Ethereum 2.0: What it is and why it matters
Ethereum launched in 2015 and since then, it has gone on to become the second-largest cryptocurrency project after Bitcoin. The king of altcoins has shot up over the years to set a new all-time high at $2,000, with its market capitalization topping $200 billion.
However, unlike Bitcoin, Ethereum’s utility extends beyond being an asset and a store of value. It’s the bedrock of the crypto industry, allowing hundreds of other projects to exist today. Many of today’s multi-billion dollar crypto projects are built on Ethereum. Even those that aren’t such as Polkadot have emulated Ethereum in one way or another.
Despite its many use cases and a huge community of users, Ethereum suffers from many challenges. None of these challenges have plagued Ethereum more than its inability to scale. It currently processes 15 transactions per second on average as per Blockchain data.
In comes Ethereum 2.0
Scalability is one of the challenges that Ethereum 2.0 will be solving. Popularly known as ETH2, the upgrade could launch this year, making fundamental changes to the network and possibly changing the future of the blockchain industry.
Vitalik Buterin and other Ethereum developers have been working on the upgrade for years. However, the countdown began on November 4, 2020 when the Ethereum Foundation announced that the ETH2 deposit contract had gone live. It quickly racked up 524,288 ETH, which was the required minimum deposit and set in motion the journey towards Ethereum 2.0.
The most fundamental difference with ETH2 is that it migrates Ethereum from the proof-of-work (PoW) consensus mechanism it currently uses to proof-of-stake (PoS). PoW relies on miners for transaction validation and block generation. The miners get to benefit by collecting the block reward and the transaction fees, which for Ethereum have been quite high in the past year.
ETH2 will be a proof-of-stake network, devoid of miners. It will all start in July, 2021 with the London hard fork. This will introduce EIP-1559, an Ethereum Improvement Proposal that will see Ethereum users stop paying transaction fees to miners. Rather, about half the fee will go to the Ethereum stakers, better known as validators, and the other half will be burned.
To be a validator on ETH2, one has to stake at least 32 ETH, depositing it into the official deposit contract that went live in November 2020. The validator would then have to download and run Ethereum 2.0 client software. The reward a validator receives is directly proportional to the uptime on their software.
If a validator attempts to compromise the network, such as through the validation of incorrect data history, all or some of the 32 ETH he has staked will be taken.
As Vitalik, the man who wrote the Ethereum whitepaper, revealed in an interview, ETH2 is already up and running. Once the network is ready to migrate to proof-of-stake, the Ethereum developers will just merge the ETH1 and ETH2 chains.
Miners, developers and users: Who gains and who loses out?
For years now, Ethereum developers and miners have been at war. These differences became more amplified as the journey towards ETH2 kicked off in late 2020. Months later, Ethereum developers, led by Vitalik, proposed the EIP-1559, the straw that broke the camel’s back.
EIP-1559 would essentially eliminate miners. In protest, miners staged a revolt against the EIP. It all started with an online campaign by leading miners, urging the community to direct its hash power to Ethermine, a mining pool that was opposed to the upgrade. This rallying call got the support of the two largest mining pools, Ethermine and Spark Pool and within days, over 70% of the miners pledged to defy Vitalik and his EIP-1559 upgrade.
The stance softened after a few weeks of tension, with a new proposal, EIP-3368, finding a middle ground in which both parties get their way in the long term.
For the users, ETH2 is a godsent. Its biggest impact is the fee structure. Ethereum has become ‘virtually unusable’ for small transactions due to the ever-rising transaction fees. It started with Crypto Kitties, a decentralized game that shot into the limelight in 2017. It led to heightened activity on the Ethereum blockchain which eventually led to clogging and delayed transactions. Miners made a killing as transaction fees skyrocketed.
CryptoKitties died out but in 2020, a new wave took over: decentralized finance (DeFi). This led to even higher transaction fees, with some DeFi platforms such as Uniswap seeing $60-$100 fees for a single transaction.
This will be one of the major changes ETH2 and the preceding EIP-1559 will bring. The fees will now be predictable and won’t shoot up on demand. This could make Ethereum attractive as a medium of exchange, allowing more people to send value over the Internet, just as Satoshi envisioned.
ETH2 will also burn part of the transaction fees. This will make Ethereum a deflationary currency in that its supply will go down with every transaction. The effect will be a lower supply and consequently, higher demand and a price surge. According to some analysts, Ethereum’s value once ETH2 launches will double.
Obstacles abound, none greater than the developers vs. the miners’ war. However, Ethereum 2.0 looks set to launch by 2022. Once it does, Ethereum will break the shackles that have bound it for the past six years and allow it to become the enterprise blockchain Vitalik set out to build in 2015.