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What is Ethereum 2.0 and why is it important

What is Ethereum 2.0
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The long-planned upgrade to the Ethereum network is intended to resolve issues with the network’s scalability and security. In its first phase, the blockchain “world computer” will switch to a proof-of-stake consensus mechanism.

The multi-phase upgrade aims to address the scalability and security of the  Ethereum network through various changes to the network infrastructure, in particular, the switch from a  proof-of-work  (PoW) consensus mechanism to a proof of stake  (PoS).

What is Ethereum 2.0?

Ethereum 2.0, also known as Eth2 or “Serenity”, is an upgrade to the Ethereum blockchain. The upgrade aims to improve the speed, efficiency, and scalability of the Ethereum network so that it can process more transactions and alleviate bottlenecks.

Ethereum 2.0 is rolling out in several phases, with the first update, called the Beacon Chain,  going live on stakeout December 1, 2020. The Beacon introduces the native chain of the Ethereum blockchain, a key feature of the change. from the network to a point-of-sale consensus mechanism. As the name suggests, it is a separate blockchain from the main Ethereum network.

The second phase, called The Merge, is expected in the first or second quarter of 2022 and will merge the Beacon Chain with the Ethereum mainnet.

The final phase is Shard Chains, and it will play a key role in scaling the Ethereum network. Instead of laying out all operations on a single blockchain, shard chains spread these operations across 64 new chains.

This also means that it is much easier from a hardware perspective to run an Ethereum node because there is much less data that needs to be stored on a machine.

Fragment chains are not expected until 2022, but exactly when is unclear.

How is Ethereum 2.0 different from Ethereum?

While Ethereum 1.0 uses a consensus mechanism known as Proof of Work (PoW), Ethereum 2.0 will use a Proof of Stake (PoS) mechanism.

How is proof of stake different from proof of work?

With blockchains like Ethereum, there is a need to validate transactions in a decentralized way. Ethereum, like other cryptocurrencies like  Bitcoin, currently uses a proof-of-work consensus mechanism.

In this system, miners use the processing power of a machine to solve complex math puzzles and verify new transactions. The first miner to solve a puzzle adds a new transaction to the record of all transactions that make up the blockchain. They are then rewarded with the network’s native cryptocurrency. However, this process can consume a lot of energy.

Proof-of-stake differs in that instead of miners, users can stake a network’s native cryptocurrency and become validators. Validators are similar to miners in that they verify transactions and make sure the network does not process fraudulent transactions.

These validators are selected to propose a block based on the amount of crypto they have staked and how long they have staked it for.

Other validators can attest that they have seen a crash. When there are enough certifications, a block can be added to the blockchain. The validators are then rewarded for the successful block proposal. This process is known as “forging” or “minting.”

The main advantage of PoS is that it is much more energy-efficient than PoW, as it decouples power-hungry computing processing from the consensus algorithm. It also means that you don’t need a lot of computing power to secure the blockchain.

How will Ethereum 2.0 scale better than Ethereum 1.0?

One of the main reasons for upgrading to Ethereum 2.0 is scalability.

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With Ethereum 1.0, the network can only support around 30 transactions per second; this causes delays and congestion. Ethereum 2.0 promises up to  100,000 transactions per second. This increase will be achieved by implementing shard chains.

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The current configuration of Ethereum has a blockchain that consists of a single chain with consecutive blocks. This is safe but very slow and not efficient. With the introduction of shard chains, this blockchain is broken up, allowing transactions to be handled on parallel chains rather than back-to-back. This speeds up the network and can scale more easily.

How will Ethereum 2.0 be more secure?

Ethereum 2.0 has been designed with security in mind. Most PoS networks have a small set of validators, making for a more centralized system and reducing network security. Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized and therefore secure.

However,  according to  Lior Yaffe, co-founder of  Jelurida and lead developer of the Ardor and  Nxt blockchains, there is a potential vulnerability that focuses on the level of participation rates in the network.

Organizations including blockchain security firm  Least Authority and  Quantstamp are conducting security audits of the Ethereum 2.0 code.

The Ethereum Foundation is also creating a dedicated security team for Ethereum 2.0 to investigate potential cybersecurity issues in the cryptocurrency.

Ethereum 2.0 researcher Justin Drake stated that the research will include “fuzzing, bounty hunting, pager service, cryptoeconomic modeling, applied cryptanalysis, formal verification.”

 

How will the Ethereum 2.0 upgrade take place?

Following a series of testnet releases,  Topaz,  Medalla,  Spadina,  and Zinken, the full rollout of Ethereum 2.0 will take place in three phases: Phase 0, 1, and 2 (developers like to count from scratch). Phase 0 was released on  December 1, 2020, with the other phases coming in the following years.

Phase 0  sees the implementation of the Beacon Chain; this stores and manages the validator registry, as well as implementing the PoS consensus mechanism for Ethereum 2.0. The original Ethereum PoW chain will run alongside this, so there is no break in data continuity.

Phase 1, scheduled for Q1 and Q2 2022, will see the Ethereum mainnet merge with the beacon chain and officially end PoW on the network. Users who staked Ethereum on the Beacon Chain will be assigned validation roles.

Phase 2 will introduce Shard Chains to the network, with an expected launch of 64 shards (enabling 64x more throughput than Ethereum 1.0), though at launch they will not support smart accounts or contracts.

Previous iterations of the roadmap placed the Merge event after the release of Shard Chains, but due to the interoperability of each update, it was later decided to change these release events.

“Originally, the plan was to work on shard chains before the merger, to address scalability,” the Ethereum Foundation documentation reads. “However, with the rise of Layer 2 scaling solutions, the priority has shifted from proof-of-work to proof-of-stake through merge.”

When was Ethereum 2.0 released?

Ethereum 2.0 Beacon Chain, the first stage in the launch of Ethereum 2.0,  went live at 12:00 pm UTC on December 1, 2020.

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Speaking on the Ethereum 2.0 Livestream, Danny Ryan, Principal Investigator at the Ethereum Foundation, noted, “The key to the health of this is that we see more than two-thirds participation.”

With the launch of the beacon chain confirmed, there are over 21,000 active validators on the network at the time of writing, with each epoch having a success rate of over 80%.

The beacon chain will initially exist separate from the current Ethereum mainnet, before the mainnet is “  coupled  ” to the proof-of-stake system.

The first eligible block was slot 1, and its validator signed it with a  cryptic message: “Mr. F was here.”

The successful launch was celebrated by wide swaths of the Ethereum community, including Ethereum co-founders Vitalik Buterin and Joseph Lubin.

 

The launch also followed a tense month of preparation, in which certain criteria had to be met.

After the launch of the deposit contract on November 4, 2020, there needed to be 16,384 validators on the network by November 24, each holding 32 Ethereum, for a total of 524,288 ETH.

 

Initially, the pace of betting was slower than expected, with a  Twitter poll in early November revealing that half of those surveyed had no intention of making a deposit before the deadline; only 21.3% stated that they had wagered, or intended to wager, 32 Ethereum.

 

Among the reasons given was expense: 32 ETH was over $19,000 at the time. The community came together, with  Vitalik Buterin committing 3,200 Ethereum, which was worth over $1.9 million, and DARMA Capital allocating $50 million of its own holdings so institutions and individuals could contribute to Ethereum 2.0 without losing liquidity.

With a possible launch delay looming, at the last minute, a late surge of validators committed to staking.

Just 24 hours before the deadline, only about 50% of the goal had been reached; Fortunately for Ethereum 2.0, by November 24, enough validators had staked to commit to the launch of the beacon chain.

Today, there are more than 230,841 validators, according to  Eth2 Launchpad, an Ethereum analytics platform.

The future of Ethereum 2.0

Ethereum co-founder Vitalik Buterin has laid out a roadmap of how the next five to ten years could play out for Ethereum 2.0.

 

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He said that in the last two years there has been a “robust shift from ‘blue sky’ research, trying to understand what is possible, to concrete research and development, trying to optimize specific primitives that we know are implementable and implement them.” ».

The bulk of the challenges now are “increasingly around development, and the development share of the pie will continue to grow over time,” according to Buterin.

 

In June 2020, Buterin noted that Ethereum 2.0 will need to rely on current scaling methods, such as ZK rollups, for at least two years before implementing shard chains.

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August 2021 saw the deployment of the  Ethereum London Fork and the Ethereum Improvement Proposal 1559 (  EIP-1559  ), which changes the way transaction fees work on the network. EIP-1559 sees users transacting on the network pay a base fee that is burned instead of going to Ethereum miners, reducing the supply of ETH and putting deflationary pressure on the Ethereum network.

The London hard fork has served as something of a test for the next phase of Ethereum 2.0, with Vitalik Buterin expressing confidence about the next steps for the Ethereum network. Buterin told  Bloomberg  that the successful launch of the London hard fork demonstrates that the Ethereum ecosystem is “capable of significant change” and that it “definitely gives me more confidence in the merger.”

How could Ethereum 2.0 affect the price of Ethereum?

For some, the release of Ethereum 2.0 was precisely what the cryptocurrency needed.

“Once Ethereum has scalability through Layer-2 technology or ETH 2.0 all questions will be answered,” Jamie Anson, founder of Nifty Orchard and organizer of Ethereum London, told  Decrypt. “The firearm will go off.”

In other words, more scalability means more usage, which, in turn, means more demand. Which, in theory at least, should push the price of Ethereum to new heights.

“By the time ETH 2.0 and the rollups work together, there will be 100,000 transactions per second of capacity. That will mean a completely seamless experience for the next billion people,” Anson added.

Matt Cutler, CEO of Blocknative, a company that focuses on mempool complexity, is similarly optimistic, particularly as gas fees are expected to decline with the launch of Ethereum 2.0.

“Our customer base sees lower transaction fees and increased network performance as big areas of opportunity going forward,” he told  Decrypt.

Furthermore, the ecosystem noting major milestones will bolster the momentum of Ethereum developers. “This will have a long-term bullish impact on the price of ETH, despite the short-term volatility that is integral to crypto asset valuations,” Cutler added.

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