Ethereum 2.0 and what it means for the future

Ether is the world’s second-largest online currency by market capitalization. However, for quite some while now, Ethereum network members have been planning a shift away from a proof-of-work (PoW) consensus algorithm and toward a protocol that is entirely based on the proof-of-stake (PoS) consensus method.

Using the Beacon chain, the Ethereum community has been operating a parallel system that uses both PoW and PoS. As of August 2021, Eth conducted the London hard fork, which improved the stability of gas costs and added a deflationary approach to the protocol’s monetary policy. Each step adds new features and improves speed, leading to Ethereum 2.0 upgrade, as a PoS network.

Finally, the year 2022 has arrived, which is expected to be the year in which this long-awaited update to Ethereum 2.0 is slated to take place. Developers on the Ethereum platform are undoubtedly working around the clock to fulfil this deadline; yet, it is hard to predict whether the ecosystem will fully move to ETH 2.0 this year. Although several key milestones have already been achieved by the network in the run-up to the big “Merge,” there is still more work to be done.

Let us take a closer look at this new development in the Ethereum world in more depth.

What is meant by Ethereum 2.0?

Ethereum 2.0 (Eth2) is an upgrade to the existing Ethereum blockchain. It is often also referred to as “Serenity” or “Eth2.” The proof of Stake consensus method has been implemented in place of the Proof of Work algorithm. By upgrading the Ethereum network, it will be able to handle more transactions while also alleviating bottlenecks. The update will improve the speed, efficiency, and scalability of the blockchain network. The branding is meant to emphasise that Eth2 is an improvement of the existing network rather than a brand-new system in its entirety.

How is Eth 2.0 different from Eth 1.0?

Ethereum 1.0 uses the proof-of-work (PoW) consensus method, but Ethereum 2.0 will utilize the proof-of-stake (PoS) method. Eth 1.0 is now reputed as the “execution layer“, wherein smart contracts and network rules are stored, while Eth2 is reputed as the “consensus layer“, which guarantees that all devices contributing to the network are behaving in line with the network’s established rules.

Compared to the previous Ethereum version, the new version has major structural and technical changes. The most notable changes are “proof of stake” and “sharding.”

Sharding is the process of dividing a blockchain into shards. It increases network efficiency by reducing strain on a single validator. Each validator keeps track of “their” shard. To prevent manipulation, these validators are frequently switched across shards. The Beacon Chain facilitates shard communication and coordination.

In a proof of stake consensus method, there are validators instead of miners. Their key job is to propose new blocks, offer the processing power, storage, as well as bandwidth to verify transactions. There’s also a deposit contract of 32 ETH which should be locked in by these validators. It is a form of security deposit that is forfeited totally or partly in the case of any malpractice. This strategy is quite efficient in reducing malpractices.

What is the functioning of Ethereum 2.0?

As the primary providers of Ethereum 2.0’s infrastructure and upkeep, validators are the most critical part of the network. Every validator is divided into two components which are a signature key and a withdrawal key. To conduct “work for the blockchain,” a signature key must be utilised. The validator has three major characteristics:

To verify the beacon & shard chain’s authenticity.
To report harmful conduct on the part of other validators.
To offer recommendations for and add blocks to the Beacon Chain or one of the shard chains.

As a result of these considerations, the signature key must be available at all times. The withdrawal key is responsible for performing actions on the monies. It is not required that the withdrawal key be accessible at all times. However, since the individual has complete authority over all of the cash, it must be protected.

In the foregoing discussion, we can see that validators play a vital part in the whole process of transactions taking place through ETH 2.0. Before proceeding, let us understand more about validators, such as what they are and how much value they presently store as per proof of stake contracts.

What are validators?

The term “validator” refers to an actor on the Ethereum 2.0 network who proposes and attests new blocks to be added to the network. As previously stated, under Proof of Stake, a validator risks 32 ETH to participate in the network’s upkeep and maintenance. If a validator is selected to certify the next block, they are compensated in ETH in proportion to their stake, which is expressed as a percentage. In contrast, validators who fail to carry out their responsibilities as if they were offline, for example, will be subjected to fines, or slashes, in the form of tiny sums of ETH being deducted from their respective stakes.

Value locked up in the Validators: A significant milestone in the development of the Ethereum protocol has been attained with the passing of 300,000 Ethereum 2.0 validators (as of February 28, 2022) and reaching 300,702. More than 9.6 million ether, worth more than $28.4 billion, has been locked up in the Ethereum 2.0 contract as of March 2022. Amounts of exactly 32 ether per deposit are added to the deposit contract regularly. A validator’s fee is 32 ether or $94,400 at current ETH exchange rates.

According to data from analytics platform Dune Analytics, over 10 million ether is currently locked on Eth 2.0 staking contract before a scheduled upgrade to a proof-of-stake network.

Ether (ETH) gained 107 per cent in value for the year 2022, and the price of ether has climbed by 14.1 per cent in the past two weeks of March 2022, according to CoinMarketCap. There have been 275,594 validators since the beginning of the year, a 9.11 per cent increase from the beginning of the year

Importance of validators in the transition into Eth 2.0: Validators, like miners, do transaction verification and ensure that the network is not processing bogus transactions. These validators are picked to propose a block depending on the quantity of bitcoin staked and the duration of time staked.

Other validators may then vouch for the fact that they have encountered a block. A block may be added to the blockchain once there are enough attestations. Validators are then compensated for submitting a successful block proposal. This method is referred to as “forging”.

Why will Eth 2.0 be just ‘Eth’ when it’s over?

An interesting thing to understand is that the world is presently migrating from Eth to Eth 2.0, but what will happen after Eth 2.0 is over? The conclusion is simple. Eth 2.0 is an upgrade to Eth, not a new coin. As previously stated, eth 2.0 is an update to the current blockchain network. In a lot of ways, ETH 2.0 is a major advance over Ethereum. Its primary purpose is to increase the Ethereum network’s transaction capacity, reduce transaction costs, and make the network more sustainable. Because lower transaction fees and faster transaction times bring the network available to a bigger demographic of users, improvements to Ethereum’s network may have a substantial influence on the cryptocurrency’s price.

Benefits:

Enhanced scalability: Ethereum must be able to accommodate thousands of transactions per second (TPS) for faster and cheaper applications. The combination of sharding and a PoS algorithm should increase scalability by adding nodes, resulting in higher TPS without consuming more power. The initiative to produce a quicker, cheaper and more scalable version of Ethereum reached a significant milestone in late March 2022.

Blockchain transactions per second (TPS) will be raised from 12 to 15 TPS limit to 100,000 TPS for centralized and decentralized finance (Defi) projects, along with gaming in non-fungible tokens, metaverses, according to developers. “With this update, Ethereum is attempting to address scalability and high-cost issues,” Ed Moya, senior market analyst at Oanda

Enhanced safety: The priority is to make people feel safe using Ethereum, it must be as secure as possible. The Beacon Chain is intended to assist network security. The PoS algorithm in ETH 2.0 makes it harder to corrupt the Ethereum network. Attackers will have to pay more since every validator on the network has a traceable address. At the same time, frauds will be easily detected and prevented. According to GlobalBlock market analyst Marcus Sotiriou, “Ethereum’s transition to proof-of-stake have a long-term favourable influence on pricing,” Being a long-term element implies being protected for the next year with effective security technologies.

Enhanced Sustainability: Less carbon impact has become a big bitcoin subject. The PoW consensus algorithm uses a lot of power. Ethereum 2.0 is better for the environment since no mining is required. According to Ethereum Co-Founder Vitalik Buterin, PoS would reduce Ethereum’s energy usage “by a factor of over 1,000”. He said that Ethereum would be completely redesigned this year, reducing energy usage by roughly 95%, making Ethereum 2.0 more eco-friendly than Bitcoin.

Decentrification: Sharding, one of the primary components of the new update, will eliminate technological obstacles from the network. That will attract more validators to the platform. With Sharding, even non-technical users may use Ethereum. This will increase the platform’s decentralisation.

Decentralised staking options like Lido Finance and Rocket Pool look to be gaining ground. Lido, Kraken, Binance, and Staked.us account for 36.6 per cent of all ETH deposits on Eth 2.0. Lido manages approximately 750,000 ETH on Eth 2.0 from 9,000 individual Ethereum accounts, behind only Kraken in total ETH deposited.

Migration to Proof of Stake:

As we know that Ethereum 2.0 will migrate its blockchain to a more efficient proof-of-stake mechanism, which will be more secure. As part of such a system, the node that records each transaction is selected by an algorithm, with the likelihood of selection growing in direct proportion to the quantity of the currency held by the node’s owner.

Introducing Proof of Stake (PoS) in Ethereum 2.0 changes the crypto-economic incentive system for certifying the blockchain. Ethereum’s present design relies on a PoW consensus algorithm. Proof of Work is the architecture employed by the most widely used blockchains, including Bitcoin, Ethereum, Litecoin, and others. Proof of Work requires miners to operate nodes and solve challenging mathematical problems to mine the next block.

Block rewards, which are awarded to miners who successfully mine a block, verify the time and money miners spend running hardware and using power on PoW networks. The processing power necessary to compromise a well-established PoW blockchain like Bitcoin or Ethereum would be prohibitively expensive if it existed at all.

It is possible to significantly reduce the complication of the cryptographic operation, resulting in significant performance benefits for the whole network. Anyone attempting to attack the network would find it prohibitively costly because each node must stake its cash to join.

On Ethereum 2.0, Proof of Stake replaces the two fundamental components of PoW, such as miners and electricity, with validators and stake. Because of this replacement, the updated Eth will have a variety of effects on miners as well as the environment; let’s take a look at these two.

Mining: Since its inception, the Ethereum community has modified the way it mints ether, the network’s value. Cryptocurrencies like Ethereum and bitcoin are often criticised for their mining method. Computers tackle challenging arithmetic problems to produce fresh money in both cases. External observers have criticised this project’s use of massive quantities of energy to power the computers. While many support the switch to Ethereum 2.0, the miners are not delighted.”Some miners are against it, but it’s in their financial interest to be against it,” Beiko said.

Ethereum mining will cease to exist once the protocol completely adopts a proof-of-stake model. The major difference it brings is the new way it rewards miners. So far, the Ethereum network has compensated miners for verifying transactions every few seconds, as well as for each transaction’s gas charge. However, under the new ‘Proof of Stake’ technique, miners must now also put up a stake in the form of their very own Ether. Only those with the highest stakes in the game will be rewarded for verifying transactions.

According to Coinmarketcap, “While there’s nothing stopping miners from becoming validators, many will have costly equipment that suddenly serves no purpose.”All of this entails a substantial loss of income for most miners. Those still rewarded will receive less. Users may “tip” miners for urgent transactions, but it will only cover a part of the gas costs. Instead of receiving 100% of transaction fees, miners would earn an optional “inclusion fee” paid by users requesting priority for their transactions, according to Coindesk.

Another side of the picture is that as there will be no more mining incentives established by the proof of work consensus process, there will be many fewer ether tokens minted each year as a consequence of the move to proof of stake. In Ethereum 2.0, the number of fresh ether tokens will be cut by 90%. This would force Ethereum to get very deflationary, which is great news for crypto investors since having an appreciating asset is what every investor wants. It remains to be seen after the whole update since their staff is trying to improve every conceivable flaw. According to the Ethereum Foundation, the complete upgrade to Ethereum 2.0 is scheduled for 2023.

Environment: The improved network will be able to incorporate sharding, a method of lowering transaction costs, which have been a key barrier to broad adoption of the Ethereum network, but it will also use the more environmentally friendly proof of stake technique for transaction verification. By switching to proof of stake, the Ethereum network’s energy consumption will be reduced by 99.9%.

The transition to proof of stake will allow Ethereum to attract institutional investment by satisfying environmental, social, and governance (ESG) criteria. The world’s second-best cryptocurrency by market capitalization is now confirming transactions on its blockchain using the energy-intensive proof of work process. The energy-intensive proof of work process has been a barrier to entry for the world’s biggest financial institutions that must make ESG promises. This merger will be the most significant technology change in the eight-year history of Ethereum.

Conclusion:

With the introduction of Ethereum 2.0, the proof-of-work-mining mechanism will be replaced entirely by staking and bring various innovations in the future. Staking will increase involvement in protecting the Ethereum network, resulting in a more decentralised blockchain. This would render the conventional mining system obsolete, and miners will be forced to switch to staking to verify transactions for block rewards and transaction fees.

The most important contribution of Eth2 in the future will be the sustainability of the environment as it will be eco-friendly technology. Ethereum is among the most popular cryptos, second only to bitcoin in terms of market capitalization. The transition to Eth2 is a significant set of events that will resolve the network’s difficulties and may lead to widespread acceptance of the blockchain while perhaps boosting the Ether price in the meantime.