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    Ethereum 2.0 | Why this network is switching to proof of stake and how it will work

    Ethereum 2.0 | Why this network is switching to proof of stake and how it will work

    Ethereum 2.0 | Why this network is switching to proof of stake and how it will work
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    By CNBCTV18.com  IST (Published)

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    Ethereum 2.0 will eliminate the Proof-of-Work consensus model in favour of the Proof-of-Stake (PoS) consensus model. The PoS consensus mechanism eliminates the high computational and energy requirements of the PoW. This upgrade in the consensus mechanism has been dubbed Ethereum 2.0 due to the sheer scale of the changes being carried out.

    The Ethereum network has burned over 2 million ETH tokens since the introduction of its burn mechanism in August 2021. Burning is the act of removing a currency from circulation, thereby creating a deflationary effect, and improving the blockchain. This burn mechanism was introduced as part of the network’s London Update.
    The London Update was just one of many other updates that were introduced as steppingstones for the smooth transition towards the prophesied Ethereum 2.0 upgrade.
    But what is Ethereum 2.0, and why is it so important? Let’s find out.
    What is the Ethereum 2.0 upgrade?
    There are no centralised authorities or structures in blockchain technology. Therefore, no single person or entity makes decisions regarding the future of a network or an application. Instead, this is done by multiple nodes in a peer-to-peer network. Nodes must reach a common consensus to act and make changes in a network. They do this through a consensus mechanism built in the structure of the blockchain by its creators.
    Since its inception, Ethereum has been using the Proof-of-Work (PoW) consensus mechanism. The PoW consensus mechanism requires network users to expend a large amount of computational energy to verify transactions and add new blocks in the networks.
    The users who expend their computational power for the consensus mechanism are known as miners. These miners are rewarded in ether tokens in exchange for the computational power they provided in the service of the network.
    Ethereum 2.0 will eliminate the PoW consensus model in favour of the Proof-of-Stake (PoS) consensus model. The PoS consensus mechanism eliminates the high computational and energy requirements of the PoW. This upgrade in the consensus mechanism has been coined as Ethereum 2.0 due to the sheer scale of the changes being carried out.
    Why is Ethereum switching to PoS?
    The Ethereum network has grown exponentially over the past year. This was mainly due to the rising popularity of NFTs and Decentralised Finance (DeFi) projects in recent months.
    Ethereum has been the choice of network for developers working on either NFT platforms or DeFi projects. There are currently over 200 DeFi projects on the Ethereum blockchain. This has led to a substantial increase in the number of transactions on the network.
    The increased number of transactions meant that miners had to expend even more computational power to verify transactions. The high computational power led to increased energy consumption to the point where people started evaluating its impact on the environment.


    Currently, Ethereum uses 113 terawatt-hours of electricity per year. That is as much as what the Netherlands consumes in a year, according to Digiconomist. A single Ethereum transaction can consume as much power as an average US household uses in more than a week.
    This became a huge concern for the scientific community, which warned people about the alarmingly high levels of energy consumption and the impact on the environment. The PoW consensus mechanism then faced scrutiny by lawmakers around the world. China even banned crypto, on the whole, citing environmental reasons.
    The switch to PoS will get rid of the high computational requirements of the PoW model, making Ethereum a more environmentally sustainable network. But less energy consumption is not the only change Ethereum 2.0 will bring about.
    The Ethereum network has more problems than environmental concerns. For one, the network is really slow. It has a transaction rate of a measly 15 transactions per second (TPS). This is significantly slower than Ethereum's competitors like Solana and Cardano, whose TPS rates go to hundreds.
    Another problem is the gas fee (transaction fees). The cost for a user to get his transaction verified is exuberant with the current PoW consensus mechanism. Sometimes, users even have to tip validators in the network if they want to prioritise their transactions. And this tip can sometimes be more than the value of the transaction itself. However, users are forced to pay it if they want to get the transaction processed quickly.
    The final transition to Ethereum 2.0 coming this year is supposed to use 99 percent less energy, allow the network to scale, and potentially help it reach 100,000 transactions per second.


    How will PoS work in Ethereum?
    To be a validator on Ethereum's PoS, users will need to stake at least 32 ether tokens. Users can also join a staking service that pools the tokens of various users to create a single validating pool.
    An algorithm will select the validators based on the amount they have locked in the network. The more you stake, the better is your chance to be selected. The selected validator is awarded ether for the transactions they process.
    Ethereum's PoS implementation is already being tested in the beacon chain, a testing ground for staking launched in 2020. Until now, $37 billion in ether has been staked there. The plan is to merge the beacon chain with the main Ethereum network to implement PoS this year.
    Other upgrades will follow the merge to improve the network further. Sharding will be introduced to break down the main Ethereum chain into 64 small sub-chains. Dividing the leading network into smaller chains will allow for parallel processing, helping the network scale in the future.
    The future of Ethereum
    While higher transaction speeds and scalability are vital elements to the network, reducing the environmental impact of operations should be the first and most important focus area. The future of decentralised finance, blockchains and cryptocurrency is more or less certain. However, climate change is looming large and any measure that will reduce this danger should be given first preference.
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