will open up great opportunities and what’s possible on top of Ethereum.