Just over the last month, there has been a huge final push for Ethereum to launch Ethereum 2.0, also known as Eth2.0, with much anticipation as the launch date was announced and then the looming deadline to have enough Eth staked to be able to launch the first phase outside of testnet by December 1st.
But for many of our non-crypto friends or new people to crypto who have been trying to figure out what is going on, many are left very confused about what Eth2.0 is, what it is not, and why it is important.
Daily I get messages from friends and acquaintances asking how to buy Eth2.0 and will it be worth more than the current Eth. Insert facepalm here. There is no new coin or token, just a new network that the ecosystem will be migrated to over several phases. So, let’s explore the facts about Eth2.0.
We will look at what it is and why it is important. Eth2.0 is a massive upgrade to the Ethereum network that plans to make Ethereum much faster and less susceptible to network attacks while also drastically reducing gas fees to use the network. The growing demand for this network upgrade hit its peak earlier this year with the rise of many Defi projects.
With so many projects leveraging Ethereum smart contracts and ERC20 tokens to be used on their platforms, gas fees have hit astronomical levels, sometimes forcing users to pay anywhere from $5 to as high as $40 worth of Eth in gas fees. That is definitely a huge speed bump along the road to adoption. Eth2.0 plans to change all of that and speed things up. Ethereum is in desperate need of these upgrades as Eth has become the platform of choice for most of the Defi landscape. The Ethereum network is not only the home to growing numbers of Defii users, but also to its vast network of Dapps not only used for finance, but also for gaming, social media, and the fast-growing NFT marketplaces(to learn more about NFTs, visit our past blog about NFTs.
The larger and more useful the Ethereum network, in theory, the greater the value of Ether coins. The roadmap to Eth2.0 is not a one phase launch, but a multiyear transition with several phases past us and several to come. It is important to note that most Eth users currently will continue to operate on the Eth1.0 network as this multistage rollout will not transition fully right away.
Eth2.0 is a completely new network that will change and replace the old network and the economics of the old network. Eth2.0 will eliminate mining as it shifts from proof of work to proof of stake protocol. To learn more about the differences in proof of work and proof of stake, visit our recent How-to Crypto Blog about different consensus types.
PROOF OF STAKE, MINING...
Proof of stake consensus is much more energy-efficient than proof of work, but can also allow the network to be quicker and more nimble, allowing it to handle thousands of more transactions per second while still maintaining the security and decentralization of the network. In proof of work state, mining requires an ever-growing amount of computational power, plus electrical costs and fees from mining pools.
To mine Eth in the original network requires a huge upfront cost of up to date hardware. This makes sense as it allows the network to be secure as attackers would need to spend large amounts of money on equipment or renting hash power to even attempt the attack. This will discourage many as the reward is much less than the cost of the attack.
Because miners verify transactions while also generating new blocks, this process is slow and only allows the original Ethereum chain to process around 15 transactions per second. Eth 2.0 moving to a proof of stake protocol will help to scale transactions per second into the thousands while also maintaining a secure and decentralized network.
To be able to run a stake on Eth2.0, users will need to stake at least 32 Eth. At its current value at the time of writing this, that is worth around $19,000.
Many exchanges and other custody services have offered to allow their users to stake Eth with them and earn passively for this without the need for the 32 Eth minimum. These companies have the ability to pool their users Eth for staking and paying some of that staking reward forward to users. Stakers earn block rewards for securing the network.
Staking rewards also come with negative consequences if a node does not act properly. There are penalties for failing to vote and secure the network. This means an offline node will result in a penalty in the form of Eth. The initial staked goal for Eth2.0 was met just one week prior to the December 1 deadline. The contract was required to collect 16,384 deposits of 32 Eth each, for a total of 524,288 Eth to be able to proceed with the launch phase of Eth2.0.
There have been some questions in reference to the appeal of the terms of participating in Eth2.0. Stakers would be offered yields estimated around 14.2% annually but could be sacrificing liquidity because they would not be able to withdraw the stake for an unknown lockout period dictated by the implementations of phase 1 and 2 of the launch, which could take years.
Analysts do predict a much greater demand for Eth once proof of stake is fully implemented, with a majority of Eth locked in staking either as a node validator or deposited in an exchange or other custody service offering staking rewards.
The other key feature of Eth2.0 is sharding. In many blockchains, all node validators, whether proof of work or proof of stake, run a full version of the network and transactions being processed. Sharding breaks up the network data in sections, 64 total shards in Eth2.0 case, that drastically improves the network by not requiring each node to run the full process.
Sharding is a data partitioning method that aims to unload the system while providing quick access to any stored data. Sharding in blockchain terms is aimed to spread the load over the decentralized network by partitioning data through shards. Much of this is planned to happen in Phase 1 expected in early 2021.
The shard chain implementation allows the shard chains to operate interconnected making the entire network less cumbersome than currency design requiring nodes to download the entire history of the network. To get a visual of this, instead of visualizing one giant Eth network, each shard chain has its own network, and all the shard chains form a giant network of chains in the Ethereum ecosystem. Instead of having to process every transaction in the entire network, a validator on Eth2.0 will only need to process and verify the transactions of a single shard.
This innovative technique will enable people using average consumer hardware to meaningfully participate in the Eth2.0 network. In contrast, in the current Eth model, a linear execution model requires every node to process every operation. The more users that utilize the Ethereum blockchain, the higher gas fees will be. Transitioning to sharding, transactions can be happening in parallel on different shard chains, not only speeding up transaction time but reducing network gas fees.
Now that we have walked you through the general overview of the transition to Ethereum 2.0, which is still in the rollout phase, you may ask yourself, why is this important. Ethereum has been a leader in development in many sectors of the cryptocurrency and blockchain industry. Many blockchains experience some sort of drawback from their chain’s structure and consensus model.
The most secure networks, even Bitcoin, which is the most secure, experience scalability issues that if left unchecked could hinder adoption and implementation. Ethereum has a bustling community of developers working to solve this scalability issue. In terms of cryptocurrency economics, the ability to pull this off successfully could lead to the demand for Eth to skyrocket.
This year alone, we have seen billions of dollars worth of Eth and ERC20 tokens flood into Defi protocols, such as liquidity pools, lending, borrowing, and other smart contract protocols. Although Eth2.0 is not about driving up the price of the coin Eth, execution of all the remaining phases of Eth2.0 rollout could knock down the barriers that are stopping certain companies or project teams from fully implementing their projects on the Ethereum network.
That flood of development alone could cause the price of Eth to skyrocket far beyond its all-time high price that was reached in 2018. The potential for this could also explain why so many are eager to lock up their Eth for staking in the new network. In the end, only time will tell, but if Ethereum can pull this off, it will also silence the many doubters who have criticized the long road of delays over the past couple of years.
But anyone in the development space knows that delays are part of rolling out a network that cannot fully be tested until you run traffic through it. In the meantime, are you betting on Ethereum and Eth2.0 to be a huge success? Or do you feel it will be a rocky road with more delays and bugs to come resulting in continued volatility in the price of Eth? Only time will tell, but make sure to stay informed and we will revisit this one in the future as more milestones on the Eth2.0 roadmap are executed.