homecryptocurrency NewsExplained | Ethereum 2.0: What is it, and who will benefit from it?

Explained | Ethereum 2.0: What is it, and who will benefit from it?

Explained | Ethereum 2.0: What is it, and who will benefit from it?
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By CNBCTV18.com Dec 27, 2021 5:49:23 PM IST (Updated)

Ethereum is now gearing up to launch its seminal Ethereum 2.0 upgrade that will substantially overhaul the network and address issues like scalability, high gas fees, and congestion in the network.

Since its launch, the ethereum blockchain has grown to become one of the most extensive networks in the blockchain industry. With a market capitalisation of nearly $468 billion, ethereum is only second to bitcoin.

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Ethereum is now gearing up to launch its seminal Ethereum 2.0 upgrade that will substantially overhaul the network and address issues like scalability, high gas fees, and congestion in the network.
Ethereum 2.0 is a significant upgrade to the network that consists of sequential phases that will culminate into the transfer from proof-of-work consensus mechanism to proof-of-stake, making the network more scalable, secure, and sustainable.
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The shift to ethereum 2.0 is not sudden. The idea of implementing the proof-of-stake mechanism has existed in the ethereum community for years. In fact, ethereum is only catching up to many proof-of-stake blockchains that already exist. Cardano, Avalanche, Polkadot, and Solana are some of the most prominent proof-of-stake blockchains by market cap.
Why is the shift to proof-of-stake essential?
The change to proof-of-stake will reform multiple aspects of the proof-of-work consensus mechanism, significantly altering the economics of the validating structure, energy requirement, and the hardware requirement for mining.
The proof-of-work mechanism was a tried and tested mechanism of adding new blocks in the blockchain. Under this mechanism, miners solved complex computational puzzles to add blocks. However, it is a highly energy-intensive process for miners. This became a clear problem with the proof-of-work mechanism was that the extensive energy miners spent solving the computational puzzles. Even the hardware cost for miners to solve the complex mathematical puzzles was substantial.
Proof-of-stake addresses many of these issues and makes the network more scalable and accessible. The ethereum network can store only a limited amount of data in a given time. If several transactions are pending on the network and can’t fit in a given block, they have to wait for a new block to be added to the network. Implementing sharding (method for distributing data across multiple machines) on the proof-of-stake network addresses the scalability issue.
The act of mining is essential to create new blocks and maintain the decentralised ledger. In Proof-of-work, the entry barrier is high. Miners need to have powerful computational hardware to get substantial results from the mining process. As the number of miners increases, the profitability of individual miners decreases. This encourages the miners to form mining pools, where they join resources to solve the computational puzzles. This leads to the centralisation of miners. One of the goals of proof-of-stake is to level the field for individual miners, leading to considerable returns for individual miners.
Proof-of-stake replaces miners with validators who stake their coins on the network to maintain it. In the ethereum 2.0 upgrade, validators must stake 32 ether (ETH)--ethereum's native currency--by depositing it to an official deposit contract.
Crypto staking--the process used to verify cryptocurrency transactions--involves committing holdings to support a blockchain network and confirm the transactions. It also allows participants or validators to earn passive income on their holdings.
Validators on ethereum 2.0 need to stay only to execute their share of computational responsibility. If they do not stay online, their block reward will moderately decrease. This incentivises validators to remain online.
What are the different phases in which Ethereum 2.0 will be implemented?
The move to ethereum 2.0 is being done in phases. The phases started from the end of 2020 and will continue till the summer of 2022.
Phase 0
Phase 0 launched the beacon chain in the network. The primary task of this phase was to manage the registry of the validators who create the blocks on the ethereum 2.0 network. It also laid frameworks for all the future phases.
Phase 1
The main objective of the phase 1 update was to implement shard chains and roll-ups. Shard chains allow for splitting transaction data across 64 blockchains within the ethereum network. Distributing transaction data increases the throughput of the network substantially. With multiple chains working together simultaneously, the data output could spread around to reduce the burden on the network. Phase 1 is expected to be released in early 2022.
It should be noted the features of phase 0 and phase 1 won’t function till the launch of phase 1.5 and phase 2.
Phase 1.5
Phase 1.5 is the stopgap between phase 1 and phase 2. The primary goal of this phase is to provide a bridge for ethereum 1.0 and ethereum 2.0. The merging of the two ecosystems is being referred to as ‘docking’. The merger will involve the docking of the ethereum 1.0 mainnet with the beacon chain, and then the ethereum 1.0 blockchain will become one of the 64 shard chains implemented in phase 1.
The launch of phase 1.5 will represent the official launch of Ethereum 2.0, and its features will then have a tangible effect on the network. Phase 1.5 will come soon after phase 1 in 2022.
Phase 2
After the docking of ethereum 2.0, phase 2 will start. It will initiate cross-shard interoperability and allow native decentralised application (dApp) development on the network. Phase 2 will give the network ability to handle smart contracts and transactions. This will officially transform every single shard chain in the network into a fully functioning mainnet.
Who will benefit from the rollout of Ethereum 2.0?
The change to Ethereum 2.0 will be a positive one for ethereum holders. It will change the fee structure that will lead to users paying less for transactions and even allow holders who have the necessary amount of ETH (32) to stake their coins in the network and become validators.
Any apps that already exist on the ethereum 2.0 network will simply migrate to ethereum 2.0 without losing transaction records or data.
The release of ethereum 2.0 will altogether remove the proof-work-mining structure in favour of staking. This will make the traditional system of mining obsolete, and miners will have to move to staking if they want to validate transactions for block rewards and transaction fees.
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