What is “Ethereum 2.0” and will it solve Crypto problems?

What is “Ethereum 2.0” and will it solve Crypto problems?


The next major overhaul of the Ethereum cryptonet, often referred to as “ETH 2.0,” promises to address some of its 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 will it arrive?

Ethereum 2.0 is a commonly used term that generally represents Ethereum’s long-awaited move from proof-of-work to proof-of-stake, which promises to wipe out Ethereum mining. Since January 24, 2022, the Ethereum Foundation no longer refers to this upgrade as “Eth2” or “Ethereum 2.0”. Instead, the foundation calls it “the fusion” and “the docking.”

As we will 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 taken on new urgency recently with the widespread adoption of NFTs, many of which use Ethereum smart contracts to validate tokens tied to artwork. The transition to proof-of-stake, which will no longer require GPU mining, should resolve some of these issues.

The transition to Ethereum 2.0 has been promised for years, and the foundation pretend now this will finally happen in the second quarter of 2022.

A brief refresher on Ethereum 1.0

If you’re not too familiar with Ethereum, you can conceptualize 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 virtualization to run Windows on a Mac, you’ve encountered a similar principle. In both cases, a programmable virtual machine ran as software (instead of hardware) on another platform.

Unlike a virtual machine running on a single PC, Ethereum is a distributed virtual machine consisting of thousands of computers (called nodes) linked 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 decrease or increase at any time as nodes join or leave the network.

Payment in Ether (a cryptocurrency that functions as one of the applications of the Ethereum network) incentivizes users to run these nodes and provide the computing power (known as “mining”) to run smart contracts and verify the chronological order of transactions. on the Ethereum blockchain. This verification process is called “consensus.”

Problems with Ethereum today

To understand the need for the Ethereum upgrade, you need to understand the current drawbacks of Ethereum. Ethereum architects and experts have highlighted a handful of key issues with how Ethereum works, and they generally view these issues as impeding the broader growth of Ethereum applications. Here are some key issues:

  • High gas costs: “Gas” is what makes the Ethereum network work. This is a fee paid to miners who provide the computing power needed to run the network. The gas price is a variable market price based on demand for resources on the Ethereum network. The higher the demand, the higher the gas charges. The more gasoline someone is willing to pay, the faster the transaction will be executed. This means that as Ethereum applications gain popularity, the price of gas can become prohibitive, sometimes costing more to execute a transaction than the value of the token being transacted. For example, at times, buying a low-cost NFT can cost you more in gas costs than the price of the NFT itself.
  • Energy consumption : Currently, consensus building on the Ethereum blockchain relies on cryptographic puzzles that must be solved by nodes on the Ethereum network, known as “proof of work.” The more popular Ethereum becomes, the more computational work is required to verify its blockchain, causing network nodes to use more electricity. This, in turn, inspired frequent reviews that the operation of the Ethereum network generates pollution that damages our natural environment.
  • Disk space usage: As the size of the Ethereum network increases, running a node becomes more difficult as the history of the Ethereum blockchain takes up more disk space. This limits who can run a full node (by increasing the run price), which then limits the number of nodes on the network.
  • Network congestion: In times of high compute demand, inefficiencies in the operation of Ethereum lead to network congestion in communication between nodes, slowing the execution of smart contracts. This footprint limits the complexity of applications that can reasonably run on the Ethereum network.
  • GPU Price: Ethereum’s consensus algorithm (called “Ethash“) has been specially designed be cost effective to run on consumer graphics cards. The higher the compute demand on the Ethereum network, the more miners can get paid (in gas fees), which makes them want to buy more GPUs to make more money. This, in turn, can lead to GPU shortages that cause the price of graphics cards to skyrocket. High GPU prices have a huge impact on other GPU applications, such as gaming and neural networks.

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The proposed solutions

Ethereum "merge" artwork

The Ethereum Foundation and the creator of Ethereum, Vitalik Buterin, have known about some of the disadvantages listed above since the inception of Ethereum. creation in 2013 (and launched in 2015.) However, as the network grew in popularity, it was difficult to implement upgrades and improvements. Network changes require at least 51% of Ethereum nodes to agree to them (if all nodes do not agree, the network forks, or splits into several networks). Here’s a look at what “fusion” and other upgrades will change to fix some of them.

Skip to Proof of Stake

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

Validators will be randomly chosen to create new blocks on the chain (verification of transactions and execution of smart contracts). If they disconnect mid-process or provide incorrect values, they may lose some or all of their staked Ether, hence the risk. Risk incentivizes doing the right thing, and validators will always get paid for their work in Ether.

Under proof of stake, validators will still need to perform calculations to create blocks in the Ethereum blockchain, but not as much as when forced to solve cryptographic puzzles. This is why Proof of Stake is expected to drastically reduce the power consumption of the Ethereum network and lower the barriers to entry (you won’t need an expensive and beefy GPU to win crypto as a validator.) This will also eventually lead to more nodes on the network as it will be easier to become part of a node pool. More nodes means more computing power and less centralizationwhich increases network security.

Ethereum’s move to proof-of-stake is expected to ease the demand on GPUs, although they can still be used to mine crypto, as miners who previously mined Ether adapt their existing hardware and mining methods to new ones. other cryptocurrencies. If demand for GPUs declines, graphics card prices could drop somewhat, but there are other factors at play in the current graphics card shortage.

Ethereum’s move to proof-of-stake has been a multi-phase process that has already begun by instituting the Beacon string– a sort of parallel consensus layer based on Ether staking – which will eventually merge with the Ethereum mainnet. Hence the name “fusion”.

Embracing Sharing

After “the merger”, Ethereum developers plan to introduce another major update called “Sharding”, which splits the main Ethereum blockchain into smaller chains called “shards”.

Currently, the entire history of the Ethereum blockchain occupies 4 terabytes of space. Full nodes don’t have to host all of that amount, but under the new plan, the active channel will be broken into 64 pieceseach node will therefore only have to host 1/64th of the conventional size of the Ethereum blockchain.

Sharing should lower the barriers to entry for running a node by reducing hardware requirements. This, in turn, could lead to more nodes, allowing the network to increase in capacity. Sharing will also be increase the number of transactions the Ethereum network can process by distributing the load across multiple nodes, which could help reduce gas prices.

Sharding should come to the Ethereum network sometime in 2023no specific date scheduled at this time.

Will Ethereum 2.0 reduce gas fees?

An Ethereum coin.
Alexei Ivanov/

Since “Ethereum 2.0” now means different things and has been split into different purposes deployed over time, it is difficult to confidently answer the question of whether it will reduce gas fees.

There is a a lot of skepticism in the Ethereum community that moving to proof-of-stake (“the merge”) will reduce gas fees, and the Ethereum Foundation does not promise that this will be the case. Gas prices are demand-based, and there is a finite amount of room in each Ethereum block for the calculation. Instead, sharding could reduce fees by increasing the compute capacity of the Ethereum network, but that isn’t expected to happen to the Ethereum mainchain until at least 2023.

In place, some specialists expect a reduction in Ethereum gas fees to come down to something called “Layer 2” applications built on top of the Ethereum network, which will do some of its own independent computational work but will rely on Ethereum for a foundational level of consensus and verification.

Suffice it to say, the whole issue of Ethereum upgrades and their effects is complicated and hinges on a set of dynamic conditions, including network size, Ether value, NFT demand, and demand. mood of node operators. – which can change dramatically from day to day. Only time will tell how this all pans out and what effects Ethereum’s changes will have on the wider crypto world.

But if we had to guess, Ethereum’s switch to proof-of-stake should be a game-changing move. If emulated by future cryptocurrencies, the change could even remove barriers preventing some organizations or governments from fully adopting cryptocurrencies. This, in turn, could greatly expand their adoption and make the future a very crypto-friendly place.