What Is “Ethereum 2.0” And Does It Solve Crypto’s Problems?

An illustration of an Ethereum coin on a blue backgroundWindAwake/Shutterstock.com

The next major overhaul of the Ethereum crypto network, often referred to as “ETH 2.0”, promises to address some of the biggest criticisms, from high GPU prices to environmental pollution. Let’s take a look at the proposed changes and what they could mean for the future of crypto.

What is Ethereum 2.0 and when is it coming?

Ethereum 2.0 is a commonly used term that usually represents Ethereum’s long-awaited switch from proof-of-work to proof-of-stake, which promises to do away with Ethereum mining. As of January 24, 2022, the Ethereum Foundation will no longer refer to this upgrade as “Eth2” or “Ethereum 2.0”. Instead, the foundation calls it “the merging” and “the linking.”

As we’ll explain below, the Ethereum network’s reliance on computing power to provide consensus (“proof of work”) has led to high GPU prices and criticism from environmentalists. These issues have recently taken on a new urgency with the mainstream adoption of NFTs, many of which use Ethereum smart contracts to validate tokens linking to works of art. The move to proof-of-stake, which no longer requires GPU mining, is expected to resolve some of these issues.

The transition to Ethereum 2.0 has been promised for years and the foundation now claims that it will finally happen in the second quarter of 2022.

A quick refresher on Ethereum 1.0

If you’re not that familiar with Ethereum, imagine it by imagining a giant distributed virtual computer running on the Internet. If you’ve ever used an emulator to run old MS-DOS games or use virtualization to run Windows on a Mac, you’ve come across a similar principle. In both cases, a programmable virtual computer ran as software (rather than hardware) on top of another platform.

Unlike a virtual machine that runs on a single PC, Ethereum is a distributed virtual machine made up of thousands of computers (called nodes) connected together by a blockchain. These nodes can run “smart contracts”, which are programs that run on the Ethereum virtual machine. And since Ethereum is dynamic and distributed, the size of the virtual machine can shrink or grow at any time as nodes enter or exit the network.

Payment in Ether (a cryptocurrency that runs as one of the applications on the Ethereum network) gives people the incentive to use these nodes and provides the computing power (known as “mining”) to execute the smart contracts and the chronological order of transactions on the Ethereum blockchain. That verification process is called ‘consensus’.

Problems with Ethereum today

To understand the necessity of Ethereum’s upgrade, you need to understand the current drawbacks of Ethereum. Ethereum architects and experts alike have pointed to a handful of key issues with how Ethereum works, and they generally view these issues as hindering wider growth of Ethereum applications. Here are a few key issues:

High gas costs: “Gas” is what makes the Ethereum network work. It is a fee paid to miners who provide the computing power to run the network. The gas price is a variable market price based on the demand for resources on the Ethereum network. The higher the demand, the higher the gas tariffs. The more gas someone is willing to pay, the faster the transaction is executed. That means as Ethereum applications rise in popularity, the gas price can become prohibitive, sometimes costing more to execute a trade than the value of the token being traded. For example, at certain times it may cost you more in gas costs to buy a cheap NFT than the price of the NFT itself. Power Consumption: Currently, reaching consensus on the Ethereum blockchain is based on cryptographic puzzles to be solved by nodes on the Ethereum network, which is referred to as “proof of work.” The more popular Ethereum becomes, the more computational work it takes to verify the blockchain, causing nodes on the network to consume more electricity. That, in turn, has led to frequent criticism that running the Ethereum network creates pollution that harms our natural environment. Disk Space Usage: As the size of the Ethereum network grows, running a node becomes more difficult as the history of the Ethereum blockchain takes up more disk space. This limits who can run an entire node (by increasing the price of a node), which in turn limits the number of nodes on the network. Network congestion: In times of high computing demand, inefficiencies in the way Ethereum works lead to network congestion in communications between nodes, slowing down smart contract execution. This congestion limits the complexity of the applications that can reasonably run on the Ethereum network. GPU Pricing: Ethereum’s consensus algorithm (called “Ethash”) is specifically designed to be profitable for mining consumer graphics cards. The higher the demand for computations on the Ethereum network, the more miners can be paid (in gas costs), making them want to buy more GPUs to make more money. This, in turn, can cause GPU shortages that drive the price of graphics cards up. High GPU prices have a dramatic impact on other uses of GPUs, such as gaming and neural networks.

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The proposed solutions

Ethereum "join together" artworkethereum.org

The Ethereum Foundation and Ethereum creator Vitalik Buterin have been aware of some of the drawbacks mentioned above since Ethereum’s founding in 2013 (and launch in 2015.) However, as the network grew in popularity, it has been difficult to implement upgrades and improvements. to feed. Changes to the network require at least 51% of Ethereum nodes to agree (if all nodes disagree, the network splits or splits into multiple networks). Here’s a look at what “the merge” and other upgrades will change to fix some of them.

Switch to Proof-of-Stake

After “the merger”, Ethereum will no longer create consensus through proof-of-work, which required computing power and electricity from miners. Instead, it will use a proof-of-stake algorithm that requires validator nodes to risk (or “bet”) a certain amount of Ether cryptocurrency to validate blocks on the Ethereum blockchain.

Validators are chosen at random to create new blocks in the chain (verifying transactions and running smart contracts.) If they disconnect halfway through the process or provide incorrect values, they can lose some or all of their Ether staked, which is where it comes in. risk comes. in. The risk gives the incentive to do the right thing, and validators will still be paid for their work in Ether.

With proof of stake, validators will still have to do some calculations to create blocks in the Ethereum blockchain, but not nearly as much as when forced to solve cryptographic puzzles. Therefore, proof-of-stake is expected to drastically reduce the power consumption of the Ethereum network and lower barriers to entry (you don’t need an expensive, beefy GPU to earn crypto as a validator.) It may also lead to more nodes on the network, as it will be easier to be part of a node pool. More nodes means more computing power and less centralization, which increases the security of the network.

Switching from Ethereum to proof-of-stake is expected to reduce demand for GPUs, although they can still be used to mine crypto as miners who previously mined Ether adapt their existing mining hardware and methods to other cryptocurrencies. If demand for GPUs falls, graphics card prices may drop slightly, but there are other factors at play in the current graphics card shortage.

Switching from Ethereum to proof-of-stake is a multi-stage process that has already started with setting up the Beacon Chain – a sort of parallel consensus layer based on staking Ether – that will eventually merge with the main Ethereum network. . Hence the name ‘the merger’.

Sharding’s approval

After “the merger”, the developers of Ethereum are planning to introduce another major upgrade called “Sharding”, which breaks down the main Ethereum blockchain into smaller chains called “shards”.

Currently, the entire history of the Ethereum blockchain takes up 4 terabytes of space. Full nodes don’t have to host this full amount, but under the new plan, the active chain will be split into 64 pieces so that each node only needs to host 1/64th the conventional size of the Ethereum blockchain.

Sharding is expected to lower the barriers to entry to running a node by lowering the hardware requirements. That in turn can lead to more nodes, allowing the network to grow in capacity. Sharding will also increase the number of transactions the Ethereum network can process by spreading the load across more nodes, which could help drive down gas prices.

Sharding is expected to come to the Ethereum network sometime in 2023, and no firm date has been set yet.

Will Ethereum 2.0 Lower Gas Costs?

An Ethereum coin.AlekseyIvanov/Shutterstock.com

Since “Ethereum 2.0” now means different things and is broken down into different targets that will be rolled out over time, it is a difficult question to answer with confidence whether it will lower gas prices.

There is a lot of skepticism in the Ethereum community that the move to proof-of-stake (“the merger”) will drive down gas prices, and the Ethereum foundation does not promise it will. Gas prices are based on demand and there is a finite amount of space in any Ethereum block for calculations. Instead, sharding could cut costs by increasing the computing power of the Ethereum network, but that isn’t expected to come to the main Ethereum chain until 2023.

Instead, some experts expect that a cut in gas costs for Ethereum may come down to so-called “Layer 2” applications built on top of the Ethereum network, which will do some of their own independent math, but rely on Ethereum for a fundamental level of consensus and verification.

Suffice it to say that the whole issue of Ethereum’s upgrades and their effects is complex, based on a range of dynamic conditions, including the size of the network, the value of Ether, the demand for NFTs, and the mood of the node operators. – that can change a lot from day to day. Only time will tell how it all plays out and what effects Ethereum’s changes will have on the wider world of crypto.

But if we had to guess, switching from Ethereum to proof of stake is widely expected to be a groundbreaking move. If imitated by future cryptocurrencies, the move could even remove barriers that prevent some organizations or governments from fully embracing cryptocurrencies. That, in turn, could dramatically increase their adoption and make the future a very crypto-friendly place.

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