Blog > Industry > Articles
Understanding Ethereum 2.0 and why it matters
Table of Contents
Ethereum 2.0 is finally up and running, contributing to one of the hottest news from December 2020.
From an open ledger to facilitate only peer-to-peer transfers of your funds, the technology powers smart contracts and decentralized applications (DApps). At the core of this technology is the Ethereum blockchain.
There are universal concerns about network speed, scalability, and security in general. Guess what? Ethereum 2.0 is all about addressing those pain points!
It is already estimated that approximately $532 million worth of ETH is already locked up in Ethereum 2.0, with another 7,000,000 ETH are already locked in DeFi.
Before we delve right into Ethereum 2.0, let’s start with some basics.
What is Ethereum?
Ethereum is a global and open-source platform that makes decentralized applications possible.
We have a hundred different games, exchanges, and apps running on top of the Ethereum blockchain today. So, we can be confident the future of this groundbreaking blockchain technology and the crypto ecosystem is in safe hands.
The Ethereum blockchain ensures this ecosystem does not end at crypto trading.
Ethereum was proposed in late 2013 by a cryptocurrency researcher and programmer, Vitalik Buterin. However, the system went live somewhere around mid-2015.
Over the past several years, Ethereum has consistently managed to climb to number two of market cap, following Bitcoin.
Ethereum, of course, is not the only smart contract blockchain out there. However, it remains the most popular smart contract blockchain.
With nearly half of the top 100 tokens running on the Ethereum Network, Ethereum 2.0 strives to address some of the significant shortcomings of Ethereum 1.0.
Also Read: Bitcoin vs Ethereum – which is better?
Enter Ethereum 2.0!
Ethereum 2.0 is the most-anticipated upgrade to Ethereum, and it will take the network to a whole new level.
ETH 2.0 will bring significant performance improvements to the way Ethereum works and promises to solve the scalability issue.
The most significant change that Ethereum 2.0 will bring is that it will transition Ethereum from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS).
Proof of Work vs Proof of Stake
In Ethereum 1.0, transaction blocks are validated and added to the Ethereum blockchain network by miners who run expensive mining hardware and consume a lot of energy.
Miners want to be the first to solve a mathematical problem and add a block to the chain. This high cost is necessary to keep the network secure, courtesy of the Proof of Work (PoW) consensus mechanism.
Ethereum 2.0’s Proof of Stake (PoS) mechanism, on the other hand, reduces the energy cost to a significant extent.
Unlike PoW, PoS relies on transaction validators who stake crypto to verify a transaction and earn rewards.
Validators are selected based on how much crypto they hold and how long they have kept it. For each successful block proposition, validators receive a reward. This process is known as “forging” or “minting.”
PoS edges out PoW as far as the energy-efficiency is concerned. In a nutshell, Proof of Stake minimizes the need for energy-intensive hardware resources, unlike the Proof of Work consensus algorithm.
Furthermore, transaction validators provide you with the opportunity to add new transaction blocks to the chain. Therefore, they get rewarded for their efforts in securing the network.
Future-proofing for the best-in-class security is on the cards and a three-phase plan that consists of shredding, which is a cutting-solution that enables the network scalability.
Network scalability and capacity improvements
The other noteworthy upgrade that Ethereum 2.0 brings is the introduction of Shard chains. It promises to improve Ethereum's scalability and capacity.
Shard chains are individual blockchains that run in tandem with the main chain (the Beacon chain).
The purpose is to split the responsibility of validating and adding new blocks to the chain. Beacon chain ensures all Shard chains are up-to-date with the latest data.
This way, the Ethereum network can process an increased number of transactions per second (100,000 transactions per second) instead of 30 transactions per second with Ethereum 1.0.
Nodes in each Shard chain will only process the transaction history of that particular Shard chain instead of the entire network.
These efforts are bound to increase the capacity of Ethereum while aiming to solve the scalability problem.
Three phases of Ethereum 2.0 release
Ethereum 2.0 launches in three phases.
Phase 0 introducing the Beacon chain launched on December 1, 2020. Initially, the Beacon chain will have a relatively limited set of capabilities due to Shard chains’ absence.
Its primary purpose is to register validators and ensure everyone has staked 32 ETH.
Phase 1 is expected to go live next year (2021) in two steps:
The first step will mark the debut of Shard chains, which start to validate transactions. However, they will lack immediate support for accounts and smart contracts. The Ethereum Foundation plans to launch Phase 1 with at least 64 shards.
The second step (namely Phase 1.5) will transform the current Mainnet of the Ethereum blockchain into Shard chains. This step will mark the full transition to Proof of Stake.
Phase 2: The final stage of Ethereum 2.0 rollout plans will include the Shard chains’ full capabilities, where the network will be able to process smart contracts, communicate with each other more freely, and more.
ETH 2.0 will usher in several dramatic changes to Ethereum to simplify the blockchain, improve network performance, increase security, and reduce entry barriers for the greater good.
Ethereum 2.0 and the improvements it brings to the table will not only upgrade the network but also the blockchain infrastructure and development sector as a whole. The Ethereum 2.0 era is expected to give a significant boost to the DeFi sector, the gaming industry adopting blockchain.
There is no doubt that Ethereum 2.0 will revolutionise the entire crypto industry just as smart contracts did a few years ago.
How to buy Ethereum on Liquid
Sign up for an account on the Liquid website or mobile app. You will be able to buy Ethereum online in just a matter of minutes. One of the easiest ways to buy Ethereum is through Liquid’s Quick Exchange feature. Buy with your visa card or swap with any other cryptocurrency listed on Liquid.