Ethereum 2.0: What it is and Phases

an image of ethereum logo on coins

Ether investors are looking forward to a long-awaited update to its network, known as Ethereum 2.0. The update, which has been in the works since 2014, represents a significant transition for the world’s second-largest cryptocurrency, but what is ethereum 2.0?

We’ll discuss Ethereum 2.0, including when it will happen and the significant changes accompanying this upgrade in this article.

What is Ethereum 2.0?

Ethereum 2.0, also known as eth2 or Serenity, is a set of interconnected upgrades on the Ethereum blockchain. The upgrade aims to enhance the network’s scalability, speed, effectiveness, and security through some changes to its infrastructure. 

These changes will increase Ethereum’s capacity for processing transactions, iron out bottlenecks, change the way users mine the cryptocurrency, and reduce gas fees.

Challenges With the Current Network

One critical problem with the current Ethereum network (eth1) is scalability. Presently, the network can handle 15 to 45 transactions per second (TPS) which sounds impressive. However, it is getting more congested by transactions daily, making it challenging to manage all Ethereum’s users from across the globe. 

For instance, in 2017, the network became heavily clogged when the popularity of the Ethereum-based game Crypto Kitties rose. It led to a slow trade in activities, and users couldn’t process transactions quickly. 

Additionally, the congestion in Etheruem’s network usually leads to a spike in transaction fees. Thus, during demand surges, it can cost several times more to interact within the ecosystem. The interaction process can also become inefficient as users will need to resubmit old transactions for much higher fees.

Furthermore, the eth1 network uses a consensus mechanism called proof of work (PoW) that requires miners to compete and solve complex mathematical equations to validate transactions. The first miner to solve the puzzle adds a new transaction to the blockchain and receives a reward of crypto coins.

However, the mining process involves using a high amount of computational power, and it’s therefore very energy-intensive and inefficient.

Ethereum 2.0 as the Solution

a screenshot of the ethereum site showing the vision of ethereum 2.0

The developers behind Ethereum plan to eliminate these challenges with Ethereum 2.0. Some new changes to the network that investors will see include proof of stake (PoS) and sharding that could lead to price appreciation for ether.

Abandoning Proof of Work and Moving to Proof of Stake (More Staking Opportunities)

Proof of work (PoW) was one of the reasons that many blockchain implementations like Bitcoin and Ethereum suffered inefficiencies. The Ethereum 2.0 network will abandon the PoS consensus mechanism for a more efficient proof of stake (PoS) mechanism to resolve performance issues. 

In PoS, the process of building blocks on the chain is entirely virtual. Instead of miners, the eth2 network will rely on “stakers,” also known as validators who already own some ether to process new transactions. 

In the staking process, ether owners will use existing tokens to validate and forge new ether tokens while earning staking rewards. Since the stakers in eth2 don’t need as much computing power as the miners in eth1, the network will be less energy-intensive. 

Introducing Sharding

Ethereum 2.0 plans to improve the network’s efficiency and scalability by implementing a process called sharding. Sharding involves breaking extensive data into smaller pieces that are easier to manage on the blockchain.

In the current Ethereum network (eth1), each node or computer in the network stores the history of all transactions. It means that any data added to the chain undergoes verification by all the participating nodes. With this data taking a lot of space, the system’s processing speed will slow down, leading to bottlenecks and increased transaction costs.

With sharding, the system will store small chunks of data across multiple servers. It means that the network will assign data verification among different nodes that will be responsible for verifying only the data they receive. This division will allow transactions to be processed simultaneously since the blockchain is making use of parallel processing. 

The introduction of sharding will ease pressure on the system and allow more transactions to occur each second. Ethereum 2.0 promises up to 100,000 transactions per second. 

Sharding will also make the Ethereum network more secure and sustainable. More users can operate the cryptocurrency with their devices, which will increase the network participants, create more nodes, and further decentralize the blockchain. With the creation of more nodes, the system becomes more complex, making it difficult to hack the network.

Furthermore, the Ethereum ecosystem will have a better environment for smart contract execution once these upgrades are in place. Smart contracts are contracts on the Ethereum blockchain that are automatically executed using programmable codes. Ethereum 2.0 will enable users to make automated transactions better and faster.  

Replacing EVM With eWASM

One feature that distinguishes Ethereum from other cryptocurrencies such as Bitcoin is its execution environment called Ethereum Virtual Machine (EVM). EVM facilitates the use of smart contracts, which is vital in executing complex financial transactions, running games, or operating social networks. 

While EVM sounds impressive, it can be challenging for non-programmers to understand. Thus, Ethereum 2.0 will replace EVM with a new virtual machine called eWASM, which will become the execution engine of the network. 

EWASM comes with a web assembly language that’ll make it possible to execute codes in web browsers. It will also allow users to pick from different programming languages to write codes to run on the blockchain. 

With the different options that don’t limit users to an Ethereum-only language, the number of potential programmers on the blockchain will increase.

What Does This Upgrade Mean for DeFi?

Ethereum has a blockchain-based financial system called decentralized finance (DeFi). DeFi provides a way to execute financial transactions without the interference of middlemen such as banks and brokerages.

Currently, most of the DeFi ecosystem is unusable due to congestion and slow speed. Once the new network is fully operational, the DeFi market will benefit from a faster, more efficient, and secure network. However, there are some concerns that DeFi might experience some drawbacks with the new upgrades.

Industry participants say that the proof of stake system will induce a high degree of competition among DeFi projects. Additionally, there will be competition between DeFi and the Ethereum network. Since stakers will earn interest on staking, PoS essentially shares similar reward systems with DeFi’s lending. Potential higher rewards from Ethereum 2.0 may rival rewards from DeFi products and create a conflict.

However, Ethereum developers are coming up with innovative solutions to ensure that the rolling out of Ethereum 2.0 doesn’t affect the DeFi space.

When Will it Happen? 

The upgrades to the Ethereum ecosystem are happening in different phases. The first phase had already gone live in December 2020, and there are two more to follow. These three phases of Ethereum 2.0’s rollout are scheduled to take place within three years. They are:

Phase 0: The Beacon Chain

The Beacon Chain, which is the first eth2 addition to the ecosystem, went live on December 1, 2020. It introduced the proof of stake (PoS) mechanism and set Ethereum up for staking. The Beacon Chain lays the groundwork for future updates and will eventually coordinate the entire system.

With this launch, the PoS blockchain runs in parallel with the existing system. Also, other stages of the transition will have to go live for the Beacon Chain to function fully. Hence this phase is called the “Phase 0” of the plan.

Phase 1: The Merge

The second phase, known as Phase 1, is called the merge. It essentially involves merging the Beacon Chain into the current Ethereum network, known as the mainnet. The merge is the official switch to proof of stake consensus, giving the Beacon Chain full functionality.

This phase of eth2 rollout will take place sometime in late 2021 or 2022. After the merge happens, mining Ethereum tokens will officially end, and ether holders will need to stake their ether to create new ones or earn rewards. 

This phase is automatic, and ether holders wouldn’t need to do anything while the network goes through the merging process. 

Phase 2: Shard Chains

The last part of the transition, known as Phase 2, implements sharding, which involves adding shard chains to the Ethereum network. With shard chains, the network can scale with a higher capacity to process transactions and store data. 

This third phase is expected to happen sometime in 2022 after the merge. The shards themselves will be rolled out in multiple phases and will gain more features over time. 

Why Does the Upgrade Matter?

Since the beginning of the crypto wave, Bitcoin has sat atop the market cap charts, with Ethereum following in second place. However, the current blockchain environment on which both cryptocurrencies run suffers from many limitations, including scalability. 

Ethereum developers hope to bring the network into the mainstream and solve many of the current blockchain challenges with this new upgrade. 

The new network will support thousands of transactions per second and make applications faster and easier to use. The Ethereum environment will be more sustainable without the energy-intensive mining and more secure from attacks. 

Once Ethereum 2.0 is fully running, it could be a total gamechanger, and the cryptocurrency will be in a better position to achieve market dominance.

Will the Upgrade Affect ETH’s Price?

With the upgrades, 100,000 transactions can happen per second, which will be a seamless experience for millions of users. Ethereum 2.0’s ability to scale better will lead to more usage, which means more demand. In theory, demand can increase the price of Ethereum.  

From December 1, 2020, when the first phase of Ethereum 2.0 went live to January 10, 2021, ether’s price increased by 125%. Recently, Ethereum rose from $1,964 on April 6, 2021, to an all-time high of $4,182 on May 12. That is a jump of over 100% in a few weeks.  

Experts say that this price increase is a result of two possible reasons. The first is that Ethereum’s co-founder, Vitalik Buterin gave a presentation on the roadmap to Ethereum’s development, which described the incoming updates. The information that eth2 will have the ability to scale and be more secure had a positive effect on investor’s opinions. 

The second possible reason is that the upgrade is in the pipelines in reality, with the Beacon Chain already released. It further built investor’s trust in the network. 

With EIP – 1559 set to launch, the cost of gas to process transactions on Ethereum will likely reduce, and users may be able to move smaller amounts of value. 

Although the price of Ethereum dropped by May ending, several experts have made predictions concerning Ethereum’s future increase in price. 

Wallet Investor’s algorithm-based forecast predicts a maximum price of $3,387 by December 31, 2021. Previsioni Bitcoin has its forecast at $5,798 by the end of 2021, which is higher. Other Ethereum predictions such as TradingBeats at $2,448 maximum price are pretty lower.

If all of Ethereum 2.0’s rollout phases occur as planned, it will significantly improve its price. However, the network is currently delaying the launch of new upgrades, with Ethereum developers recently moving the launch of EIP – 1559 to August. Some experts are saying that this action may lead to criticisms and even affect the price of ether. 

Conclusion

Ethereum 2.0 is what the network needs to be more scalable, secure, and sustainable. Once the launch is successful, the crypto-verse might witness a new blockchain era, and Ethereum might be better fitted to compete for the top spot.

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