Ethereum 2.0: What Is It and Why Is It So Important?

Ethereum 2.0: What Is It and Why Is It So Important?

Ethereum began as a spark in the eye of co-founder Vitalik Buterin’s back in 2013. That’s when he released the whitepaper for the project, though the Ethereum network wouldn’t see the light of day until 2015.

In between, there was the Ether sale in 2014, which is when early buyers could scoop up some of the now second-biggest cryptocurrency using bitcoin. Back then, Ether fueled the Ethereum network as a payment method for transactions on the network, and years later it stills serves that purpose.

Table of Contents

PoW to PoS

What Are the Problems With the Original Ethereum Protocol?

What Is Ethereum 2.0?

What Are the Benefits of Ethereum 2.0?

What’s Taking So Long?

PoW to PoS

Ethereum was launched using the proof-of-work (PoW) consensus protocol, similar to Bitcoin. The PoW data essentially does two things:

Allows computer nodes, which secure and guard the platform, to agree on the validity of the information published on the Ethereum network

Thwarts any economic attack on the network

The PoW algorithm, however, is not perfect, and the flaws — including slow transaction times and hefty gas fees — became too big to ignore. The emergence of the Ethereum-based CryptoKitties game is a good example. The game, which introduced an early version of non-fungible tokens (NFTs), became so popular that it clogged the Ethereum network, delaying transactions and causing fees to skyrocket.

The rise of decentralized finance, or DeFi, is yet another use case that has underscored the importance of an efficient network. While the DeFi market has seen its total-value-locked (TVL) balloon since catching on like wildfire in 2020, its growth has been stifled in some ways. Some developers have opted for other blockchains, while institutions have largely remained on the sidelines until the kinks are worked out. With greater scalability and more stable fees, Ethereum would likely disrupt traditional finance even more.

This is where Ethereum 2.0 comes in. In order for developers to avoid shooting themselves in the foot with their own innovation, they are building Ethereum 2.0. This is a massive upgrade of the existing network to one that is more scalable and could hasten the adoption of the blockchain among the mainstream.

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Chief among the changes is a switch in the consensus protocol from PoW to proof-of-stake (PoS). Staking will lead to greater participation in securing the Ethereum network, which in turn will create a more decentralized blockchain.

3d illustration of bitcoin and Ethereum coins

What Are the Problems With the Original Ethereum Protocol?

The version of Ethereum that was introduced in 2015 was groundbreaking, but unprecedented demand for the network exposed some issues. These problems can be boiled down into three key areas:

A clogged network: The blockchain became too crowded, which is not ideal when trying to attain global adoption. To maintain security, each and every computer node must verify transactions on the blockchain, which slows transaction times down.

Insufficient disk space: As the Ethereum network grew more popular, it became increasingly difficult to run software known as nodes. The trick is to come up with a way to increase Ethereum’s size and power without compromising decentralization.

High energy consumption: Ethereum’s power use to maintain the PoW consensus algorithm for network security is not sustainable for the long term.

The Ethereum team sought out to solve these issues while keeping the most important feature of the network intact: decentralization. Eth2 is the solution to achieving greater scalability and security without becoming a centralized network, though it is far from an easy task.

What Is Ethereum 2.0?

Now that we’ve established how far Ethereum has come, let’s take a look at where it is headed. Ethereum 2.0, which is synonymous with Eth2 and Serenity, is a major upgrade of the blockchain network. While it was not the first upgrade, it is the one that is designed to catapult Ethereum to total-value-locked (TVL) balloon

It is a massive undertaking among the developers that will not happen overnight. Instead, Ethereum 2.0 is unfolding in a series of steps, the first of which occurred in the year 2020 with Phase 0, otherwise known as the Beacon Chain.

The Beacon Chain is an implementation of PoS that runs alongside the PoW network and is being battle-tested first. In August 2021, Ethereum completed a hard fork dubbed London, which introduced greater stability to gas fees on the Ethereum network and presented a deflationary model to the protocol’s monetary policy. With every phase comes new functionality and enhanced performance that will ultimately lead to the destination of Ethereum 2.0, a PoS network.

What Are the Benefits of Ethereum 2.0?

Ethereum 2.0 will deliver a host of key benefits that are likely to attract even more developers to the network. The three key improvements include:

Greater scalability: Ethereum must be able to support thousands of transactions per second (TPS) for applications built on the network with greater speed and cheaper fees. The one-two punch of sharding and a PoS algorithm is expected to create greater scale thanks to the addition of more nodes, resulting in higher TPS without using more electricity.

Greater security: Ethereum must be as secure as possible to thwart attacks so that users including institutions will feel comfortable using it. The aforementioned Beacon Chain is designed to help with network security.

Greater sustainability: A lesser carbon footprint has become a major theme in the cryptocurrency industry. The PoW consensus algorithm consumes a great deal of energy. Ethereum 2.0 will be better for the environment as there will be no more mining involved. According to Ethereum Co-Founder Vitalik Buterin, whose vision for Ethereum is outlined in the below graphic, Ethereum’s energy consumption will be diminished “by a factor of more than 1,000” with PoS.

What’s Taking So Long?

Ethereum 2.0 comprises three separate upgrades, each of which is a monumental task in its own right.

Beacon Chain: Launched in 2020, this technology introduced staking to the network and paved the way for future upgrades. While the Beacon Chain is in testing mode, it is live and will eventually be the cornerstone of Eth2.

Merge: The Ethereum merge is expected for either late 2021 or sometime in 2022. This is where the Beacon Chain will be combined with Ethereum’s mainnet and it will make staking on the Ethereum blockchain a reality while marking an end to mining.

Shard Chains: This represents the splitting of the Ethereum network, which will occur in phases will result in a greater capacity for processing transactions and storing data. Sharding chains are planned for 2022.

Ethereum is one of the biggest cryptocurrencies, second only to bitcoin. The transition to Eth2 is a major series of events that solve the issues plaguing the network and could potentially lead to wide-scale adoption of the blockchain while potentially strengthening the Ether price in the interim.

This article was originally posted on FX Empire

More From FXEMPIRE:

‘Ethereum Improvement Proposal’ all set to bring major change to crypto world

Ethereum 2.0’s latest upgrade could make it outperform Bitcoins. Known as Ethereum Improvement Proposal (EIP)-1559, which went live on Thursday, is touted to be the most significant update since the launch of the cryptocurrency.

The upgrade will not only help reduce cost of transaction fees involved on Ethereum network but introduce several other fundamental changes to how Ethereum is perceived. Industry players said with the current updates, Ether stands a chance to outperform Bitcoins.

Key changes

Known as the second most valued cryptocurrency, two of the key changes the update will bring include settling on a fixed base fee instead of an uncertain ‘gas fee’ users pay in ether to miners to process their transactions over the Ethereum network.

This transaction fee tends to increase and change and there is no way the user will know the price before hand. This will be replaced with a fixed ‘base fee’. Over this base fee, the user can choose to pay a tip to speed up the process.

Also read: Ethereum co-founder says safety concern has him quitting crypto

‘Burning’ feature

The other key update is introducing the “burning” feature wherein after each transaction with the miner, a small amount of those tokens would be burned or taken away permanently out of circulation. This will lead to creating a shortage of ether supply in the network leading to increasing value and demand as it becomes rarer.

Additionally, the number of transactions allowed on one block has been doubled. Ethereum’s blockchain settles transactions in blocks or batches. Each block needs to have a certain fixed number of transactions registered to be completed and taken for settlement.

Siddharth Menon, COO WazirX told BusinessLine, “This EIP-1559 is a major overhaul in the fee model. One of the biggest challenges in the current fee model, which is bid based. There was high volatility in gas fees to be paid, which often resulted in transactions taking long to get confirmed or not even getting confirmed. With this new model, the increase or decrease of fee will be more linear and predictable and less volatile thereby enhancing user experience.”

Also read: India must take a holistic view on cryptos

“Ethereum so far has been an inflationary economy which inflated at the rate of approx 2 per cent per year. With this new fee model, Ethereum theoretically can become both inflationary and deflationary, however, practically I believe as there is more adoption in this network, it will be primarily a deflationary economy where supply will always be burned to remain lesser than demand. This could be a great opportunity for long term investors. If more people understand this economics, we could see more volume and price movement for Ethereum,” he added.

Ethereum to outperform Bitcoin

“The upgrade to Ethereum 2.0 will certainly make it more environmentally friendly than the current leader, Bitcoin. Also, the use of block in decentralised finance and its applications will hopefully support Ether’s price movements in the years to come,” Neeraj Khandelwal, co-founder, CoinDCX told BusinessLine.

“Bitcoin is seen as a store of value just like Gold. However, Ethereum has a lot more use cases and adoption led by DeFi, NFT and other Dapps being built on top of Ethereum. This adoption essentially means more demand for Ethereum which will eventually lead Ethereum to outperform Bitcoin. Ethereum Network also called EVM (Ethereum Virtual Machine) is like cloud computing using the Blockchain, and can be compared to Unix servers powering Facebook, Google and other platforms. This is the potential of where Ethereum can go and what the future tech businesses built on Ethereum could look like,” Menon said.

Ethereum upgrade may boost ether prices

If you are a cryptocurrency investor, you would recently have received a message from your trading platform that it has disabled deposits and withdrawals for Ethereum (ETH). These facilities were restored by the exchanges late on Friday. The reason was that a major technical upgrade,called ‘The London Upgrade’ or ‘EIP -1559’, was being deployed on the Ethereum network.

Experts say the upgrade is likely to give a boost to ETH prices.

“The entire crypto industry is quite excited about the latest Ethereum network upgrade. It will have a positive impact on investors as it is expected to bring in a lot of transparency in terms of transaction fees on the network," said Shivam Thakral, chief executive officer, BuyUcoin.

We tell you what this upgrade is and why it matters to investors.

The London upgrade and its need: It refers to a set of interconnected upgrades that will make Ethereum more scalable, more secure and more sustainable.

“The Ethereum upgrade is popularly known as ‘London Hard Fork’. The major change we are going to see in this is about how the transaction fee collected by the computers for processing the transaction is handled and distributed. This upgrade will mandate a part of the fee to be destroyed," said Sathvik Vishwanath, co-founder and chief executive officer, Unocoin.

In other words, only part of the actual fee charged to process a transaction would reach the person who is providing his processing power.

“Such destruction of cryptocurrency is possible by sending them to a null address and such payments can never be reversed or recovered or moved to another account. This is interesting because over time, this would reduce the ether in circulation, which could push its price higher," he added.

Impact on investors: According to experts, the upgrade is expected to boost the price of ether in the medium to long term, which will strengthen investor sentiment around the world’s second biggest cryptocurrency.

“It will be exciting to see the bitcoin vs ether phase after the upgrade, as there are already some flipping conversations going on between ether and bitcoin in terms of market capitalization. There is a huge gap in the value between the two, but ether is the only strong competitor of bitcoin in the crypto world. However, it is important to note that Ethereum is already ahead of bitcoin on various other factors," said Thakral.

While bitcoin’s most well-known use case is a store of value, Ethereum has several real-world applications such as decentralized finance (DeFi) and smart contracts.

Polygon is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development. It tries to solve pain points associated with blockchains such as high Gas fees (the fee required to conduct a transaction on Ethereum) and slow speeds, without sacrificing on security.

EIP-1559’s importance for Polygon: EIP-1559 is important for the Ethereum network as it reduces the peak Gas price, which is also helpful for Polygon and any other layer-2 solution provider.

Polygon is also in advanced stages of implementing EIP-1559, as it wants to keep the startup as close to the Ethereum network as possible.

“It will be overall helpful for the Polygon ecosystem as due to a lot of adoption, we are also seeing Gas fees also going up," said Sandeep Nailwal, co-founder, Polygon.

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