What’s Ethereum 2.0, and what does it mean for ETH?

Ethereum, an open-source, decentralized platform based on distributed blockchain technology and cryptocurrency, is currently facing revolutionary changes. These are related to ETH 2.0 – a critical enhancement that will phase in solutions that improve the scalability of the network, such as the Proof-of-Stake mechanism and sharding. 

ETH 2.0 – what is it all about?

Ethereum 2.0 is an update to the already existing Ethereum blockchain. Its introduction aims to improve the speed, performance, and scalability of the Ethereum network to eliminate bottlenecks and increase the number of transactions. The network is also expected to become more sustainable by reducing resource consumption, most notably electricity. The alternate names for Ethereum 2.0 are Eth2 or Serenity.

What essential changes will ETH 2.0 introduce?

ETH 2 is a long-awaited update introduced in phases starting December 2020. Vitalik Buterin, the creator of Ethereum, has planned to implement the improvements in four steps to be completed in 2022.

Ethereum 2.0 introduces several fundamental structural changes compared to the previous version – Ethereum 1.0. The main ones are Proof-of-Stake and sharding ‒ let’s look at both of these terms a little closer, but at first, we should better understand the operation of ETH 2.0

Proof-of-Stake ‒ a cheaper and less energy-intensive alternative to Proof-of-Work

Two main consensus algorithms dominate the cryptocurrency world for confirming transactions made on the blockchain. The first is the expensive and energy-intensive Proof-of-Work, in which miners play a central role by digging new blocks on the network through the computing power of computers. As a result of the increase in network traffic, the limitations of the Proof-of-Work mechanism began to cause bottlenecks, accompanied by a significant increase in transaction fees.

An alternative to PoW is Proof-of-Stake, a mechanism based on staking. Instead of diggers, the miners (stakers) temporarily put their Ethereum into a so-called “staking pool” through a particular type of wallet to process transactions and encrypt the blocks. Then, as validators, they run software that verifies and validates transactions on the network and, when the right ones are selected, create new blocks on the chain. The network determines the “winner” based on the amount of ETH each validator has in their pool and the length of time they hold it. For example, those with 32 ETH will be eligible to become validators.

On the other hand, with smaller resources, people willing to become validators will join the community. In addition, users are to receive rewards for not using frozen cryptocurrencies. With PoS, transaction execution speed is expected to increase to 100,000 per second.

The most significant advantage of Proof-of-Stake is the power savings compared to the energy-intensive Proof-of-Work consensus. PoS is also a greener solution, cheaper to maintain and available to virtually everyone – everyone, regardless of power resources, can mine cryptocurrencies this way. The need to consume fewer resources also makes the network more decentralized. Unlike PoW, Proof-of-Stake is also resistant to hacking attacks. 

This is why Ethereum is moving from a problem-causing PoW to a problem-solving PoS through technical updates dubbed as ETH 2.0. This phase is known as the Beacon Chain. 

Another step towards a scalability-improving consensus change was the December 2021 launch of the Ethereum 2.0 Kintsugi test network, which illustrates how the ETH network will operate soon.

Sharding – a way to improve blockchain performance

The move to Proof-of-Stake consensus is not the end of improvements to the Ethereum network. Its scalability, which is the most crucial factor affecting the performance of a given blockchain, is also to be improved by the introduction of the so-called sharding. 

Sharding is a mechanism that divides the network to allow separate parts of it to process a specific group of transactions at the same time. However, processing transactions by all network nodes simultaneously significantly reduces its efficiency – this is where shard chains come to the rescue – parallel, decentralized chains of blocks that take over part of the network processing work.

How will ETH 2.0 change the Ethereum network?

According to experts, Ethereum 2.0. may turn out to be one of the most critical developments in the history of cryptocurrencies so far. First of all, it will revolutionize Ethereum, a network that has grown to become the most popular blockchain since its launch in 2015 and faces many challenges today. Without the introduction of PoS and shard chains, the network could lose its status as a leading platform in the cryptocurrency ecosystem. ETH 2.0 will allow Ethereum to improve scalability without sacrificing performance, security or decentralization. It will also undoubtedly enhance the development of DeFi and the entire decentralized financial market.


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