Key Takeaways:
- Answering the question, what is Ethereum 2.0 exactly?
- Is Ethereum 2.0 completely overhauling the existing Ethereum, or is there something else in the play?
- Analysing the objectives behind transitioning to Ethereum 2.0
- What do you, as a holder or user of ETH need to do to protect your funds ahead of the Ethereum Merge?
What is Ethereum 2.0?
Ethereum 2.0 or ETH2, ETH2.0 is simply the merging of the existing execution layer of Ethereum (the Mainnet that is in use as of writing this piece) with the proof-of-stake based consensus layer (also called Beacon Chain). Switching from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism eliminates the need for energy-ontensive mining and also secures the network using staked ETH.
According to the Ethereum Foundation themselves, this is an ‘exciting step in realising the Ethereum vision – more scalability, security and sustainability. Ethereum developers have been hard at work for a very long time preparing for an eventual transition away from PoW to PoS. On 1 December, 2020, the PoS based Beacon Chain was created, which has so far existed as a separate blockchain, running in parallel to the PoW based Ethereum Mainnet. The approaching Merge is when these two systems finally come together, and proof-of-work is replaced permanently by proof-of-stake consensus layer.
Additional Read: Proof of Work vs Proof of Stake
#Ethereum 2.0 just launched! #ETH https://t.co/g3LThkKo9H
— Binance (@binance) December 1, 2020
Will Ethereum 2.0 Replace Ethereum?
Ethereum 2.0 isn’t a replacement for the Ethereum we know today, rather it is a systemic upgrade within the blockchain network. The execution layer of the Ethereum network we know today will remain exactly the same while only the consensus layer will be transitioned from the PoW based one to the PoS based one, also called the Beacon Chain.
According to the official Ethereum Foundation blog, the terms Eth1 and Eth2 are being phased out and Eth 1 will now be addressed as the “execution layer” while Eth2 will be known as the “consensus layer”.
Hence, the Ethereum Merge will simply look like this:
Eth 1 – execution layer
Eth 2 – consensus layer (PoS based)
Execution layer (Eth 1) + Consensus layer (Eth 2) = Ethereum
After the ‘merging’ of the Beacon chain into the Ethereum mainnet to replace the existing PoW consensus layer, the next step in the process would be sharding. This is being introduced to reduce the pressure on the existing blockchain and its nodes and via the process of sharding, 64 additional chains will be added to lighten the load.
With these 64 new chains, also known as shards, Ethereum 2.0 upgrade will enable the network to process thousands of transactions per second – multiple times the Ethereum network’s current capacity. This is being done in the hope of adding further security and scalability to the blockchain compared to the existing Ethereum chain.
So the question of whether Ethereum 2.0 will replace Ethereum is technically flawed, there isn’t any overhaul that is being done on the network, it is simply swapping out one part of the larger engine to make the machine run a bit smoother and in this case, make it a whole lot environmentally friendly. These would be the primary differences between Ethereum and Ethereum 2.0.
Also read: Polygon Founder Sandeep Nailwal clears Misunderstanding around Ethereum Merge & ETH 2.0
Ethereum 2.0 vs Ethereum
Here are some of the most prominent differences between Ethereum 2.0 and Ethereum.
Shift from PoW to PoS consensus mechanism
This transition from PoW to PoS in the Ethereum Merge has been already explained before, but it has a few more added benefits that often go unnoticed. It adds an additional layer of security too to protect the blockchain from scams and frauds, for example – any validator who is caught authenticating illegitimate transactions faces a reduction in his staked funds in a process called slashing.
Also, apart from being a greener blockchain technology, it makes Ethereum 2.0 become more decentralised than the existing Ethereum. This is due to the fact that since validators don’t have to buy expensive mining rigs anymore, anyone with a certain amount of ETH can participate in the validating process, thus with a greater participation comes more decentralisation.
Sharding
Another important update that makes Ethereum 2.0 different from the classic Ethereum is sharding. As mentioned earlier, the Ethereum Merge would be followed by the process of sharding, and the introduction of 64 shards, or new chains that are connected to the older Ethereum chain to link with the previously recorded data.
Theoretically, this would solve Ethereum’s scalability issues going forward. Sharding is basically a process to add multiple lanes onto an extremely busy highway that earlier had only one.
Beacon Chain
Beacon Chain, which was launched back on 1 December, 2020 will be the backbone behind the Ethereum 2.0. It will essentially be the connection between all the 64 shards that are planned to be created in the Ethereum 2.0 process. Also, this Proof of Stake based Beacon Chain will be responsible for performing the crucial function of randomly choosing a validator and monitor its activity on the chain and is also responsible for any slashing that may be required.
Objectives of Ethereum 2.0
Security
One of the most important goals of the Ethereum community is to make the platform more secure for investors and developers alike. In the past, ever since its launch in 2015, we have seen numerous attacks and hacking incidents that have plagued blockchain networks and resulted in people losing their money. Thus, moving towards a PoS system in theory would minimize the risk of cyberattacks. It does so by making the blockchain theoretically more secure against “51% attack” – a form of cyberattack where attackers control over half the network.
Scalability
Ethereum is the largest smart contract there is and understandably so. It hosts a massive number of dApps and DeFi services on its network, it is home to over 80% of all Defi apps and about 90% of all the NFTs are a part of its ecosystem. Having such a huge traffic tends to result in thousands of transactions happening all at the same time.
The existing Ethereum network however only has the capacity to handle 15 transactions per second which results in the skyrocketing of gas fees and delayed transfers. With the sharding planned to come after the final Ethereum Merge, this could potentially be a solution to that problem.
Sustainability
This is one of the most well known objectives of the Ethereum Merge. The transition from PoW to PoS undoubtedly signifies its environmentally friendly stance – moving from the energy heavy mining process to the more efficient and faster validator system that uses less than 99.95% of its earlier consumption, according to Ethereum Foundation’s own blog on the matter. Thus the network becoming more eco-friendly would only help its future growth and adoption into the mainstream.
Will Ethereum 2.0 affect Ethereum price?
That is a very dicey question to answer. This is because, firstly, ETH price has already rallied quite a bit in the past month, in fact it has nearly doubled from its June 2022 lows to its highs in the second week of August 2022, when it managed to touch $2000. But since then it has fallen significantly due to broader market sentiments in the weeks leading up to Jerome Powell’s speech at the Jackson Hole Symposium that finally happened on 26 August, 2022.
So one shouldn’t pin their hopes too much on seeing a crazy rally either. It is helpful to remember what happened during Cardano’s move to add smart contract capability to its blockchain last year. Speculations around such news can push ETH price to unsustainably high valuations of tokens but soon after they can come crashing back down. As mentioned earlier, it will only solve some of Ethereum’s problems, but not all of them. There’s a chance the reality of the merge will disappoint, just as Cardano’s smart contracts did.
Additional Read: Ethereum Price Prediction Weekly
What should you do with your current ETH Crypto Holdings?
If you are a holder or a user of ETH, you do not need to do anything to protect your funds entering the Ethereum Merge. According to the Ethereum Foundation themselves, as a user or holder of ETH or any other digital asset on Ethereum, as well as non-node-operating stakers, you do not need to do anything with your funds or wallet before The Merge.
During this process of replacing the PoW based consensus layer with the PoS based Beacon Chain and merging it with the Ethereum execution layer, the entire history of Ethereum since genesis remains intact and unaltered. Any funds held in your wallet before The Merge will still be accessible after The Merge takes place. There is no action is required to upgrade on your part.
Future of Ethereum 2.0
The future of Ethereum 2.0 is yet to be seen going forward. There has been an extensive process of testing and working out the kinks in the system to ensure a bug free Ethereum Merge on the mainnet but the actual proof will be in the pudding, as they say. With some of the best engineers and developers working with the Ethereum Foundation to successfully transition Ethereum to Ethereum 2.0, along with multiple delays along the way, one can expect that most issues have been bugged out.
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