What is your first thought when you hear the word “cryptocurrency”? We bet Bitcoin immediately pops up. But with the rapid success of this cryptocurrency, many other cryptocurrencies, called altcoins, began to appear on the market. One of the most outstanding altcoins today is Ethereum.
With a full-fledged launch in 2016 today this cryptocurrency ranks second in the world. Its capitalization in 2021 is $30.5 billion, which is six times more than that of Bitcoin. Despite the fact that Ethereum has gained great popularity in the world of cryptocurrencies, its developers don’t plan to stop there. For the next two years, a global update is planned. A new and improved version is called Ethereum 2.0 and it should bring this blockchain technology to another level. You can check everything about ETH 2 on the new ETH2 explorer in seconds.
In this article, we will dive deeper to study Ethereum’s underbelly and see what the future holds for this cryptocurrency.
What is Ethereum 2.0?
Ethereum 2.0 is an improved version of the Ethereum blockchain. It is a solution that will scale the original blockchain and make it more user-friendly.
The main difference between Ethereum 2.0 and the current version of the network is the consensus mechanism, that is, how the nodes reach an agreement on the current version of the blockchain and the addition of blocks. Now the Ethereum network uses Proof-of-Work, which involves performing complex calculations with video cards and other equipment. The latter is heavily criticized by experts since it’s very labour-intensive and far from being environmentally-friendly. Whoever is the first to find the right solution for adding a new block to the network will receive a reward.
Proof-of-Work (PoW) vs Proof-of-Stake (PoS)
The distinctive feature of Ethereum 2.0 is the transition of the network to the Proof-of-Stake (PoS) consensus – it will replace the Proof-of-Work (PoW) consensus, on which the blockchain is currently running. The principal difference between PoS and PoW is that miners who generate computing power are no longer needed to keep the network running. In this process, the stacking method is used. This means that the integrity of the blockchain is guaranteed by the holders of digital coins, in turn receiving a reward for this.
So what makes switching to PoS an advantage for Ethereum 2.0? The update will increase network efficiency, bandwidth, and the number of transactions that can be processed simultaneously. Users will be able to contribute their coins to stacking and receive a certain percentage for the validation of new blocks.
Ethereum 2.0 and its Phases
Due to the vastness of the work, the update is carried out in several phases and will take a considerable amount of time (according to forecasts, about 2 years).
The starting zero phase (Beacon Chain) was launched on December 1, 2020. Regular Ethereum users haven’t noticed big changes in how the blockchain works, but some important points are still present in this launch update. The new main chain of the Beacon Chain phase already performs the following functions:
independent selection of the next manufacturer
organization of validators for voting on the proposed blocks
distribution of rewards among validators
the Beacon Chain serves as an anchor for synchronizing information from shards
The next phase of the Ethereum 2.0 rollout will be the creation of shard chains – this could happen in 2021 (the exact date is not yet known). In this phase, shards will be introduced, but not quite in working order. This will only be a test of sharding in the blockchain. Developers will test the interaction of the main chain with shards and reach a consensus between them. During the first phase, the old PoW chain will continue to work, and miners will receive rewards as they used to. That’s a principally new technology, that’s why the developers step with care and dedicate the entire phase to its implementation.
The second phase will be foundational for Ethereum 2.0. In this phase, all the functions of the network will be brought together to organize the most efficient operation of the blockchain. Smart contracts and the concept of “execution environments” will be implemented with this phase. This concept will allow any individual shard to form an environment in which various technologies can be applied. But so far this technology is at a very early stage.
Throughout these updates, the old chain will function unchanged. Only after the final completion of the second phase the transfer from the old chain to the new one will be initiated and ETH 1.0 and ETH 2.0 will be merged.
Why is Ethereum 2.0 a Giant Leap for Decentralized Networks?
Decentralization is an integral part of any cryptocurrency. Blockchain and decentralization are now practically synonymous. The technology allows you to create a network in which everyone is equal, and all information is distributed across many computers in the world. This characteristic is of particular value for banks and other commercial institutions, it increases the safety and speed of operations. The advantages of decentralized networks are in the following points:
decisions are made by consensus
the absence of a central server (the decentralized system will not suffer damage if one of the blocks is subjected to a hacker attack)
each user has a copy of all operations that have ever taken place in the system
decentralized network ideal ground for complete anonymization of personality
The Ethereum platform was created for the functioning of blockchain-based decentralized applications using smart contracts. And when compared to Bitcoin, Ethereum is considered a more decentralized network. However, the numerous flaws that have surfaced as the use of the Ethereum blockchain grows in different environments confirms that the network is not 100% decentralized. But the update called Ethereum 2.0 is designed to once and for all solve the problems with the gaps in the decentralization of the original version. It is the transition from the Proof-of-Work to the Proof-of-Stake that will help make the Ethereum network more decentralized.
Ethereum 2.0 is an upgrade to the existing Ethereum blockchain that is designed to scale the original blockchain and improve user experience. The update has already begun to be implemented into the existing network and the developers plan to complete it within two years. But the launch of Ethereum 2.0 is just the beginning, as network developers have yet to make significant changes at the protocol level that has yet to stand the test of time.