Ethereum has been one of the fastest-growing cryptocurrencies. Its value has increased nearly 4x from the beginning of 2021 and continues to make new highs every day. A crucial reason for this is the new features and upgrades announced to the crypto network. After the release of these features and upgrades, the network of Ethereum will be upgraded to Ethereum 2.0. But what is it? What are the new upgrades and features added to the same? And why is it important? Before diving into that topic, let’s take a look at the working of ETH. And the problems that developers wanted to solve with this new version.
What are the problems with Ethereum 1.0?
One of the major problems with cryptocurrency is scalability. At present, their network is capable of processing only 5 transactions per second which is very slow. Suppose you consider a huge network of people using the network, then it could take a lot of time for their payments to get processed, which makes it impractical. They also have trust issues with entities offering full node usages as users won’t be able to see that. And this is one of the major problems that the developers have tried to address in the new version.
Ethereum also faces inflation problems, though not very severe, it does. Since there is no fixed supply of the coins in the market, the prices will drop for every new coin released in the market. Raising funds and then liquidating them will also push new coins in the market, and there will be a further drop in the price. Also, you should know that one cannot use the Ethereum network offline, and also it is expensive to store the same.
What is Ethereum 2.0?
Now that you know the problems with Ethereum, you should also know about the upgrades the new version will have. The biggest changes in this upgrade is the “proof of stake system” and “sharding.” It will increase the speed and efficiency of the system. At the same time, the version will also address the scalability problems of Ethereum. There are a lot of bottlenecks that have been fixed in this new version.
The proof of stake system used in the new version of Ethereum makes it a much efficient choice. In the same, there are validators present instead of miners. And their work is to make new blocks and provide the computing power to validate transactions. They also receive rewards like miners in the respective cryptocurrency, which is Eth here. And for anyone wanting to get into the game, a 32 ETH deposit has to be made. In case of any kind of wrongdoing, this deposit will be slashed.
Then we have sharding, which technically means breaking up something into smaller parts. And in the case of Ethereum, it will mean breaking up one blockchain into smaller parts called shards. This will mean that multiple validators can work on a single transaction at the same time. And each one of them will store the information of their respective part or shard. There is also shuffling going on between these shards to prevent any form of malpractice.
How does all this work together in Ethereum 2.0?
For any network of a payment system, the most important thing is that it should be able to process transactions fast and efficiently. So, in the case of Ethereum, the most important part of their network is the validator. Their work is to process transactions and get rewarded for the same in terms of Ethereum. Every validator gets a signing and a withdrawal key. In order to start validating blocks they need to sign in with the signing key and come online. They have three tasks to do:
- Validate and add blocks
- Report malicious behavior of other validators
- To check the shard chain and beacon for authenticity
And as you might have guessed, the work of the withdrawal key is to withdraw the funds from one’s account. Do note that the validators work in groups with a minimum of 128 of them. At the same time, there are Epochs where validators confirm particular blocks and then finalize them.
Benefits and Security of Ethereum 2.0
In the latest version of Ethereum 2.o, the most important thing is scalability. The shards of the blockchain will be able to process 10,000 transactions per second, up from a mere 5. This will reduce delays, congestion and make the network more usable. Shards allow for parallel processing and hence speed up everything entirely by a huge margin. All this combined will make the entire network a lot more practical and will boost the usage of the currency.
At the same time, there are a lot of validators in Ethereum 2.0 which will make the entire network a lot more secure then other currencies. These validators will do cross verification and make sure there are is no manipulation going on in the blockchain. According to their release there will more than 16000 validators on the blockchain.
How will things shift to the new version?
The upgrade of Ethereum to the 2.0 version is one of the biggest in any crypto ever. And the shift will happen in three primary phases. These are phase 0, 1 and 2. In phase 0, the beacon chain will be implemented, whose work will be to store all the information regarding the validators on the blockchain. At present, Ether is based on proof of work system but with the new upgrade it will move to the proof of stake system. With the implementation of this new chain, the old will continue to run in order to prevent any data loss or data continuity issue.
The next phase (phase 1) will implement a shard chain whose primary task will be to improve the scalability of the system. This will allow one chain to split into 64 different ones and allow for the parallel procession of transactions. This will allow for a system that will be much faster than the old Ether network and will increase the throughput of transactions by a huge margin.
And finally, we have phase 2, which is still not very clearly stated by the developers. But it will also have a lot of features that enhance the entire blockchain. Reports say it could enable transfers, withdrawals, cross-shard transfer, and more. And after all, things are implemented and settled, the proof of work mechanism of the 1.0 chain would be turned off.
How can you take advantage of the new upgrade?
Well, for now, as a normal user, there is nothing much to do about the same. But yes, if you plan to earn from this new blockchain upgrade, there are two things you could do. First, you could become a validator, but for that, a deposit of 32 ETH is necessary, and also you do need some expertise to handle things. This is not for everyone and is a difficult job.
So for those who are not so tech-savvy can take advantage of the new chain by staking. You don’t even need a huge stash as staking happens with a group of people depositing their holdings at a place with some sort of minimum deposit which is highly attainable. After you stake your Ethereum on the 2.0 version, you will receive rewards based on the stake you made.
Do you need to worry about your holdings on exchanges?
No! you don’t, as the holdings, you have on exchanges are completely safe. They will continue to remain fully usable on the older blockchain, and after the transition is complete, they will automatically become a part of the new chain. There is nothing that you need to do from your end to make this happen. Only if someone is interested in staking they need to do their work to transfer funds at the right place. Else sit tight and enjoy the gains.
Is becoming a validator on ETH blockchain worth it?
The pace with which the value of Ethereum is increasing makes me wonder why this question is even required. But yes, there are some things that one needs to keep in mind before taking up the job of a validator on ETH. Since you need to make a deposit of 32 ETH, you could lose it all if you don’t follow protocols. The most important one among them is the requirement of staying online more than 50% time and validate blocks. If someone fails to do that, they might lose any amount of fund.
Secondly, being a validator on the blockchain, one is not allowed to publish information about the blockchain that is not right. In that case, one could lose between 1 ETH to the entire funds depending on what they wrote and other factors. But these two things are very intentional and can be easily avoided. And that makes the work of a validator on ETH really safe. So, I do think it is worth it.
Will this new blockchain upgrade be the future of crypto?
There are a lot of cryptocurrencies that have strong technological backing and have a huge potential for growth. But none of them are as popular as Ethereum. Even though ETH is technically an alt, it stands there with Bitcoin. And as the new updates roll out, it could have a strong growth rate and surpass the market cap of Bitcoin. It has already reached 1/3rd of the market cap, and the rest doesn’t seem very far away.
At the same time, the usage of ETH is already rising due to the increased popularity of DeFi, NFTs, and other apps that use its blockchain technology. There is over $60 billion locked in its network of apps, and this is just expected to increase from here on. Another important thing that the new implementation will bring is reduced and even negative inflation. Developers of the token said they are going to burn a lot of tokens which means the price of existing Eth will increase.
They are also going to address the gas fee issue that makes the ETH network very expensive to use. Till now, one could bid gas fees manually, and for this reason, the prices used to rocket due to many wealthy users. But with the new version of ETH, it will be decided by the network itself and will have a fixed rate or all. It will incentive the use of the network and also reduce network congestion. At the same time, for every GAS spent or transaction happening, tokens will be burned.
What makes ETH a good investment?
Ethereum is a good investment because of the scarcity of tokens that could follow in the future. Report suggests that the number of tokens produced daily will be even less than BTC by the end of 2021. And negative inflation, decreasing supply, and increasing demand would mean sky-high prices. This makes it a really interesting investment choice for crypto enthusiasts. The price of Eth has already increased to $2950 in a week after the dip, and it is expected to rise beyond $10k by the end of the year.
In fact, if we consider a future where crypto is more valuable than fiat, then Ethereum will have a lot of practical uses than Bitcoin. Here is a roadmap that the co-founder of Ethereum Vitalik Buterin shared on Twitter a year back. Yes, there is a lot of skepticism and criticism regarding the upgrades. But we have to wait and see how it ultimately turns out to be.
This is my approximate view of what the next ~5-10 years of eth2 and beyond might look like.
Roadmap below reflects my own views, others (including future versions of me) may have different perspectives! Details may of course change as we discover new info or new tech. pic.twitter.com/wynMVC04Ag
— vitalik.eth (@VitalikButerin) March 18, 2020
I think that Ethereum 2.0 will have a really bright future ahead. And it could take the price of the currency to the next level. What do you think about the same? And do the upgrades seem good to you? Let us know in the comments below. Also, if you found our content informative, do like it and share it with your friends.