Understanding Ethereum 2.0 and Its Impact on the Crypto Industry
Ethereum 2.0 is set to become one of the biggest events in Ethereum’s history, with the official launch happening within months.
Despite its breakthroughs in the blockchain industry, Ethereum still has a long way to go in living up to its promise to become a decentralized, worldwide supercomputer. For that to happen, Ethereum has to overcome its scalability issue, which has become a well-known problem since it was first introduced in 2014.
Ethereum 2.0 promises to be the solution to these tech challenges, with the project roadmap including the long-awaited proof of stake protocol, sharding, and many more performance (and security) updates.
Here we’ll go over the changes coming in Ethereum 2.0 and how they could affect the fundamentals and value of ETH as the project moves forward.
What is Ethereum 2.0 and Why is it Important?
To deem Ethereum a success is a wild understatement. Despite a sharp decline in value from its all-time high of over $1,400, Ethereum continues to pave the way for innovative blockchain solutions in the real world. In fact, many enterprises are already using Ethereum to empower their operations with blockchain tech.
Despite its success, the Ethereum protocol is held back by limitations in the performance and scalability department.
Ethereum currently processes transactions on a proof-of-work consensus model. This model works great for small networks, but it’s limited in terms of speed. Currently, the average ETH transaction time takes 15 seconds or up to 5 minutes depending on the gas price and network congestion — nowhere near fast enough for mainstream usage.
Ethereum’s transactions per second (TPS) capability is a major concern, as the Ethereum network can only process anywhere between 12 and 45 TPS. This is dwarfed by enterprise networks like PayPal and Visa that can handle 193 and 1667 TPS respectively.
These scalability issues hinder the mainstream adoption of Ethereum since the network cannot process transactions — like payments and bank transfers — quickly enough to cater to mainstream users.
Ethereum 2.0 aims to solve these challenges by making the network scale and perform orders of magnitude better than before. In the Ethereum 2.0 roadmap, this goal is achieved through two objectives:
- Proof-of-stake consensus: a new consensus model designed to replace the resource-intensive proof-of-work consensus mechanism.
- Sharding: an upgrade that improves the speed and throughput of ETH transactions to accommodate real-world use cases.
Bear in mind that Ethereum 2.0 is not a direct upgrade to the current Ethereum protocol. Instead, the upgrade will be rolled out in the form of a separate platform from the main Ethereum network, gradually replacing it in the future.
What Are the Major Tech Changes in Ethereum 2.0?
There are three development phases in Ethereum 2.0 that need to be completed before the protocol can be widely used.
Phase 0: Beacon Chain
The Beacon Chain can be considered the main engine behind Ethereum 2.0. It introduces the long-awaited proof-of-stake chain, which will at first run parallel to Ethereum’s current proof-of-work chain.
The current proof-of-work model rewards miners when they process transactions through solving complex cryptographic problems. However, proof-of-work requires a significant amount of computing power, which makes it expensive and environmentally taxing due to electricity requirements.
Proof-of-stake works in a similar manner but achieves consensus through a set of nodes (known as validators) instead. Each validator must stake or put in a minimum of 32 ETH to be part of the consensus process. These validators are then allowed to validate transactions in the Ethereum 2.0 blockchain.
While miners are rewarded for solving problems, validators are rewarded for good behavior, like voting only for valid transactions. There is also a penalty system for validators that do not act as expected, thus protecting network users from fake or illegitimate transactions.
Validators are also responsible for proposing the addition of new blocks to the Ethereum 2.0 chain and validating them. This is achieved through a random selection of 120 validators who then have the right to vote on which blocks to include in the chain.
Phase 1: Sharding
Sharding improves scalability, as it divides the Ethereum 2.0 chain into multiple smaller “shards” or partitions, allowing the network to add and process multiple transactions concurrently. Each shard has its own network chain and is capable of handling transactions independently.
Vitalik Buterin explains the concept of sharding best with this analogy:
“Imagine that Ethereum has been split into thousands of islands. Each island can do its own thing. Each of the islands has its own unique features and everyone belonging on that island i.e., the accounts, can interact with each other AND they can freely indulge in all its features. If they want to contact other islands, they will have to use some sort of protocol.”
Ethereum 2.0 will assign user addresses to a particular shard, granting it the ability to interact with other addresses on the shard. These shards can then communicate and transact with each other to create an interconnected web of shards, leading to increased network performance, speed, and scalability.
Phase 2: Ethereum WebAssembly (eWASM)
The eWASM is an Ethereum Virtual Machine built specifically to work with proof-of-stake and sharding — features that are not available in the current Ethereum Virtual machine build. With eWASM, developers can easily create and deploy smart contracts and user accounts and develop dApps for the Ethereum 2.0 network.
The eWASM is still in development, but it is expected to be generally available next year or in 2021 at the latest.
What Should Investors Expect from Ethereum 2.0?
Validators are rewarded for their efforts by earning interest on their staked ETH. Current estimates suggest that validators can earn up 10.3% in annualized returns, with the actual figure depending on the network’s usage rates.
This could lead to an increase in demand for ETH, as token holders will be eager to cash in on a lucrative passive income stream. Having more ETH locked-up would also lower its market circulation total, which could stimulate a rise in value.
There are some risks with Ethereum 2.0 concerning the lack of clarity around a realistic development roadmap and whether the protocol can actually promote mainstream blockchain adoption.
If Ethereum 2.0 can overcome these challenges and deliver on its roadmap, however, it will help move forward the adoption of a slew of innovative products and services. These will ultimately have the potential to revolutionize global markets and industries, further spiking the popularity of ETH and its counterparts in the blockchain field.
How Cryptoasset Investors Can Keep Up with the Latest Ethereum 2.0 Updates
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