ETH 2.0 What You Need to Know

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The year 2022 hasn’t been stellar for cryptocurrency, as most major tokens are down more than 50% off their 2021 highs. Despite the prolonged bear market, interest in crypto investing remains strong and could grow stronger as Ethereum progresses toward its next iteration: ETH 2.0. What is Ethereum 2.0 do? In theory, the switch will provide faster transactions and fewer headaches, but hurdles still remain for implementation.

Ethereum vs. Ethereum 2.0

In order to understand the reasons behind the Ethereum upgrade, it’s important to know the different ways cryptocurrency transactions reach a consensus. One of the puzzles digital currencies solve is how to verify transactions in a trustless system without a third party. When two parties send cash over PayPal or Venmo, banks and centralized processors verify and confirm the transaction. With no centralized authority, cryptocurrencies depend on two main processes: proof-of-work and proof-of-stake.

  • Proof-of-Work - Used in the Bitcoin blockchain, proof-of-work (PoW) is a consensus mechanism that emanates from miners on a particular blockchain. When using a proof of work system, miners compete to solve cryptographic equations in order to earn tokens. Whoever verifies the transaction first gets the token reward, so miners are incentivized to act quickly and fairly. 
  • Proof-of-Stake - Unlike proof-of-work, proof-of-stake (PoS) doesn’t depend on miners using computer power to solve complex cryptographic puzzles. Instead, it gives weight to validators who hold large amounts of the native token on the blockchain - a “stake” in the overall market cap of the digital asset. The more tokens a validator holds, the more chances they have to be chosen to verify the transaction and earn rewards.

Will ETH 2.0 replace ETH? Well, not exactly. Ethereum 2.0 is a new blockchain known as the Beacon Chain, which will eventually merge with the original Ethereum blockchain to create an execution layer (ETH 1.0) and a consensus layer (ETH 2.0).

Will Ethereum 2.0 Reduce Gas Fees?

As cryptocurrency reached its zenith in the second half of 2021, many traders of tokens and NFTs noticed a recurring problem: slowing transaction speeds and sky-high gas fees. One of the downsides of the proof-of-work system is the massive amounts of computing power required to mine and verify transactions. And when too many transactions are being processed on the network, Ethereum gas fees spike, leaving users paying large transaction costs and getting minimal bang for their buck.

Under the PoS system, Ethereum 2.0 is expected to have a much faster processing speed than the original Ethereum blockchain. Under the current PoW system, Ethereum cannot process transactions quickly. Only about 15 transactions can be processed per second, which creates large backlogs and jacks up gas fees. 

ETH 2.0 will utilize a process called ‘sharding’ to relieve network tension by splitting the database into separate entities. The upgrade is currently promising up to 10,000 processed transactions per second, improving scalability and greatly reducing user fees. Not only will the network be faster and cheaper to use, but PoS is expected to beef up the security of the network as well.

Will ETH 2.0 Replace Ethereum?

The plan for Ethereum 2.0 is to increase the network's speed, security, and scalability, but the current Ethereum blockchain won't exactly be going away. Instead, the two chains will merge, and all new transactions will be processed using PoS. There is a scenario in which ETH could hard fork. In that case, ETH 1.0 will continue to exist on its current POW chain as ETH 2.0 moves forward on the new POS chain.

Right now, the Ethereum upgrade is scheduled for the 4Q of 2022, but delays have occurred in the past, so nothing is set in stone. Regardless of timeline, with faster speeds and lower gas fees on the horizon, crypto investors are eagerly anticipating the merge.