The long-awaited upgrade to Ethereum 2.0 is just around the corner. The goal of the multi-phase upgrade is to improve the scalability and security of the Ethereum network through several changes in the network infrastructure – in particular, 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 is a new version of the Ethereum blockchain that will use a proof of stake consensus mechanism to verify transactions through a stake. Ethereum 2.0’s staking mechanism will replace the proof of work (PoW) model, where cryptocurrency miners use high-powered computers to complete complex mathematical functions known as hashes.
The mining process requires increasing electricity to verify Ethereum transactions before they are recorded on the public blockchain. Proof of work systems consumes a lot of electricity. Bitcoin mining, for example, currently consumes electricity at an annual rate of 127 terawatt hours (TWh). This is currently higher than the electricity consumption of all of Norway. ETH currently has an annual electricity consumption roughly equivalent to Finland and creates a carbon footprint equivalent to Switzerland. Fortunately, the merger is expected to reduce Ethereum’s carbon footprint by up to 99.95%, addressing one of the cryptocurrency’s main drawbacks.
What is a Staking?
Staking is the process of actively participating in the verification of transactions (such as mining) on the Proof-of-Stake blockchain. In these blockchains, anyone with a minimum required balance of a particular cryptocurrency can verify transactions and earn stake rewards.
What are the rewards associated with staking ETH? You can get a return for every ETH you stake as a reward for helping secure the network. ETH staking rewards are awarded based on the amount of ETH verified and what rewards the network offers in a certain period. If less ETH is staked, the protocol rewards will be larger as an incentive for more ETH to come online. As ETH stakes increase, the reward decreases.
Proof of Stake
Proof of Stake (PoS) is the most important change in Ethereum 2.0 because it changes the structure of crypto-economic incentives for blockchain verification. Ethereum’s current architecture is maintained by a Proof of Work (PoW) consensus mechanism. Proof of Work components are well known in the blockchain community: it is the architecture used for the most popular blockchains to date, including Bitcoin, Ethereum, Litecoin, and others.
In Proof of Work, miners run nodes and expend computing power to solve complex mathematical problems in a competition to mine the next block. The time and money required by miners to implement the hardware and the electricity consumption of the PoW chains validate the block rewards that are distributed to miners who successfully mine an existing block. PoW chains are very secure; the combined computing power required for an individual to compromise a well-established PoW blockchain like Bitcoin or Ethereum would cost an extraordinary amount of money and possibly nothing.
Ethereum moving from Mining to Staking
Ethereum is moving from mining to staking. Staking is a process that replaces mining to verify Ethereum transactions after a merger is complete. Staking requires users to stake a certain amount of cryptocurrency to participate in the transaction verification process. In a proof-of-stake model, an algorithm chooses which validator can add the next block to the blockchain-based on how much cryptocurrency the validator has staked.
Investors must deposit at least 32 ETH to become an Ethereum validator. There are currently over 300,000 validators on Ethereum. The more ETH each validator stakes, the more likely the validator is to create blocks. Each time a validator creates blocks, the validator receives Ethereum rewards for handling validation duties. Currently, Ethereum’s Beacon Chain execution yield ranges from 4.3% to 5.4% Annual Percentage Rate (APR).
With Ethereum trading at nearly $1,900, the minimum requirement of 32 ETH, which is over $59,000, can be quite expensive for the average investor to bet on. However, individual investors can also join staking pools, which are collections of Ethereum stakers that pool their resources and share rewards. Most major cryptocurrency exchanges also provide staking services for investors who are not ready or able to stake 32 ETH themselves.
Ethereum vs Ethereum 2.0: What’s the Difference?
As of April 2022, Ethereum operates two parallel blockchains, one that works with proof of work and a test chain that works through proof of stake. The merger will combine the older Ethereum Mainnet blockchain (ETH1) and the new Beacon Chain (ETH2) into a unified blockchain.
Ethereum developers recently removed the ETH1 and ETH2 terminology due to concerns that it would confuse users about the connection. The Ethereum network’s native cryptocurrency may be confused by what appear to be two versions of the coin on any exchange like Coinbase, and other popular cryptocurrency exchanges. When users stake their Ether on any exchange it is converted from ETH to ETH2 and the prices of ETH and ETH2 are the same. Once the merger is complete, the two versions of Ether will be merged into one token.
Ethereum vs. Bitcoin
Bitcoin and Ethereum are the two most popular cryptocurrencies, together accounting for 63.6% of the global cryptocurrency market capitalization. Ethereum’s price has increased 648% over the past three years, more than double the 250% gained by Bitcoin over the same period.
The merger would make Ethereum a more attractive investment than Bitcoin from an ESG perspective, but it wouldn’t necessarily mean Ethereum would become a threat to dethrone Bitcoin as the world’s leading cryptocurrency. Chris Kline, COO, and co-founder of Bitcoin IRA say that Bitcoin and Ethereum are complementary rather than competing in the crypto market.
“Bitcoin and Ethereum serve different purposes. Bitcoin is a proof-of-work, limited-asset, monetary crypto, while the utility of Ethereum is the backbone of Web 3.0. Both serve critical and different purposes. It is an element of the overall digital asset ecosystem that is being launched,” he said.
While crypto investors await The Merge later this summer, the next big event on the way to prove a stake in Ethereum came in June. Ethereum completed a major integration test in June with the Ropsten test net. Once the Ropsten upgrade is complete, Ethereum developers will have two more test nets to upgrade before merging with the main Ethereum network.
Will Ethereum 2.0 replace Ethereum?
The Ethereum 2.0 upgrade does not technically replace Ethereum. However, it is best described as a combination. In the Ethereum.org FAQs for Eth2, the site also states that it is “inaccurate to think of Eth2 as a separate blockchain.”
The upgrade to Ethereum 2.0 is now closer than ever, as the developers of ETH have just started the second phase of the merger. Fusion testing has already begun and a tentative date for the big merger has been announced. According to the foundation’s developers, the transition from Ethereum to PoS will officially take place on September 19, 2022.
Main features of Ethereum 2.0
Ethereum will be 99.95% more energy efficient. It is estimated that Proof of Stake no longer requires the power of an entire country to secure the network.
Ethereum is divided into 18 “Shards” that operate simultaneously. This greatly improves efficiency.
Ethereum is moving to Proof-of-Stake Consensus so anyone can stake and help secure the network.
Network compromise becomes more expensive under Proof-of-Stake. 51% of attackers can also be easily identified using validator addresses. They can be removed from the network in the event of an attack.
What are the different phases in which Ethereum 2.0 will be implemented?
The transition to Ethereum 2.0 is being done in phases. Phases began in late 2020 and will run until summer 2022.
Phase 0 starts the chain of network beacons. The main task of this phase is to manage the registry of validators that create blocks in the Ethereum 2.0 network. It also sets the framework for all future phases.
The main purpose of the phase 1 update is to implement shard chains and roll-ups. Shard chains enable the distribution of transaction data across 64 blockchains within the Ethereum network. Distributing transaction data can greatly increase network throughput. With multiple chains working together simultaneously, data output can be distributed to reduce network load. It should be noted that Phase 0 and Phase 1 features will not work until Phase 1.5 and Phase 2 are launched.
Phase 1.5 is a delay between phase 1 and phase 2. The main purpose of this phase is to provide a bridge between Ethereum 1.0 and Ethereum 2.0. Connecting two ecosystems is called “docking”. The merger will involve docking the Ethereum 1.0 mainnet with the beacon chain, and then the Ethereum 1.0 blockchain will be one of the 64 shard chains implemented in phase 1. The launch of Phase 1.5 will represent the official launch of Ethereum 2.0 and its features will have a tangible impact on the network. Phase 1.5 will follow Phase 1 in 2022.
After Ethereum 2.0 is docked, phase 2 will begin. This will begin with cross-shard interoperability and enable the development of a native decentralized application (dApp) network. Phase 2 will give the network the ability to manage smart contracts and transactions. This officially turns every shard chain on the network into a fully functional manner.
Who will benefit from the launch of Ethereum 2.0?
Ethereum 2.0 development will be positive for Ethereum holders. This will change the fee structure, resulting in users paying less for transactions and even allowing holders with the required amount of ETH (32) to stake their coins on the network and become validators.
All applications already on the Ethereum 2.0 network simply migrate to Ethereum 2.0 without losing transaction records or data. The release of Ethereum 2.0 will completely remove the proof-of-work mining structure in favor of staking. This will make the traditional mining system obsolete and miners will have to switch to staking if they want to verify transactions for block rewards and transaction fees.
Frequently Asked Questions
- What is Ethereum 2.0?
Ethereum 2.0, also known as Eth2, refers to a set of upgrades that will make Ethereum more scalable, secure, and sustainable.
2. What is the difference between Ethereum 1.0 and Ethereum 2.0?
Two major innovations were introduced in Ethereum 2.0 that were not present in Ethereum 1.0.
Proof of Stake and Shard Chains.
3. What is the Ethereum 2.0 release date?
Beacon Chain Proof of Stake was launched in December 2020. A merger combining Mainnet Ethereum and Beacon Chain is expected in Q1/Q2 2022.
4. What happens to the ETH I currently own?
There is nothing special to do with the ETH you currently have. It remains fully functional with Ethereum even after Proof of Stake integration.