Ethereum 2.0 is slated to be launched soon, and given how this network is home to the second-largest crypto by market cap in the world, the transition needs to go smoothly.
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What Is Ethereum 2.0?
This won't result in a brand-new cryptocurrency being created — your ETH will be exactly the same. Instead, most of the changes are going to be at the backend, technical enhancements you probably won't even notice.
For an example, just look at what happened when CryptoKitties launched in the heady days of 2017, when Ether and Bitcoin were heading to all-time highs. Demand for these collectible cats reached such a peak that there were tens of transactions stuck and waiting to be processed.
Update: Ethereum 2.0 Is Renamed the "Consensus Layer"
The renaming also serves to help clear incorrect assumptions — for instance, unlike what some may deduce, Ethereum 1.0 does not cease to exist after the merge, and there isn't any "ETH2" token that is required to stake on the Beacon Chain (some staking providers use the ETH2 ticker to represent their stake in the Beacon Chain).
To sum up, the Ethereum network consists of both the execution layer and consensus layer.
How Is Ethereum 2.0 Different From Ethereum 1.0?
Blockchain technology company ConsenSys has a neat way of describing how ETH 2.0 is different to its predecessor ETH 1.0.
Imagine that Ethereum 1.0 is a busy road with a single lane going in each direction, meaning all of the cars have to crawl through at a slow pace when there's congestion.
The shift from PoW to PoS is going to be extremely significant, not least in terms of energy efficiency. Proof-of-work uses a jaw-dropping amount of power — so much so that a single transaction on the Bitcoin blockchain has a carbon footprint that's equivalent to 667,551 VISA transactions. One payment on Ethereum 1.0 ends up using more electricity than the typical U.S. household does in a whole day.
What Are Shard Chains?
Sharding is the technology that will make Ethereum 2.0 scalable. It effectively involves splitting the blockchain mainnet into loads of tiny shard chains that run alongside each other. Instead of transactions being executed in a consecutive order, they'll be handled simultaneously — and this is clearly a much cleverer use of computing power.
As the ConsenSys team explained: "Each shard chain is like adding another lane to upgrade Ethereum from a single lane road to a multiple lane highway. More lanes and parallel processing leads to much higher throughput."
Now, you may be thinking "This is genius! Why wasn't this done from the start?!" — the answer, to be blunt, is that life isn't that simple.
How Does Staking Work?
A significant change in the Ethereum 2.0 blockchain will be the shift to staking. This will entail a complete rethink about how new blocks are confirmed.
The PoS system, known as Casper, involves validators putting their money where their mouth is. In order to be given the privilege of adding new blocks to the blockchain and receiving a reward, they need to cough up 32 ETH that will be locked away. You could compare this to an insurance policy — just like you'd lose your security deposit if you trashed a hotel room, validators risk losing their ETH if they fail to act in the interests of the blockchain network.
As you'd imagine, this is vastly different from the way Ethereum works right now. New blocks are mined by those who have the most computing power — technology that's far out of the reach of the everyday consumer. With the proof-of-stake consensus, blocks are usually delegated in a proportional way, based on how much crypto someone has locked up. So: a person who has staked 5% of the total will end up validating 5% of the new blocks, and receiving the reward. With Ethereum 2.0, validators are going to be chosen at random.
Assuming, as an example, that 1 ETH was worth $300, this would require a total investment of $9,600 in order to become a validator. That's a hefty chunk of change. Because of this, staking pools have emerged where crypto enthusiasts will be able to bring their Ether together and split the proceeds.
Will Proof-of-Stake Be the End of Ethereum Mining?
What Are the Pros and Cons of Ethereum PoS?
As we've mentioned, greater energy efficiency is one of the biggest advantages associated with staking. But this is just the start. Here are some of the other benefits:
- Lower barriers to entry. Becoming a validator on a proof-of-work blockchain is often prohibitively expensive because of the high tech mining equipment you need. With the PoS consensus, Ethereum's stated goal is to "allow for a typical consumer laptop to process and validate shards."
- A fairer playing field. Because of the sheer cost of mining equipment, and the electricity consumption required on a PoW consensus mechanism, the responsibility of creating new blocks often falls to a small handful of miners who have the cashflow to make things happen.
- Network attacks are more expensive. Validators have a financial interest in making sure that the blockchain is safe and secure. For a malicious actor to succeed in attacking the Ether network, they'll have to stake a security deposit — money they would eventually lose.
As you'd expect though, there are disadvantages to the proof-of-stake consensus. They include:
- Big stakers could end up having an outsized influence. Eliminating mining doesn't mean that you get rid of a power imbalance. Someone with deep pockets could end up staking 32,000 ETH, and hence end up validating 1,000 times more blocks than everyone else.
- It's been untested at this scale. Ethereum is going to be the biggest cryptocurrency to ever transition to Proof-of-Stake. Complications and unexpected vulnerabilities could be nothing short of disastrous for the project.
What Are the Main Phases of ETH 2.0?
As you'd imagine, the Ethereum Foundation wants to tread very lightly with the upcoming upgrade. Because of this, the process of switching to ETH 2.0 is perhaps best compared to continuing to live in a house while it is being renovated.
In a nutshell, there are three main phases: Phase 0, Phase 1, and Phase 2. The existing Ethereum 1.0 blockchain will continue to be operational at each stage.
Here's what each step entails:
- Phase 0 will herald the launch of the Beacon Chain, which is going to be responsible for managing validators and delivering the PoS consensus mechanism — as well as dishing out penalties and rewards. This was scheduled to happen in January 2020.
- Phase 1 adds sharding to the mix, dividing the Ethereum network into 64 different chains. Although it's logical to think that this would multiply capacity by 64, it could actually mean that ETH 2.0 can handle hundreds of times more transactions per second than its predecessor. This part of the roadmap was penciled in for 2021.
- Phase 2 will mark the arrival of ETH transfers and withdrawals, along with smart contract functionality, eventually leading to the Ethereum 1.0 blockchain being turned off once and for all. It is hoped that this would be live by 2022 — but when have you ever known such a big project to run on schedule?
Why Has Ethereum 2.0 Been Delayed?
Well, don't worry, the news didn't pass you by... the truth of the matter is that this new blockchain's development is running seriously behind schedule.
After the original deadline was missed, it was hoped that ETH 2.0 would launch in July — just in time for the blockchain's fifth anniversary. Champagne corks would fly, and the unpleasant delays would be forgotten about. Alas, this didn't happen either.
Following on from Drake's remarks in mid-July, one of Ethereum's founders, Vitalik Buterin, went to great lengths to play down this pessimism. He pointed out that the Altona testnet launched in July, and suggested that Phase 0 could kick off in November. Replying to Drake on Reddit, Buterin said: "I personally quite disagree with this and I would favor launching phase 0 significantly before  regardless of level of readiness."
That's a bold, brash, high-stakes statement. Launching before you're fully ready could result in some major disruption for those who rely on the ETH blockchain, crash the price and unearth nasty security vulnerabilities.
Update: Merge Delayed from Q2, 2022 to Q3 According to Ethereum Foundation Devs
On the flip side, Ethereum devs have the option to delay the difficulty bomb through a hard fork — however that would take valuable time and resources away from the merge, causing even further delays. It appears that the devs would be pushing through with the merge, by continuing to test and evaluate where things stand, according to Tim Beiko.
What's Going to Happen to the ETH 1.0 Blockchain?
Once ETH 2.0 is fully built and functional, ConsenSys says: "The current plan is for the Ethereum 1.0 chain to effectively become the first shard on Ethereum 2.0 when Phase 1 launches."
There actually are some pretty snazzy analogies out there that describe how the switch is going to work.
One ConsenSys employee, Jimmy Ragosa, tried to explain it simply by comparing Ethereum 1.0 to a bus, and Ethereum 2.0 to a train.
What Happens to the ETH That I Own Now?
If you currently own Ether, you might be really worried that your ETH will be worthless as soon as the new blockchain roars to life.
Here's the important thing to remember: it isn't going to be the cryptocurrency that's different when ETH 2.0 launches, it'll be the blockchain technology that underpins it that changes. There won't be any new token that you need to buy, nor will you have to make fiddly conversions from one digital asset to another.
But if you are sitting on a decent amount of ETH, one thing you might want to consider is putting your cryptocurrency to good use through staking. A word of warning though, you might not want to do it straightaway. Validators who join at the Beacon Chain phase won't be able to withdraw the Ether that they've staked until Phase 2 of the upgrade, which could be two or three years away.
Once again, it's important to stress that you won't be able to buy ETH 2.0 tokens once the upgrade is complete. It'll be the same old Ether that you know and love, in the same Ethereum wallet you've always used.
How Will ETH 2.0 Affect DeFi?
Ethereum 2.0 could make decentralized finance far more practical, both in terms of speed and transaction fees.
At present, ETH 1.0 can only manage about 25 transactions per second (TPS). That's barely enough for a single DeFi protocol, let alone a whole blockchain network.
But Kyle Samani, the founder of Multicoin Capital, believes that even this may not cut the mustard if decentralized finance manages to become more popular.
Will This New Blockchain Technology Affect Ethereum DApps?
One concern surrounding ETH 2.0 is the impact that this upgrade could have on existing DApps. Are we going to end up with a scenario like Apple, where newer iPhones no longer support apps that were designed for older devices?
Ultimately, there isn't necessarily a risk that DApps will no longer be compatible with this blockchain. A bigger danger is that bumps in the road as the network is rolled out could cause business disruption that slows activity down.
If the Ethereum 2.0 rollout is done right, this could trigger a new wave of innovation on the blockchain as developers, previously fed up with high transaction fees and slow confirmation times, begin to return from smaller platforms.
In the fullness of time, we could begin to see Ethereum retake some of the market share it has lost over the years. The Dapp report shows that Ethereum managed to double the number of active decentralized app users in Q2, reaching an all-time high of 1.25 million. This was largely driven by the demand for DeFi apps.
What Does Vitalik Buterin Think About Ethereum 2.0?
As we've seen, Buterin is determined to get this blockchain launched — and it looks like he won't be resting on his laurels once ETH 2.0 comes to fruition, either. In March 2020, he released a detailed Ethereum roadmap of "what the next five to 10 years of ETH 2.0 and beyond might look like."
He has also been a staunch defender against claims that Ethereum 2.0's design remains inferior to how Bitcoin was built all the way back in 2009. Buterin insists that sharding, along with cutting-edge technology known as zero-knowledge proofs, will result in the blockchain network being much cheaper to use than BTC.
But despite all of these benefits, it all comes back to the one single issue that Ethereum developers are desperate to solve. "ETH 2.0 is all about scale," he wrote.
What Are the Main Downsides of ETH 2.0?
This all points to a wider issue — one that's crucial in cracking mainstream adoption once and for all. Blockchains and cryptocurrencies are immensely complicated things. Sometimes, even someone with a PhD in computer science will need to take a moment to ensure that they're understanding a crypto startup's technical paper correctly.
Making the platform more technical risks alienating everyday consumers who may have otherwise considered making their tentative first steps into the crypto market.
DeFi, the industry that's also driving this newfound, frenzied demand for the blockchain network, also often lacks simplicity and usability — especially for people who haven't had exposure to digital assets before.
Will the New Blockchain Increase Ether Prices?
The question on the lips of many traders is what effect ETH 2.0 will have on the value of Ether once it's fully launched.
Of course, there's little point having a crystal ball when it comes to the crypto markets, as things can change dramatically in the space of a few hours. (Just look at what happened during the crypto flash crash in March 2020, when ETH fell off a cliff, suddenly liquidating positions in DeFi protocols.)
The authors wrote: "The successful launch and development of Ethereum 2.0 through its initial two phases could greatly boost Ethereum’s value proposition in the eyes of investors. The launch of Ethereum 2.0 would be concrete evidence of a working alternative system of transaction validation that is more energy efficient."
Sounds promising. But likewise, the report warned that traders and investors need to keep a close eye on Phases 0 and 1 of this ambitious project. If there's little concrete evidence of a working PoS blockchain network, it predicts that ETH's value could start to dwindle.
The final factor to bear in mind — which runs in parallel to the development of this new blockchain — is whether DeFi represents the future, or whether the industry is a bubble that's going to burst.
Ultimately, the future of Ethereum very much hinges upon what happens in the next couple of years. With some in the crypto community beginning to lose confidence in the blockchain because of the repeated delays in the launch of Phase 0, with DeFi pushing the blockchain network to its limits, it's no wonder that the Ethereum Foundation is beginning to feel the heat.