Insights on Ethereum 2.0

Ethereum is an open-source blockchain platform that allows developers to build and deploy decentralized applications. Ethereum was proposed in 2013 by Vitalik Buterin, a cryptocurrency programmer and researcher. From July to August 2014, Ethereum had its crowdsale and in July 2015 the Ethereum blockchain went live.

As at today ethereum is the most used blockchain in the world. Ether (ETH) is the native cryptocurrency of the Ethereum blockchain and it is also the second largest cryptocurrency based on market capitalization after Bitcoin. Ether on November 24 reached a price of $620 making it one of the best performing assets of 2020. As at January 2020 one Ethereum was priced at around $124.

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Ethereum is proposing a change of consensus mechanism with the upgrade to Ethereum 2.0 and in order for us to have a better understanding lets define what a consensus mechanism is.

What is a consensus mechanism?

In simple terms a consensus mechanism is a protocol used within blockchain networks to reach agreements between participants managing the blockchain through verifying and authenticating transactions.

A blockchain operates in a decentralized peer-to-peer manner with no central authority having total control over transactions and data available. In a centralized system like a database holding students’ data in a university, an administrator holds the authority to maintain and update the database from time to time. So we can say the administrator is in charge of the consensus mechanism of the database. This means the administrator who is a central authority is in charge of maintaining genuine records of the university students.

Public blockchains are decentralized and operate in a global scale with no central authority. Thousands of participants are involved in the process of reaching a consensus by maintaining the blockchain through verifying and authenticating transactions. The process of reaching a consensus within the public blockchain network is referred to as a consensus mechanism.

There are different kinds of consensus mechanisms based on different principles but the two most widely used consensus mechanisms are Proof-Of-Work (PoW) and Proof-Of-Stake (POS). Bitcoin and Ethereum both use the Proof-Of-Work (PoW) consensus mechanism.

Why Ethereum 2.0?

Ethereum 2.0 or Eth2, also known as Serenity is a planned upgrade to the Ethereum blockchain. This upgrade will involve a change in the consensus mechanism of Ethereum moving from Proof-Of-Work (PoW) to Proof-Of-Stake (PoS).

The Proof-Of-Work (PoW) consensus mechanism involves miners using specialized computer hardware to solve complex mathematical equations and in the process verify transactions happening within the blockchain. As a reward miners are given new cryptocoins. This is how new Ether (ETH) are gotten and the ethereum blockchain is maintained based on the Proof-Of-Work consensus mechanism. However, this process is energy consuming and involves plenty of computing time.

Proof-Of-Stake consensus mechanism on the other hand involves validators staking their crypto in order to be able to verify transactions and secure the blockchain. In return these validators are rewarded with new cryptocoins. One major advantage of PoS is that it is far more energy efficient compared to PoW, as it doesn’t involve energy consuming computer hardware solving mathematical puzzles. This is a major reason for the upgrade to Ethereum 2.0.

Apparently, another reason for Ethereum 2.0 is improved scalability. Ethereum presently supports around 30 transactions per second, which results in delays and congestion of the Ethereum blockchain. Through the implementation of shard chains Ethereum 2.0 promises to deliver about 100,000 transactions per second. This will also result in cheaper transaction fees.

What are the expectations of Ethereum 2.0?

  1. Change of consensus mechanism from Proof-Of-Work (PoW) to Proof-Of-Stake (PoS).
  2. Improved scalability with up to 100,000 transactions per second.
  3. Low energy consumption.
  4. Improved security.
  5. Low transaction fees.

When will Ethereum 2.0 go live?

Ethereum 2.0 will go live on December 1, 2020. Cointelegraph reports that the criteria to go live was met earlier today November 24. A total of 16,384 validators each staked the required 32 ETH for a total of 524,288 ETH to meet the thresh hold for Ethereum 2.0 to go live. But then Ethereum 2.0 will be executed in three phases. Let’s take a look at the three phases.

Phase 0

The Beacon Chain will be implemented, which marks launch of the Proof-of-Stake (PoS) consensus mechanism for Ethereum 2.0.

Phase 1

This phase will be due to go live in 2021, will see the creation of shard chains which will be directly linked to the Beacon Chain. The Ethereum mainnet will become a shard and be transitioned to Proof-of-Stake, although there won’t support accounts and smart contracts at launch.

Phase 2

The final phase is expected to go live around 2021/22. The shard chains will be fully-functional and compatible with smart contracts.

Conclusion

Vitalik Buterin, Ethereum co-founder has made it known that Ethereum 2.0 is all about scalability. With the transition to PoS consensus mechanism and implementation of shard chains, Eth2 is expected to handle 100,000 transactions per second. This will mean a total smooth experience for those using the ethereum blockchain which would directly ease congestion and may correlate with a decrease in gas fees.

Ethereum 2.0 has had a bullish effect on Ether (ETH) price as expected despite the short-term price volatility. Ether reached its highest price of $620 since 2018. My expectations on Ethereum 2.0 borders around improved scalability and a significant decrease in gas fees. I would love people to have a smooth experience transacting on the Ethereum blockchain and pay low gas fees.

On a personal note I think Ethereum 2.0 is a much needed upgrade for the Ethereum blockchain with big corporations moving to green energy and seamless ways of transacting. The switch to PoS consensus mechanism will most importantly signify a shift to an energy efficient solution, and the implementation of shard chains will greatly improve the user experience of those building decentralized applications (DApps) and transacting within the Ethereum blockchain bearing in mind this is the most widely used blockchain.