Introduction
Today marks almost two years since the blockchain community began waiting for the Ethereum network to shift to a Proof-of-Stake (PoS) algorithm. While change is always good, a great number of people don’t actually understand the meaning of the stages of network modernization.
Byzantium, Istanbul, Constantinople, and Berlin are all raising eyebrows, and it’s no wonder, since the majority are still very ignorant about hard forks and the digital assets’ market in general. The core of the concept for the upgrade is hidden behind useless comments on cryptocurrency forums. Even authoritative blockchain-oriented channels publish rather vague information.
It should be mentioned that the developers themselves at large to blame. The release has been delayed again and again, sometimes for technical reasons. Nevertheless, the project is hurdling full speed ahead.
This review discusses Ethereum 2.0. We will analyze its stages and its potential impact on the crypto world. Let’s jump right into it.
Eth2 Explained
First, we have to clearly define what Ethereum 1.0 is before we can go on to its successor. Here’s the simplest explanation with no metaphors or hyperbole: it is a proof-of-work blockchain that enables people to create their own dApps. If this platform is something you are interested in, we invite you to come along with us a little further.
This project was first envisioned to be a global decentralized computer. This supercomputer would execute anyone’s code in exchange for a fee. This is called “gas”. The creator’s original vision was that it would be akin to the Google Play Store on groundbreaking technology. Upload your dApp and use it anywhere you want.
It’s great to be full of ambition, but great feats take time. There’s no way around it. As you can understand, making this wild dream into a reality is a complicated task.
Ethereum is the second-largest cryptocurrency platform by market capitalization, and it uses the Proof-of-Work (PoW) Ethash consensus mechanism to propagate blocks and confirm transactions. In plain English, it is similar to Bitcoin, where miners have to devote RAW processing power to make the network secure. This process makes Bitcoin inefficient in terms of resource consumption. The PoW algorithm is best suited for relatively small networks with a limited number of transactions.
From the very beginning, only a few simple dApps could run with minimal processing power across a small collection of nodes. Much has changed since then and the number of dApps and transactions are no exception. As a result, we have a blockchain that slows the system down and makes gas fees rise. Not exactly the global decentralized supercomputer everyone was hoping for, right?
The grand takeaway here? The unfortunate answer when dealing with PoW is, “At first, yes. Over time, not so much.” It’s time to pull the plug on this problem. A shift in the underlying consensus mechanism seems like a prudent move.
The shift consists of the following four stages:
● Phase 0 (PoS)
● Phase 1 (data sharding)
● Phase 2 (state and execution)
● Phase 3+ (STARKS, further scaling, etc.)
Of course, there are more questions than answers for now. However, information about some phases is already known.
Proof-of-Stake
When using PoS, a node’s ability to generate a new block is determined based on the percentage of tokens in its balance. Thus, those with the greatest chance to generate a new block and solve the problem to prove it are not the people with the most powerful equipment but the people who own the largest amount of this currency.
The new algorithm will bring what we haven’t seen yet but probably need. Let’s step back and briefly examine what we mean by that:
● PoW is extremely inefficient and centralized — it is the worst possible combination, plus it works very slowly. PoS, however, can speed up blockchain operations by a thousand times and increase the network’s decentralization.
● The existing algorithm is rife with problems. It is not effective and demands greater processing capacity. Consequently, the developers want to switch to a high-performance one. This makes it possible to increase the throughput capacity from the current 15 to 1,000 transactions per second. PoS requires users to hold assets in a wallet to keep the system functioning and improve security.
● When it comes to PoW, miners are forced to constantly increase the power of their equipment (in the Bitcoin network, for example, mining remains in a lot of large pools). We don’t know what you think, but for us, that mechanism is a loser. The main advantage of PoS is its significantly greater energy efficiency.
● PoS has a relatively lower barrier to entry than PoW currencies, especially those whose complexity implies the purchase of ASIC miners worth hundreds or even thousands of dollars.
● In the case of PoW, there is a problem of “wasted” resources — only the node that first found a solution gets rewarded. The rest of the units are operated, and the consumed power is wasted. With a better alternative, the requirements for computing power are much lower, which reduces power consumption and eliminates the need for absurdly powerful “farms”. The problem of wasted resources is also significantly reduced (because fewer resources are needed).
We can safely say that the shift to PoS will positively impact the network, reduce transaction processing time and network power consumption. The latter will have a very positive effect on the ecological state of the planet because natural resources are used for electricity consumption, and in some cases, the Earth’s ecosystem is harmed. What is more, when the long-planned upgrade finally happens, it will support greater network throughput while maintaining a balance of decentralization and security.
With such grand plans, Ethereum has the potential to become:
● A key element in the global financial system
● A platform for new economic systems
● A global collaboration center
Staking
All crypto projects depend on their communities because the users provide support. As a bystander, you can take part in trading, but if you want to give the network a chance to live, it’s high time you invest in it.
The process is all about providing the network with your limited resources: time, money, and processing power. By doing so, you show your loyalty, and the network will allow you to become directly involved in ensuring its survival. In a distributed public blockchain network, this type of investment is called staking. Let’s look at it piece by piece.
Ethereum is going to undergo a lot of changes and with those changes come a lot of opportunities. One of those opportunities is earning passive income rewards by staking your digital coins and running a validator node by participating in the blockchain.
When Eth2 goes live, it won’t have mining anymore. Miners will be replaced by validators. They participate in running the blockchain. The groundbreaking technology represents a peer-to-peer network of nodes that all talk to one another. Every node represents a computer. That’s crucial to understand because if you want to become a validator, you need two different things: to run a node and 32 Ether so you can stake it to the node to run the network. If you lack these things, you can join pools that allow you to participate in so-called group staking.
Participants stake their crypto to assure transactions any time the blockchain is updated. They validate these transactions and risk money in order to do so.
There’s also an economic incentive to act honestly. If you confirm a transaction and it’s valid, then you get a juicy reward. Similarly, if you act dishonestly, you’ll be penalized and lose money. That’s the whole idea behind staking. You take money, assign it to your validator node, and validate new transactions that come into the blockchain. If they are good, you earn money. If they are bad, you lose money. That’s pretty much it.
Forget about expensive equipment for mining and farms. All you need is a computer with a wallet and digital assets in the balance. You do not have to think about where to place the equipment, how to ensure uninterrupted electrical power, or cooling.
Concluding Thoughts
It’s been a long time coming — over two years, in fact. It’s been two years since Ethereum first proposed a solution to the persistent scaling problems that plagued the network. Some have given up hope. Others have resorted to mockery. But many more have been keenly awaiting the release of these much-touted features. Now it seems as if 2020 could indeed be the year we see the first iterations of these changes collectively known as Ethereum 2.0, the most anticipated sequel since Bad Boys II.
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Happy trading!
