Ethereum (ETH), the second most popular cryptocurrency behind Bitcoin (BTC), attempts to improve the Blockchain space in several ways. However, over the years, ETH has been overshadowed by the presence of BTC.
However, the project quickly realized what held it. ETH was partly held back due to Bitcoin’s restrictions, including the former’s reliance on the inefficient Proof of Work (PoW) consensus process and general scalability. Interestingly, this is where the project laid the groundwork for its next-gen upgrade, a renewed consensus mechanism that would operate over the Proos Of Stake (PoS) mechanism.
Being a beginner, it’s evident that you can be confused about ETH 2.0, its concept, and the upgrade in detail. So to educate our readers about the latest update, we’ve come up with the necessary insight into ETH 2.0. Let’s check it out in the following sections of the blog.
Ethereum 2.0: The Concept In Detail
Ethereum 2.0 is a massive upgrade to the network that will take several years to complete. In addition, there are currently centralized worries over Ethereum’s security, which makes scaling a problem. Improvements in scalability, safety, and decentralization were among the goals of Ethereum 2.0.
Besides, now that the ETH 2.0 upgrade has finally concluded, the upgrade has made the following changes to the Ethereum protocol:
- Miners in Ethereum compete to solve a complex mathematical puzzle. The fastest solver can then extend the longest chain by one block. Ethereum mining requires a substantial investment in electricity and specialized technology, making it prohibitively difficult to enter the market.
- It needs to make more financial sense to mine Ethereum on your computer. You can only be sure that the block containing your transactions is part of the canonical chain once more blocks are added (also known as confirmations).
Ethereum Vs. Ethereum 2.0: Differences Explained
Proof-of-stake is substantially more energy-efficient than proof-of-work because it uncouples the consensus mechanism from resource-intensive computer computation, which is the main difference between the two consensus mechanisms used by Ethereum. More CPUs aren’t needed to ensure the safety of the Blockchain, either.
In addition, Ethereum 2.0 is a significant improvement over the first iteration of the platform, which was limited to 15 transactions per second. At this rate, it can process up to 100,000 transactions per second. Following The Merge, ETHPoW, a proof-of-work fork of Ethereum, went live and continues to use the PoW consensus mechanism for validating blocks.
What Makes Ethereum 2.0 Safer?
The next version of Ethereum, 2.0, was developed with safety in mind. The minimal number of validators in most PoS networks increases the likelihood of a compromised network and makes the system less secure. Since Ethereum 2.0 needs a minimum of 16,384 validators, it is significantly more decentralized and, therefore, safe.
Ethereum 2.0 Basics: Rewards, Penalties, & Slashing
Inflationary rewards are distributed to Proof of Stake participants in the form of newly created ETH for their participation in the network by proposing and verifying blocks, much like in Proof of Work. Every epoch, the system calculates the rewards, punishments, and cuts.
A validator can earn staking rewards of between 2% and 22% by submitting attestations promptly and including the attestations of other validators when proposing blocks (also referred to as the staking ratio).
There may be repercussions for failing to submit attestations or submitting inaccurate votes (i.e., being offline). For every epoch a validator is down, they will lose 67K Gwei (equivalent to 0.000067 ETH). The penalty amounts have been deliberately low to ensure that validators who are honest but have poor connectivity can still profit from staking. Another punishment mechanism is the inactivity leak, which kicks in if the entire network cannot reach finality continuously. Since this is likely to happen infrequently.
If a validator does something that poses a severe threat to the network’s security, it may lose its position. For example, if you try to propose two blocks in the same slot or provide attestation votes contradicting each other, you will be severely punished.
Any validator cut will be removed from the active validator set after 8,192 epochs (about 36 days). Until the validator is removed from the active set, their ETH balance will be reduced at the end of each era. Depending on the staking ratio and the number of slashed validators at roughly the same time, the ETH balance of the slashed validator could drop by as much as 10%.
The Merge: An Insight Into ETH’s Latest Switch
When the Ethereum network makes the switch from Proof-of-Work (PoW) to Proof-of-Stake, this is called a “Merge” (PoS).
The name “Merge” comes from the fact that it involves joining two separate Blockchains operating in parallel up to this point. There will soon be a “merger” between the original Ethereum Blockchain and a secondary Blockchain called the “Beacon Chain.” On December 1, 2020, Beacon Chain was released. Creating a Proof-of-Stake Blockchain is the sole goal of the Beacon Chain community.
Beacon Chain does not implement tokens, transactions, or the Defi protocol. This Blockchain was created solely intended to serve as a Proof-of-Stake Blockchain.
Beacon Chain may easily combine with Ethereum by exchanging its Proof-of-Work (PoW) method, as it is an “empty network” that can use Ethereum’s PoW. When these networks are combined, Ethereum’s PoW consensus will be replaced with a PoS consensus system.
What Makes The Merge Important?
Every year, Ethereum is getting extra and higher recognition among users. Therefore, it is essential to satisfy the global need for speed, safety, and environmental friendliness to expand the market’s second-greatest cryptocurrency similarly.
These days, Blockchains are much less likely to undergo such radical overhauls. No other Blockchain, especially one as huge, well-known, and ecosystem-defining as Bitcoin, has undergone such enormous alterations in the history of cryptocurrency. The shift to PoS could have been faster partly because of the significant risks associated with many feasible errors.
The annual supply of ETH will decrease from 4.3% to 0.43% due to the merger. This is because of the efficiency gains made possible by the PoS consensus process. By providing a high level of Blockchain security at a low cost, Proof-of-Stake (PoS) allows you to spend substantially less on community safety. In addition, more than 90% of emissions may be cut by switching to PoS.
Ether’s value perception will shift after Ethereum 2.0 is released. If Ethereum 2.0 is booming, ether may go from being a highly desirable commodity to a vital asset. Ether is used by organizations and individuals worldwide for various purposes, including creating databases and applications. Therefore, a global shift in perspective on Ethereum is priceless.