What Is Ethereum 2.0? Major Changes to Expect

One of the world’s biggest blockchains is currently undergoing a significant upgrade – and it’s set to have huge ramifications.

Ethereum uses a Proof-of-Work consensus mechanism right now, just like Bitcoin. This means miners are responsible for verifying transactions – and they receive new coins as a reward.

Here’s the problem: PoW is incredibly energy-intensive. Miners need to use vast amounts of computing power to complete the mathematical problems that give them the right to add the next block to the blockchain. The amount of electricity this gobbles up, and the carbon footprint it generates, is comparable to some countries.

Ethereum 2.0 is designed to change all of this, and address some of the other pain points that have emerged as the network’s popularity has grown – with decentralized finance protocols and non-fungible tokens pushing existing infrastructure to its limits, and ETH’s price witnessing triple-digit gains in 2021.

What Is Ethereum 2.0?

ETH 2.0 has been years in the making. As well as making miners obsolete, it’s hoped the upgrade will make the blockchain far more scalable – meaning more transactions can be processed every second.

Ether 2 heralds the arrival of validators. Now, anyone with 32 ETH can establish their own node and help to keep the Ethereum network secure. Validating transactions and adding blocks to the blockchain means they’ll be rewarded with shiny new ETH. However, if they act against the network’s best interests, their financial stake can end up being deducted.

As of October 2021, about 8 million ETH has been staked. Given how 32 ETH is worth about $110,000 at the time of writing, this is a lot of crypto for an individual to contribute on their own. Because of this, a number of pools have emerged that allow smaller investors to get involved – all without having the responsibility of managing their own node.

How does Ethereum 2.0 Differ?

We’re yet to see the full impact of Ethereum 2.0, and that’s because the project is gradually being released in phases. The slow, cautious approach is understandable. This blockchain processes transactions worth trillions of dollars every year, and this upgrade is comparable to radically renovating a house while still living in it.

Ethereum 1.0 can currently handle about 30 transactions per second. But because demand is much higher than this, transaction fees end up going through the roof. Critics say this has priced consumers out of using this technology because DeFi transactions are prohibitively expensive and NFT minting costs are astronomical. Layer-two solutions, which sit on top of the Ethereum blockchain, are designed to serve as a sticking plaster for these scalability woes.

Another big change with the Ethereum 2.0 release concerns how a sizeable chunk of the ETH in circulation is now going to be locked up indefinitely, reducing liquid supply. We’ll explain the impact that this could have on Ethereum price below.

Ethereum 2.0 Major Changes

When the upgrade is fully complete, a sharding mechanism will ensure that Ethereum 2.0 can handle far more transactions per second than at present. In simple terms, this involves splitting the blockchain into dozens of tiny pieces that can operate simultaneously. This reduces the amount of data that a validator node is responsible for. Because this actively increases the amount of decentralization in the network, the Ethereum Foundation believes this will ramp up security because it will make it much harder to attack the entire blockchain.

Enthusiasts hope that the upgrade will help to futureproof Ethereum 2.0 for years to come – and that transaction fees will fall substantially, helping with the development of new use cases for the blockchain. The network will initially have 64 shards, but this could be increased to keep up with demand.

When Is Ethereum 2.0 Released?

The Ethereum 2.0 release date has been subject to multiple delays as developers work to put finishing touches to its code.

Phase one involved the Beacon Chain going live, a milestone that was achieved back in December 2020. This paved the way for staking functionality. At present, estimates suggest that the new Proof-of-Stake blockchain will merge with the existing Ethereum mainnet at some point in 2022, officially eliminating mining. The next phase will involve rolling out shard chains.

High levels of demand on Ethereum 1.0 means that this upgrade is being pursued with urgency, especially as a number of so-called “Ethereum killers” – Cardano, Polkadot and Solana among them – try to offer a compelling alternative.

How Ethereum 2.0 Can Affect ETH Prices in 2022

It’s important to know that the shift to PoS won’t result in a new cryptocurrency, so there’s little point in searching for information on Ethereum 2.0 prices.

Nonetheless, Ethereum 2.0 still has the potential to have an impact on ETH’s value.

Over the summer of 2021, Ethereum Improvement Proposal 1559 meant a chunk of the fees paid to process a transaction ended up being burned. As of November 2021, more than 700,000 ETH has been taken out of circulation forever – and over time, this change has the potential to make the world’s No. 2 cryptocurrency deflationary. This, when coupled with the millions of ETH that’s locked up for staking, could help diminish the supply that’s available to buy when demand levels are high.

A high-Stakes Upgrade

Overall, the Ethereum Foundation has a lot riding on this upgrade going smoothly. Smart contracts were once native to this blockchain, but now, a plethora of rivals offer similar functionality. A successful transition would make Ethereum the largest Proof-of-Stake blockchain in existence, making it an eco-friendly alternative to Bitcoin. Failure could mean that developers – and investors – move their business elsewhere.

Work It