Crypto Explained

What is Ethereum 2.0? Overview, Features, and Price Implications

November 27, 2020
The second-largest cryptocurrency by market cap, Ethereum, has had the most significant update in its 5-year history. A major milestone has been achieved on the path to ‘Ethereum 2.0’, also known as ‘Eth2’, which represents a pivotal development in the evolution of the Ethereum blockchain.

● ETH2’s ‘genesis day’, which will see the launch of the new Beacon chain, has been confirmed for December 1st following the transfer of almost 525 thousand Ether from over 16 thousand validators into the ETH2 deposit contract.
● Ethereum’s Beacon chain is an interim blockchain that will operate in parallel with the current network as it begins the first of four migration phases to the 2.0 scaled network.

The second-largest cryptocurrency by market cap, Ethereum, has had the most significant update in its 5-year history. A major milestone has been achieved on the path to ‘Ethereum 2.0’, also known as ‘Eth2’, which represents a pivotal development in the evolution of the Ethereum blockchain.

Ever since the release of Ethereum, the world has witnessed a sharp rise in the development of new blockchains and new technologies in the form of decentralized applications (Dapps). The Ethereum platform has provided a long-cherished and trusted foundation to some of the biggest and most innovative developments in Decentralized Finance (DeFi). As the network increased in popularity and entered into the mainstream, issues surrounding scalability emerged; the Ethereum 2.0 upgrade aims to remedy this issue and would effectively enhance the capacity of the blockchain by a multiplier of 64[1].

Frequently throughout the year, Ethereum transaction fees spike due to high traffic volumes on the network. The more users and protocols that the network attracts, the more transactions that are sent through the network[2]. This congestion creates a vicious circle of higher fees and decelerated transaction processing times.

The Ethereum 1.0 network can only support approximately 30 transactions per second, compared with Ethereum 2.0 which is said to be able to handle 100,000 transactions per second. Eth2 therefore seeks to exponentially increase the functionality and usage potential of the network. The most notable new features of the Ethereum 2.0 upgrade will include the Proof of Stake model, Shard Chains, and the introduction of an entirely new blockchain called the Beacon Chain. These new features and the upgrade will improve speed, efficiency, security, and scalability on the Ethereum network, making it better able to process transactions and circumvent current issues of congestion from bottlenecks.

New Features

From Proof of Work to Proof of Stake — Blockchains such as Ethereum 1.0 rely on a consensus mechanism known as Proof of Work to validate transactions on the network in a decentralized way. This is also known as the process of mining. This process involves people who are called miners that verify new transactions by solving complex mathematical problems. Miners are rewarded with coins whenever they successfully verify a new transaction and add a block to the blockchain. Mining requires large amounts of computer hardware processing power.

The Proof of Stake model found in Ethereum 2.0 replaces miners with transaction validators who must stake cryptocurrency in order to gain the right to verify a transaction. On the Eth2 network, validators must stake at least 32 ETH. Validators deposit their funds into an official deposit contract and use client software which allows them to be randomly selected to attest that they have seen a specific block. Validators are rewarded ETH as a percentage of their initial stake every time they make a correct attestation. A block can only be added to the blockchain after a number of validators have attested to it. This process is also sometimes referred to as “forging” or “minting” and is much less energy-intensive than the process of mining.

Shard Chains — Nodes are used to access the Ethereum network. A single node contains a copy of all of the transactions that have ever occurred on the network. Shard chains are features that are similar to blockchains but only contain a segment of one blockchain. Shard chains enable nodes to manage slices of the network. It is anticipated that Ethereum 2.0 will be launched with 64 shards thus enabling 64 times more throughput on the network.

Beacon Chain — The Beacon chain is a central component of the Ethereum 2.0 network. The new blockchain allows for information sharing between shards and supports the shard chains which run parallel to it. Shards and the Beacon chain are necessary for improving scalability on the network.

The Future of Ethereum

Ethereum 2.0 will roll out on a phased basis at 4 different stages. Phase 0 is concerned with the implementation of the Beacon chain. Phase 1 will require integrating the proof of stake mechanism and shard chains to the network. Phase 1.5 will involve the transition of Ethereum from a shard to a proof of stake. Phase 2 will involve shards becoming compatible with smart contracts, and transfers and withdrawals of Ether. The launch of Ethereum 2.0 was conditional on 16,384 validators on the network staking 32 ETH by November 24th. The minimum 524,288 ETH was staked for the upgrade, which means Phase 0, the launch of the Beacon Chain, is set to take place at 12.00 UTC on December 1st, 2020.

Ethereum co-founder Vitalik Buterin has shared his carefully planned roadmap for the platform online and has suggested that the key challenges the network will face in the next five to ten years will be in relation to development and scaling methods. With more scalability will come more usage and higher demand for Ethereum. Experts are now predicting a record-breaking price increase of ETH like never before.

What does this mean for the price of ETH?

Source: CoinMarketCap

Unlike Bitcoin (BTC), which is predominantly viewed by investors as a form of digital gold, ETH’s price is closely tied to the efficacy of the Ethereum blockchain. The increase in investment in DeFi protocols running on the Ethereum blockchain over the past 5–6 months is also a major contributing factor to ETH’s price surge, signaling increased confidence in the cryptocurrency’s underlying use case. On the back of the announcement of the December 1st upgrade timeline, ETH has been reaching new highs. This momentum could also be part correlated the BTC rally, with some analysts asserting that the bullish mentality has spread out into the wider digital currency ecosystem.

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