Ethereum 2.0: Everything You Need to Know

2021/04/27 09:15:12

Even though blockchain technology is still relatively new, its potential is more than evident. This technology is revolutionizing almost every industry in the global market today. It has disrupted and completely transformed various sectors such as healthcare, agriculture, fintech, banking, etc.

Cryptocurrencies, as we all know, are digital assets, and as of January 2020, there were over 2000 of them which you can purchase from exchanges like KuCoin. Ethereum clinches a spot as the second-largest cryptocurrency by market capitalization, second only to Bitcoin. Its main purpose is to serve as a decentralized blockchain that allows users to build decentralized apps (DApps) and smart contracts.


Ever since its public launch in 2015, the Ethereum blockchain has undergone four primary upgrades. It introduced Homestead in 2016, Metropolis Byzantium the following year, and Metropolis Constantinople and Istanbul in 2019. With the continuous effort to make the decentralized space more accessible to everyone, it upgraded from its older version to a newer one, Ethereum 2.0 (Phase 0 - Beacon Chain), on December 1, 2020.

What is Ethereum 2.0?

As mentioned above, Ethereum 2.0 is an upgrade from the previously-existing Ethereum blockchain. Also known as Serenity in the blockchain space, this innovation aims to improve the functionality and performance of Ethereum in diverse ways such as speed, efficiency, and network scalability. It addresses several issues and ultimately increases the number of possible transactions on the network without compromising its security.

This innovation was a very anticipated one, and fortunately, it has lived up to its expectation so far. Built by nine engineering teams funded by the Ethereum community and foundation, it is a reasonable approach to connecting different kinds of clients to the Ethereum network.

However, calling this innovation an update may be somewhat wrong. It is an entirely distinct project — Ethereum 2.0 - that features some immediate changes to the architecture and designs of the previous versions. Ethereum's architecture was previously maintained by the Proof of Work (PoW) consensus mechanism, but it aims to be switched to Proof of Stake (PoS). This upgrade would make transaction validation more economically viable and democratic. In essence, the two fundamental changes in its structure are Sharding and PoS.

What is Sharding?

Sharding is a practical approach adopted in the blockchain industry that ensures scalability and allows the processing of more transactions per second. It involves splitting a blockchain into several blockchains called shards. Besides, it makes the whole network better because it divides the workload between validators. Every validator is responsible for any information related to their allocated shards. Also, the network shuffles them between shards to avoid the risk of manipulation. The Beacon chain is responsible for coordination and communication between the aforementioned shards.

What is Proof of Stake (PoS)?

The PoS concept is a consensus mechanism that allows users to participate in block validation by locking their coins. This denotes that the more coins you have as a validator, the more power you possess. As an alternative to the previously adopted PoW, where miners do all the work and secure the network in exchange for transaction fees and block rewards, on the PoS, there are no miners. Instead, only chosen validators mint new ethers and process transactions algorithmically.

In essence, the validators propose new blocks, offer storage, bandwidth, and computing power to validate transactions in reward for periodic ETH payouts. These validators are obliged to lock in a deposit contract of 32 ETH, which is a form of security deposit that they may forfeit in case of malpractice. Thus, this approach is effective in eliminating dishonest validators.

This concept's primary advantage is that it is much more energy-efficient than the PoW. It completely detaches the high energy-consuming computer processing from the consensus algorithm. This signifies that securing a blockchain no longer needs a lot of computing power.

How Does Ethereum 2.0 Work?

The most critical component of this innovation are validators. These individuals are mainly responsible for its maintenance of the network. Each validator possesses two primary keys, a withdrawal key, and a signing key. They use this signing key to carry out various tasks on the blockchain, which may include;

  • Reporting malpractices and malicious intent of other validator;
  • Proposing and adding blocks to one of the shard chains or the beacon chain;
  • Confirming the genuineness of the shard and Beacon chain.

As these tasks are paramount to the network's maintenance, the signing key must be online at all times.

On the other hand, the withdrawal key is necessary to carry out tasks related to funds. Unlike the signing key, it's not necessary to keep it online 24/7. However, its holder must keep it very secure as it holds control over the funds. Before you can become a validator, you must lock up 32 ETH on the beacon chain.

Validators do not operate as a single entity. Usually, they form a committee with a minimum of 128 validators. This committee votes on the blockchain head using various forms of vote casts, which can be the Casper FFG votes or LMD ghost votes.

What Differentiates Ethereum 2.0 from Ethereum?

The primary distinguishing factor between both blockchains is the adopted consensus mechanism. Ethereum implements the PoW mechanism, while Ethereum 2.0 implements the PoS approach.

PoW is pretty energy-intensive and involves decoding sets of complex mathematical equations using computer hardware processing power. They also use this computational power to verify new transactions. The first miner to decypher the puzzle adds a new transaction that contains the preceding transactions records constituting the blockchain.

On the other hand, the PoS consensus involves locking crypto holdings to verify transactions by validators as an alternative to miners. The validators can only propose based on the time and crypto value they possess. Whenever the major part of the validators claim to have seen the block, the network adds it to the blockchain, and they get their rewards for proposing the blocks successfully. This is how minting and forgoing occurs.

How Does Ethereum 2.0 Scale Better Than the Previous Version?

As mentioned above, scalability is one of the main reasons that triggered the upgrade to Ethereum 2.0. With the previous version, the network could only support about 30 transactions per second. This throughput has led to transactional delays and congestion. However, Ethereum 2.0 promises about 100,000 transactions per second. This significant increase is a result of the implementation of shard chains.

How Is Ethereum 2.0 More Secure Than Ethereum 1.0?

The primary idea behind upgrading the existing Ethereum blockchain is to ensure more security in every transaction. A lot of PoS networks only feature a small set of validators, accounting for the shaky network security.

However, Ethereum 2.0 requires a significant set of validators, of about 16,350, making it a more decentralized, tamper-proof, and secure platform.

Besides, the Ethereum Foundation is looking to create a dedicated security team for this innovation. This team will research other possible cybersecurity issues in the industry. According to Justin Drake, a member of the research team, the research will include multiple approaches to ensure the safety of all assets on the blockchain.

How Will Ethereum 2.0 Affect the Price of Ethereum in 2021 and Beyond?

It goes without saying that scalability means more use. This, in turn, implies more demand. Hence, according to available theories, this should at least propel the price of Etherum to more significant heights. When rollups and Ethereum 2.0 work together, investors and individuals will benefit from the 100,000 transactions per second capability. This will signify an entirely seamless experience for stakeholders in the crypto space.

In essence, as scalability improves, demand skyrockets, and ultimately, price follows suit.

Are There Any Risks Associated with Ethereum 2.0?

Yes, there are a few of them. As an Ethereum holder interested in ETH 2.0, you may face the following key risks:

  • Service provider shutdown before step 1.5;
  • One-way Beacon chain transfer and the network might lock up your funds until phase 1.5.

What Does the Future Hold For Ethereum 2.0?

Ever since its launch, Etherum is developing and growing. Well over 1500 projects have been built on this blockchain. Vitalik Buterin, the co-founder of Ethereum, laid out a roadmap of how the next few years could look for Ethereum 2.0. The upgrade will take place in three phases, 0, 1, and 2.

Launched on December 1, 2020, the first phase 0 implements the Beacon chain. It stores the validators registry and kickstarts the PoS consensus. Following this first phase is phase 1. Scheduled for some time in 2021, this phase will implement shard chains, ultimately partitioning the Ethereum blockchain into 64 distinct chains. In the last stage, the shards will start functioning fully with full compatibility with smart contracts. Scheduled to launch in 2021 or 2022, this version will be an upgrade with multiple newly added features.

Considering these additional benefits and scalability, Ethereum 2.0 will surely garner more curiosity from investors in years to come.

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