General information
Approximately two years ago, Ethereum proclaimed its intentions to change their algorithm from Proof-of-Work to Proof-of-Stake.
Of course, developments and advances of any kind are always welcomed by the crypto community, but when it came to Ethereum’s modernization plans, many users didn’t understand all the steps of the process. Ethereum has come through a number of hard forks, and for those educated enough in the crypto space, Istanbul, Berlin and Constantinople aren’t just geographical names.
Yet, there are few people who possess comprehensive knowledge about such processes in the crypto space.
The poor level of hard-fork awareness may be caused by the way people share information on crypto-related forums. The accuracy of this information and the data shared across blockchain-related social media and blogs leaves much to be desired.
This article is devoted to Ethereum 2.0 with a detailed explanation of the network and proposed influence on the sector of digital assets. Let’s dive in and take a look!
Ethereum 2.0 In Details
In order to understand what Ethereum 2.0 is about, users must know about all the weak points of Ethereum’s previous version 1.0. Ethereum 1.0 worked on a POW (proof-of-work) algorithm dedicated to deterring denial-of-service attacks such as spam messages. POW blockchain allows to create decentralized applications. Ethereum attempted to create a globally accessible DeFi infrastructure to provide users with advanced financial opportunities, but the technology turned out to not be cost-effective with its high dependency on computer energy.
Just for reference, Ethereum is the 2nd top open-source platform for De-Fi applications and a cryptocurrency, with only Bitcoin having a bigger market capitalization. Ethereum operates on a proof-of-work algorithm to enable users to create blocks on the basis of blockchain and verify them. Ethereum’s main competitor — Bitcoin — works by a similar principle and requires users mining the coins to deliver processing power to enhance the system’s security. The Proof-of-Work mechanism works perfectly for medium and small-scale networks with a small number of transactions.
First of all, only a few decentralized applications could function without extensive processing power within a small network of nodes. It has been so for a while, but now things have changed as well as the number of decentralized apps used and transactions processed. Therefore, the blockchain used today decreases the speed of the system and increases gas fees. It doesn’t sound like the cutting-edge DeFi industry everyone’s talking about, does it?
There’s no better time to deal with the problem than now
Changing the underpinning algorithm seems to be a wise move. The process involves the following phases to complete the change:
- Phase O — Proof-of-Stake
- Phase 1 — database partition
- Phase 2 — (state and execution)
- Phase 3 and further — STARKS, further scaling, etc.
POS (Proof-of-Stake)
The Proof-of-Stake mechanism is based on the principle that miners can confirm transactions depending on the amount of coins they hold. The more coins a miner has, the more processing power he or she is able to use. Most notably, it means that it’s not necessary to possess the most advanced equipment and hardware to create new block transactions, but it’s important to have more cryptocurrency on the balance.
The shift to another type of consensus mechanism will allow to meet all the requirements of the system and users that haven’t been satisfied before. In order to clearly understand which areas of system operation weren’t taken care of by PoW, let’s have a look at it once again:
- The PoW algorithm proved its inefficiency and inconsistency with decentralized applications, which is already inappropriate for a network developing in DeFi direction. Apart from that, the speed of PoW functioning leaves much to be desired. Proof-of-Stake, on the other hand, can boost the speed of transaction processing by multiple times and encourages the system’s decentralization.
- PoW has many problems in store. It fails to achieve its stated objectives and requires much more processing power. Users are tired of the worn-out mechanism and long for a new, more advanced one that already makes it possible to jump from 15 to 1,000 transactions processed per second. PoS involves having a wallet to store the digital assets, which will facilitate the system operation and security.
- Users mining on a PoW mechanism are required to regularly enhance their technical powers (for instance, mining Bitcoin is only possible in large mining pools and practically impossible individually). Of course, Bitcoin is a leading cryptocurrency throughout the industry, but the technology it’s using is old-fashioned. PoS’ competitive advantage lies in its much more efficient power management.
- Cryptocurrencies mined with PoW have higher entry barriers than those working from a PoS algorithm. PoS provides opportunities for an easier entry to all kinds of currencies, including those with high network difficulty where the use of specialized mining devices like ASIC miner is required.
- PoW is considered to be resource-ineffective. It means that the use of a PoW algorithm requires the use of too many resources that would be vastly wasted as a reward is only given to the node that’s the first to find a solution. Therefore, a lot of processing power is consumed with no reason. PoS offers an alternative mechanism where much less computing capacity is required, which means much fewer resources will be wasted. PoS technology allows for significantly lower electricity costs and leaves the notion of mining farms in the past.
Given the above-mentioned facts, it’s safe to say that a switch to Proof-of-Stake will have a very beneficial influence on the network, fastening transaction processing and reducing energy consumption many times over. Less energy wastes will positively influence local ecologies and a global environmental issue, because energy is generated through a consumption of natural resources and processes that may be harmful to the planet. When the shift from POW to POS is finalized, it will increase the network’s overall capacity, keeping it decentralized and secure.
By changing the consensus mechanism, Ethereum has all the chances to become:
- A core part of the global financial industry
- A base for the development of new economic systems
- A global financial center
Staking process
There’s no cryptocurrency project in the world that wouldn’t be dependent on its community of users who make the project come alive. When users truly like the project and the ideas behind it, they tend not just to trade its currency, but also invest in the project.
Investing in a cryptocurrency means devoting user resources — money and computing power. By providing these resources, users automatically demonstrate their loyalty to the company and become an integral part of the process of maintaining the project’s functioning. When users want to invest in public blockchain projects, they usually do it by staking. So, what is staking all about?
The Ethereum network is on the verge of a range of serious changes that brings about many opportunities. For example, now users will be able to receive remuneration for staking coins and taking part in the blockchain generation.
In the new version of Ethereum, there will be no miners, as the network will consist of validators — computers and users, checking the validity or accuracy of a code or a part of it. The innovative mechanism involves the P2P interaction of nodes communicating with each other. Each node is a computer in the network. These are the fundamentals that must be well understood by all users of the network, especially those who want to be validators. Full validators on Ethereum 2.0 are required to run a node and deposit 32 ETH into the official deposit contract provided by Ethereum Foundation. Users not meeting either of the two conditions can stake coins via staking pools.
Users do this staking to validate transactions once the chain faces any updates. Transaction validation involves risking users’ own money. Users managing to validate transactions receive a remuneration in the form of a cryptocurrency. There are occasions when users try to validate transactions by scamming, but if it’s disclosed, they are charged penalties. This is what staking is about in general.
Staking doesn’t oblige users to have a costly hardware or high-power mining farms. The only equipment a user needs is a computer with access to a digital wallet. No worries about having large equipment and significant amounts of money to pay electricity bills are needed.
A Two-Year Long Process
Approximately two years ago, Ethereum first announced its ideas about the problems applicable to the first Ethereum version and possible solutions. The community has split up to those eagerly waiting for the launch of the updated version and those not supporting the move. It seems like 2020 is truly the year of fundamental changes on the crypto arena.
Ethereum 2.0 is going to be launched soon — in the beginning of 2021, as it is planned. Despite officially announced time frames, many think it may be introduced even earlier.
