What Exactly is this New Blockchain Version?

Ethereum — the second most popular blockchain after Bitcoin — has continually deduced methods to update its network to become better than its predecessor and major rival.

And after a long wait, the upgraded version launched in mid-September 2022 called “Ethereum Merge”. Originally referred to as Ethereum 2.0, the merge is an upgraded version of the Ethereum network that now uses proof-of-stake consensus. 

The upgrade will allow Ethereum to scale its transaction throughput, enable new applications to drive greater utility on-chain, and further reduce cost. Let’s understand how this revolutionary Merge upgrade will gear up to be future-proof to follow mass adoption. 

What is Ethereum 2.0?

Ethereum 2.0 is simply an upgrade to Ethereum’s network. It is a multi-phased project that intends to make the blockchain network faster, cheaper, more accessible, more secure, and more effective. 

This upgrade heralded the switch of Ethereum’s consensus mechanism from the Proof-of-Work (PoW) model to the Proof-of-Stake (PoS) model, and brought about “Sharding.” Sharding is reportedly the last phase of the Ethereum 2.0 transition which should be finalized by 2023. 

The transition from Ethereum 1.0 to 2.0 was always in the works, and not a random event. To be honest, you hardly find any unplanned incidents in the crypto space. Even the rising platform admits that no events go unprepared for in the ecosystem. 

It commenced in December 2020 with the launch of the Beacon Chain, which introduced staking and PoS to the Ethereum network. Using the proof-of-stake (PoS) model over the proof-of-work (PoW) model was a major game changer for the network. 

Normally, with the PoW model — which was the primary consensus method used by all networks, as started by Bitcoin — miners use their sophisticated computing power to decipher complicated equations and validate blocks, which are then added to the blockchain. Each block had to be proven unique to prohibit duplication of transactions. This process rendered the whole PoW process expensive, in terms of financial resources and time to undergo.  

In addition, blockchain mining utilizes a lot of electricity which isn’t environmentally friendly. Then there’s the issue of miners who are inferiorly stacked against their competitors, as they don’t have enough resources to compete to solve these equations. There is, however, the option of miners collaborating with other miners in a ‘mining pool’ to solve these equations. But, the reward is shared amongst the miners. 

With the PoS model, users ‘validate’ transactions (just like PoW mine) by ‘staking’ crypto into the network. The more funds the validators stake, the higher their rewards for participating. 

In this method, the bar for entry is low as long as you have the funds to participate, (and there are other ways to get the 32 ETH needed to stake), unlike PoW which involves having expensive hardware and utilizing copious amounts of electricity. 

This level of network accessibility (of Ethereum 2.0) enables better scalability, as more users are connected to the network and validate blockchain transactions. Ultimately, this leads to a higher level of security and decentralization due to multiple peoples’ participation. 

Using the PoS model also prevents a 51% attack, something which is prevalent in PoW models. It simply means when a user commands control of 51% of nodes and validates transactions wrongly. Since it is practically impossible to HODL 51% of tokens on the Ethereum network, the PoS model is more secure. 

Also Read: Proof of Work vs Proof of Stake: Major Takeaways

Generally speaking, upgrading to Ethereum 2.0 will help secure the network and allow participants, collectors, and cryptocurrency owners to stake their ETH tokens and earn rewards.

When did Ethereum 2.0 Start?

Work on Ethereum 2.0 had begun early, as previously stated. It can be summarized into four phases:

Phase 0

It commenced in 2020 with what was called “Beacon Chain” — which introduced the PoS model to the Ethereum blockchain —  enabling users to stake their ETH and become validators. Beacon Chain didn’t disrupt the Ethereum 1.0 blockchain but existed alongside Ethereum’s mainnet. 

The first Phase provided three major technological implementations to the Ethereum ecosystem: the Beacon Chain, the PoS consensus mechanism, and validator nodes. 

Phase 1

The next phase was purported to launch in mid-2021 but it was delayed to early 2022, with the Ethereum developers mentioning unfinished work. In Phase 1, there was meant to be a merge of the Mainnet into the Beacon Chain, therefore switching the consensus mechanism from PoW to PoS. Miners were expected to take their holdings and stake them to evolve into validators.

In addition, the Ethereum developers intended to introduce “Sharding” in this Phase. This is because it has a significant effect in ensuring the Ethereum network can handle an increased number of transactions. 

Rather than settling all operations on just one blockchain, “Shard” chains disperse these operations across 64 new chains. This enables parallel processing to decrease the latency that originates from linear processing utilizing a single blockchain. 

Invariably, this would lead to an increase in the transaction speed and reduce the load on the network as validators could run their Shards. Also, processing any transactions would become easier from a hardware purview, as there would be reduced data to be stored on a particular machine.

Phase 2

Ultimately, Phase 2 came with the introduction of Ethereum Web Assembly (eWASM). It was designed to make the Ethereum 1.0 network more efficient, a subset of the proposed Ethereum smart contract execution layer. 

Ethereum 1.0 was equipped with an Ethereum Virtual Machine (EVM). This software interacts with dApps, evaluates gas fees for every transaction, and computes the network after each block is added to the blockchain. A fundamental constituent of the Ethereum blockchain, the EVM wears many hats. For one, it executes and terminates smart contracts, and detects if a dApp is deterministic or if a smart contract is isolated and is used by users globally. 

As a result of numerous transactions occurring at once on the Ethereum blockchain, the EVM has become slow. Unfortunately, it is difficult to upgrade since it was written in complicated code, i.e Solidity. So the most likely option was to replace it.

That’s where eWASM comes in. It was designed to replace the EVM in the Ethereum hierarchy. It speeds up the network process by computing codes fast and it is effectively compatible with various coding languages like C and C++. All of these are poised to make eWASM more accessible for the Ethereum blockchain, which in turn makes the network faster and more efficient. 

Phase 3

This phase — a miscellaneous stage — was reserved for any extra upgrade that might have been needed before Ethereum 2.0 was launched completely. For example, creating extra Shard chains to add to the original 64 chains, heightened privacy on the network, or improving the overall technology on the blockchain.

It was estimated that each phase of Ethereum 2.0 would require about six to eight months to come to total fruition. Admittedly, the long-awaited Ethereum merge finally came, in mid-September 2022.  The Ethereum Foundation however remarked that the complete transition to Ethereum 2.0 would occur in 2023, as the network was highly dynamic and ever-evolving.

Also Read: What’s Next After the Ethereum Merge?

Why Shift to Ethereum 2.0?

Over time, the Ethereum network was faced with some constraints that were affecting its efficiencies like scalability, accessibility, and security.

Users, at times, had to pay over 100% in gas fees and extra costs just to undergo minimal transactions. Plus, the network struggled to approve transactions rapidly too.

All of these necessitated the need to improve its blockchain network to achieve an expansive level of adoption from investors. This is because Ethereum finds use in dApps — which are beneficial in governance, supply chain, finance, education, etc. 

Therefore, Ethereum developers — led by the creator, Vitalik Buterin — established a proposed upgrade (Ethereum 2.0) and worked towards it. It is simply the transition of Ethereum’s consensus mechanism from a proof-of-work (PoW) model to a proof-of-stake (PoS) model. 

This was in hopes to reduce the blockchain’s energy consumption by 99%, and make the network faster, more scalable, and more secure to utilize.

What Are the Benefits of Ethereum 2.0?

Previously, Ethereum was held back by some technical limitations, but all these changed with the advent of Ethereum 2.0. These are the benefits:

Less Computation Power, More Eco-friendly

As opposed to the proof-of-work (PoW) model which involves using sophisticated power to solve complex equations, the proof-of-stake (PoS) model — which Ethereum 2.0 utilizes — doesn’t require such. This in turn makes it to be more eco-friendly as a single PoW transaction is reportedly said to consume as much energy as an average U.S. household in a week. Moreover, the hardware is said to generate electronic waste also.

Increased Scalability and Efficiency

Ethereum 1.0 computed about 25 to 30 transactions per second, but Ethereum 2.0 is said to handle 100,000 transactions per second. This increased Scalability is possible due to the Sharding technique. 

Sharding enables Ethereum to store and access data, plus “Shard chains” would be utilized in transactions which makes it reportedly 64 times faster than the previous blockchain version. 

Making ETH a more Deflationary Asset

Due to the merge, issuing Ether as block rewards would greatly reduce. There are reportedly about 13,000 ETH mined daily. The number would reduce to 1,600 ETH daily as a result of the Merge. All of which would ensure less ETH is in circulation, thereby reducing its inflationary quality.

Higher Security Level

Ethereum 2.0 needs a minimum of 16,384 validators, enabling a decentralized network and thus securing the blockchain, by reducing the attack surface area. This prevents a 51% attack from occurring on the network.

More Network Participation

With lower hardware requirements, more people can participate in Ethereum 2.0. By using Sharding, validators don’t need to store data by themselves. They can instead employ data techniques to confirm that the data has been made usable by the network. Moreover, more users can join in the staking process — provided they have 32 ETH to lock in — thereby increasing network participation.

Reduced Costs

With the PoW model, there was a high cost of hardware equipment, gas fees, and electricity bills. All of these are not present in Ethereum 2.0, as the PoS model doesn’t require as much hardware (with Sharding) and doesn’t have to pay miners gas fees, as the validators who stake ETH secure the network indirectly.

What Are the Risks of Ethereum 2.0?

The Ethereum merge is the most significant upgrade to a blockchain network and it doesn’t come without its risks:

Possible Scams

Some crypto-related organizations pretend as though ETH (Ether) was what was updated to Ethereum 2.0, by calling it “ETH 2.” This is in a bid to get users to swap their ETH for the so-called ETH 2 and scam them.

Feasible drop in ETH Value

If things go awry after the merge, it is possible that the value of ETH would drop, as well as other cryptos that are built on the Ethereum blockchain.

Also Read: Ethereum Price Prediction 2023: Can ETH hit $2500?

What is the Future of Ethereum?

The crux of an updated Ethereum network (Ethereum 2.0) is to enable it to process more transactions speedily while being secure and accessible. 

With the transition to a PoS model from the PoW model and the advent of Sharding, expectations — from industry experts and enthusiasts alike — are high. It is expected that the merge would have an all-encompassing impact on the DeFi space. Time would tell what would happen though.

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