What Is Ethereum 2.0? – Investopedia
Ethereum has a long and storied history, with many developments and incidents to mark both significant positive changes and setbacks. The most important upcoming change is a shift from the proof-of-work (PoW) to the proof-of-stake (PoS) model, which aims to improve the security and scalability of the blockchain network.
The changes come under “Ethereum 2.0,” an all-covering term that describes Ethereum’s next evolution into a better-performing, more accessible network. The upgrade also adds sharding, which allows transactions to be processed simultaneously across smaller chains, resulting in faster transaction speeds.
Ethereum 2.0 is a broad term used to cover several improvements to the Ethereum network, which tackle some of its most pressing technical hurdles. Ethereum 2.0, or ETH2, is an informal name — the Ethereum Foundation prefers to refer to Ethereum 2.0 as the consensus layer and ETH 1.0 as the execution layer.
Ethereum 2.0 has been taking shape over several years and is not a one-off event. It started with the launch of the Beacon Chain in December 2021, which allowed the staking of Ether, the native token of the Ethereum network. The process of staking entails holding tokens for a period of time as a means of supporting the crypto network’s security and validating blocks within the blockchain network. These investors receive rewards for this practice through a process known as proof-of-stake (PoS).
In other words, Ethereum is moving from proof-of-work to a proof-of-stake model or consensus mechanism where the latter aims to improve the security and scalability of the blockchain.
The second phase began earlier in 2022 through a series of “merges” with testnets, culminating in a merge with the Ethereum mainnet slated for September 2022. These merges are simply integrations of the Beacon Chain with various testnets. When it merges with the mainnet, Ethereum will have officially moved to a proof-of-stake model.
All of the latter changes relate to the consensus model of the network, but the Ethereum 2.0 upgrade will also involve the implementation of sharding, which tackles the scalability of the network. Sharding follows the merges and is the final phase of the Ethereum 2.0 transition. This phase should be complete by 2023.
There are plans for changes after sharding; however, these are currently not the immediate attention. The improvement of the Ethereum network is an ongoing process.
The Ethereum 2.0 upgrade is a complicated one and has involved the best efforts and minds to see its execution. The reason there has been an enormous push for this change is because the Ethereum network has been bogged down by a few technical limitations, namely scalability, accessibility, and security.
Improvements in these areas are key to Ethereum reaching a wide level of adoption. Ethereum is the home to smart-contract-based decentralized applications (dApps), and these have applications in finance, real estate, supply chains, and governance, among many others. But to have that impact, the applications must be able to handle network interactions at large scale.
The Ethereum network has seen bottlenecks over, simply because of the sheer activity on it. For instance, sometimes, the gas fees, which are paid to miners for their work, reach extraordinarily high levels. It can improve after Ethereum 2.0, as validators who stake Ether will be responsible for securing the network. These validators have to lock in 32 Ether as part of the bargain. While 32 Ether is still a high barrier to entry, there are alternative ways for those with smaller holdings of Ether or the technically unaware to join in.
Proof-of-stake is faster and more eco-friendly than proof-of-network as it consumes far less power. It is expected that PoS will increase the network's scalability and decrease its energy usage by roughly 99.95%.
Currently, the network can handle about 25–30 transactions per second, but Ethereum 2.0 promises to handle 100,000 transactions per second.
That level of scalability will be achieved through the implementation of the sharding technique. This change will see 64 “shard chains” put to use, which run through transactions in parallel. It is theoretically 64 times as quick in recording transactions as the current Ethereum network.
With proof-of-stake and sharding, Ethereum will have completed the biggest evolutions in its history. It is not without reason that many market analysts and industry insiders are playing the transition up, as it will have a profound effect on the operation of various niches, not the least of which is decentralized finance (DeFi).
There is no doubt that Ethereum 2.0 is the most significant change for the network yet. It sets the stage for a future where Ethereum can comfortably handle applications in a wide variety of verticals and also makes it more accessible to the public. Ethereum 2.0 makes it possible for Ethereum to become a more globally used network across a wide range of verticals.
Ether's price has been improving with news of all the merges on testnets, but as with any development in the crypto market, it's hard to make a completely accurate estimate of how it will impact prices.
After shifting from proof-of-work to proof-of-stake, the energy consumption on the Ethereum network will be reduced by 99.95%. This indicates that staking is 2000x more efficient than traditional mining.
Investing in cryptocurrencies and other initial coin offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own Ethereum.
Ethereum.org. "The Ethereum Upgrades."
Ethereum.org. "The Beacon Chain."
Ethereum Foundation Blog. ''Ethereum's Energy Usage Will Soon Decrease by ~99.95%.''
ETHTPS.info. "Live Ethereum TPS Data."
Twitter. "@VitalikButerin 9:46 AM · Jun 30, 2020."
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