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What Is Ethereum 2.0 and Why You Should Care

5 mins
Updated by Ana Alexandre
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In Brief

  • Ethereum 2.0, or Serenity, is a long-awaited update to the Ethereum network, attempting to solve some of the blockchain’s most pressing issues.
  • Ethereum 2.0 will take its rightful place as the core infrastructure for dApps, DeFi projects, tokenized assets, and smart contracts.
  • To counteract any potential issues, the Ethereum development team has decided to launch Serenity in phases.
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Ethereum (ETH) is flawed. Its new update is poised to overhaul the technical infrastructure, in hopes of readying the network for the future’s demands. With this release, the development team will attempt to achieve the holy trinity – scalability, security, and energy efficiency.

Long have the crypto overlords promised a solution that would aid the mass adoption of cryptocurrencies and decentralized apps (dApps). 

In essence, Ethereum 2.0 (ETH 2.0), or Serenity, is a long-awaited update to the Ethereum network, attempting to solve some of the blockchain’s most pressing issues. ETH 2.0 will do this through a series of technical adjustments and by renouncing its traditional consensus mechanism in favor of an ingenious alternative. 

We’re here to tell you why!

Ethereum houses the world’s second-largest digital currency by market capitalization. It’s also the preferred infrastructure for decentralized finance (DeFi) projects and dApps. With over $12 billion locked in the DeFi market, these projects demand a robust yet dynamic blockchain infrastructure. 

Ethereum plans to stick around, but its current blockchain framework is unsustainable. 

It cannot provide a high transaction throughput, nor can it be energy efficient. In fact, the network is only suited to handle about 15 transactions per second (tps). In comparison, Visa claims to process over 2,000 tps. In terms of energy consumption, third parties report that Ethereum currently drains about 11.83 TWh every year — that’s about as much as Sudan. Given these numbers, no environmental activist would advocate for Ethereum.

The root cause runs deep. Serenity will put the network into rehab. By carefully administering a few updates, Ethereum 2.0 will rise from its ashes and take its rightful place as the core infrastructure for dApps, DeFi projects, tokenized assets, and smart contracts. 

The doctor’s order is crystal clear — ditch proof-of-work (PoW), replace it with proof-of-stake (PoS), and introduce shard chains. In doing so, sustainability is assured. Ethereum will turn into a high-speed motorway, where cars consume next to nothing and accidents never happen. 

What is proof-of-stake?

Most cryptocurrencies work by having miners gather up transactions, which are then settled, timestamped, and added to a block. Each block must link back to the preceding block, thereby forming a chain. Consensus mechanisms were designed to eliminate ambiguities or conflicting interpretations. The algorithm relies on a predetermined mechanism to vote on the truth and update the chain. 

Ehtereum currently employs the proof-of-work consensus mechanism. Miners cannot be expected to fairly designate who will create the next block. In response, PoW requires them to solve a complicated puzzle. Once obtained, the solution is easy to verify. Whoever solves the puzzle first gets to create the next on-chain block. While secure and apt for decentralization, PoW is slow and burns a lot of electricity.

Proof-of-stake is a radically different approach to ensuring consensus. It works by introducing a financial commitment that replaces PoW’s high degree of energy consumption. This mechanism requires miners or validators to invest and hang on to a store of value. They no longer need to spend great deals of energy to decide who gets to create the next block. 

Security is easily attained as validators will be penalized if they fail to act in the best interests of the network. Planning to process an ill-willed transaction? Say bye-bye to your stake. Planning to go offline? Be penalized. Those who continuously act against the network’s interests will be forced to exit the Beacon Chain. 

To become a validator on Ethereum 2.0, you’ll need to stake 32 ETH. Decentralization is easily maintained as the network will likely feature a few thousand validators. Users who are unable to stake the minimum threshold can still help the network by joining a staking pool. In exchange for their services, validators will obtain ETH-based rewards. 

By setting up a higher stake, a user can increase their chances of being chosen as the next validator, hence reaping more rewards. Early on, validators will receive a maximum annual rate of 18.10 per cent on their 32 ETH stake.

The reward will be diminished as more validators join the network. When operating at full capacity, validators can expect to earn 1.81 per cent per annum. 

The scalability dilemma cannot be single-handedly solved by PoS. With shard chains, however, the Ethereum blockchain will be reinvented.  

What are shard chains?

What do you do when you can barely process 15 transactions per second, yet the market demands thousands? No, you don’t build another blockchain. You also don’t call it quits. Instead, you acknowledge the necessity of shard chains and figure out how to deploy them. 

To implement sharding, the Ethereum blockchain will be divided into 64 distinctive chains. These motorways are part of the same road system, but they process different transactions simultaneously while remaining interoperable.

Network nodes will no longer have to download, compute, and store all transactions to verify incoming traffic. Thus, shards ease the network strain by handling a significant part of the processing effort.

Shard chains will be managed by the Beacon Chain — a core blockchain that ensures consensus across its shards. Every transaction block will be reported to the beacon chain, which will then distribute the information to the other chains, thereby providing continuity. 

According to the development team, support for over 100,000 transactions per second may be obtained, once ETH 2.0 is fully rolled out. Before this happens, we ought to consider how the update will impact the digital assets market. 

The market impact of launching Ethereum 2.0

First things first, your ETH and ERC-20 tokens are safe. The new update will only overhaul Ethereum’s blockchain network, leaving the cryptocurrency component untouched. Of course, users should expect a price impact.

As the network improves, the demand for ether may rise, leading to value growth. This obviously depends on whether the transition goes smoothly. While statistically unlikely, a failure of epic proportions may deem Ethereum unviable. 

It’s also believed that Ethereum 2.0 will drive the DeFi market to new heights. Such projects require a reliable, scalable, decentralized, and secure blockchain infrastructure. With the update, Ethereum’s blockchain will likely be regarded as an ideal fit. Decentralized apps will also gain access to enhanced performance benchmarks. Although slight disruptions may occur, compatibility with Ethereum 2.0 is guaranteed.

When will Ethereum 2.0 be released?

Deploying the full update from the get-go is risky. To counteract any potential issues, the Ethereum development team has decided to launch Serenity in phases. 

  • Phase 0: 2020 saw the introduction of the Beacon Chain. This phase will register validators and manage the staked ether in preparation for the upcoming releases.
  • Phase 1: in 2021, developers will launch shard chains. Shortly after, the current mainnet will be converted into a shard, finalizing the transition to PoS. 
  • Phase 2: due beyond 2021, the last phase will transform shards into functional chains. This phase will mark the end of the Ethereum 2.0 update process. 

If successful, the Ethereum 2.0 update will future-proof the blockchain network by deploying proof-of-stake and shard chains. On these grounds, dApps and DeFi projects will access a scalable, efficient, and secure infrastructure that will foster innovation and encourage the usage of next-gen projects. Excited, we are!

NOTE: The views expressed here are those of the author’s and do not necessarily represent or reflect the views of BeInCrypto.

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Daniel Dob
Daniel Dob is a cryptocurrency writer, blockchain consultant, and law graduate. He has been involved with the crypto market for the last seven years or so, writing for some of the most popular publications.