Everything You Need to Know About Ethereum 2.0

Ethereum 2.0 is a widely used name that refers to Ethereum’s much-anticipated transformation from proof-of-work to proof-of-stake, which is expected to eliminate Ethereum mining. The Ethereum Foundation no longer refers to this upgrade as “Eth2” or “Ethereum 2.0” as of January 24, 2022. The foundation is referring to it as “the merging” and “the docking.”

The Ethereum network’s reliance on computational power to generate consensus (“proof of work”) has resulted in high GPU pricing and environmental criticism, as we’ll describe below. With the mainstream use of NFTs, many of which use Ethereum smart contracts to authenticate tokens that relate to works of art, these challenges have taken on new urgency. Some of these issues are likely to be solved by switching to proof-of-stake, which does not require GPU mining.

Etherium 1.0

If you’re not familiar with Ethereum, think of it as a massive, distributed virtual computer that runs over the internet. You’ve probably experienced a similar principle if you’ve ever used an emulator to play ancient MS-DOS games or virtualization to run Windows on a Mac. In both cases, a programmable virtual computer was running as software (rather than hardware) on top of another platform.

Unlike a virtual machine that runs on a single computer, Ethereum is a distributed virtual machine made up of thousands of computers (known as nodes) connected via a blockchain. Smart contracts, which are programmes that run on the Ethereum virtual computer, can be executed by these nodes. The size of the virtual machine might shrink or grow at any time as nodes join or leave the network because Ethereum is dynamic and dispersed.

Payment in Ether (a cryptocurrency that serves as one of the Ethereum network’s applications) incentivizes people to run these nodes and provide the computational power (also known as “mining”) required to execute smart contracts and verify the chronological order of transactions on the Ethereum blockchain. The process of verification is known as “consensus.”

Problems with Etherium today

To comprehend why Ethereum has to be upgraded, you must first understand Ethereum’s current flaws. Ethereum’s architects and specialists have identified a number of major flaws in the way Ethereum works, which they see as impeding the spread of Ethereum applications. Here are a few crucial points to consider:

  • High Gas Fees:

The Ethereum network runs on “Gas.” It’s a fee paid to miners who offer the network’s computing power. The gas price is a fluctuating market price depending on demand for Ethereum network resources. The higher the demand, the more expensive the gas. The faster the deal is completed, the more gas someone is ready to pay. As a result, as Ethereum applications get more popular, the gas price might become prohibitively expensive, costing more to conduct a transaction than the value of the token being transacted in some cases. For example, at times, purchasing a low-priced NFT may cost you more in petrol fees than the cost of the NFT itself.

  • Power Usage:

Currently, consensus on the Ethereum blockchain is established using cryptographic puzzles that must be completed by Ethereum network nodes, a process known as “proof of work.” The more popular Ethereum becomes, the more computing effort is required to verify its blockchain, resulting in increased electricity consumption by network nodes. As a result, there has been a lot of criticism that running the Ethereum network causes pollution and harms the environment.

  • Disk Space Usage:

Because the Ethereum blockchain history takes up more disc space as the Ethereum network grows in size, running a node becomes more challenging. This restricts who can run a complete node (by raising the cost), which restricts the number of nodes on the network.

  • GPU Prices

The consensus method for Ethereum (dubbed “Ethash”) was created specifically to be profitable to mine on consumer graphics cards. The higher the demand for computation on the Ethereum network, the more miners can be paid (in gas fees), prompting them to purchase additional GPUs in order to earn more money. As a result, GPU shortages may occur, causing graphics card prices to skyrocket. Other GPU uses, such as gaming and neural networks, are severely harmed by high GPU prices.

Proposed Solution

Since Ethereum’s conception in 2013, the Ethereum Foundation and Ethereum developer Vitalik Buterin have been aware of some of the issues highlighted above (and launched in 2015.) However, upgrades and improvements became more difficult to deploy as the network expanded in popularity. Changes to the network must be approved by at least 51% of Ethereum nodes (if all nodes do not agree, the network forks, or splits, into different networks). Here’s how “the merging” and other enhancements will address some of these issues.

Switching to Proof-of-Stake

Ethereum will no longer create consensus through proof-of-work, which requires processing power and electricity from miners after “the merge.” Instead, a proof-of-stake mechanism will be used to compel validator nodes to risk (or “stake”) a specific amount of Ether cryptocurrency to validate blocks on the Ethereum blockchain.

To create new blocks on the chain, validators will be picked at random (verifying transactions and executing smart contracts.) They risk losing some or all of their staked Ether if they disconnect in the middle of the procedure or submit wrong values. Validators will still be compensated in Ether for their work, and the risk gives an incentive to do the right thing.

Validators will still have to do some computation to construct blocks in the Ethereum blockchain under the proof of stake, but not nearly as much as they would if required to solve cryptographic riddles. Proof of stake is predicted to drastically cut the Ethereum network’s energy consumption and remove entry barriers (you won’t need an expensive, hefty GPU to earn bitcoin as a validator). It may also result in more nodes on the network because it will be easy to join a node pool. More nodes imply more computational power and less centralization, boosting network security.

The switch to proof-of-stake is likely to reduce demand for GPUs. However, miners who previously mined Ether may still be utilised to mine cryptocurrency adapt their existing mining hardware and methods to other cryptocurrencies. Graphics card costs may reduce slightly if GPU demand falls, but other factors are at play in the current graphics card scarcity.

Switching Ethereum to proof of stake has been a multi-step process that began with creating the Beacon Chain, a sort of parallel consensus layer based on staking Ether that will eventually join with the main Ethereum network. As a result, “the merging” was coined.

The Adoption of Sharding

Following “the merge,” Ethereum’s developers intend to implement “Sharding,” which divides the main Ethereum blockchain into smaller chains known as “shards.”

The Ethereum blockchain history currently occupies four terabytes of space. Full nodes are not required to host the entire amount, but under the new design, the active chain will be divided into 64 sections, requiring each node to host only 1/64th of the Ethereum blockchain’s standard size.

By lowering hardware requirements, sharding is projected to reduce entry barriers for running a node. As a result, new nodes may be added, allowing the network to expand its capacity. By distributing the burden among more nodes, sharding will increase the number of transactions the Ethereum network can handle, perhaps lowering gas prices.

Will Etherium 2.0 lower Gas fees?

Because “Ethereum 2.0” currently represents many things and is divided into different goals that will be implemented over time, it’s difficult to say with certainty whether it would lower gas prices.

The Ethereum community is sceptical that the conversion to proof of stake (“the merge”) would reduce gas fees, and the Ethereum foundation does not guarantee that it will. Gas prices are determined by demand, and each Ethereum block has a limited quantity of computing space. Instead, sharding could lower costs by increasing the Ethereum network’s computing power, although this isn’t likely to happen until at least 2023 on the main Ethereum chain.

Instead, other experts believe that lowering Ethereum gas fees will need “Layer 2” applications built on top of the Ethereum network, which will execute some of their independent processing but rely on Ethereum for a fundamental level of consensus and verification.

To put it another way, the entire issue of Ethereum upgrades and their impacts is difficult, and it’s dependent on a set of dynamic conditions that can change dramatically from day to day—including the size of the network, the value of Ether, the demand for NFTs, and the attitude of the node operators. Only time will tell how things will turn out and what impact Ethereum’s improvements will have on the crypto ecosystem. Switching Ethereum to proof of stake, on the other hand, is widely believed to be a game-changing move. If other cryptocurrencies follow suit, the transition may remove restrictions that hinder some corporations or governments from fully accepting cryptocurrencies. As a result, their acceptance could skyrocket, making the future a crypto-friendly environment

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