Ethereum 2.0: A Guide For Newcomers

The objective of the upgrade is to improve scalability, sustainability, as well as the security of Ethereum. Ethereum 2.0 is a collection of interconnected upgrades built to enhance the speed, efficiency, and scalability of Ethereum in order to equip it with the ability to process more transactions while easing bottlenecks. Ethereum 2.0, also referred to as Eth2, will be launched in three major phases. Phase Zero, which is the first, was launched towards the end of 2020. Each phase is geared towards improving the performance and functionality of Ethereum in different ways. 

Differences Between PoW and PoS

Proof-of-Work (PoW) relies on electricity and physical computing power to build blocks on the Ethereum blockchain. Proof-of-stake (PoS) on the other hand is an upgrade to the existing consensus mechanism. It doesn’t depend on electricity or physical miners, instead, it utilizes validators who are expected to deposit a certain amount of Ether to participate in block building on the Ethereum blockchain.  

The major difference between PoW and PoS is that PoW requires users to use complex hardware processing powers to solve complex puzzles as well as verify transactions. When this is done, miners get ETH as rewards. The downside to this is that it consumes a lot of energy. PoS doesn’t require the efforts of miners at all. Instead, validators who stake crypto are given the right to verify transactions. The choice of validators however depends on the amount of crypto they have and for how long they’ve held those assets. The validators afterwards get rewarded for assisting in validating a block and adding it to the blockchain. PoS is more energy-efficient than PoW and also requires less computing powers to secure the blockchain. 

Problem of PoW

The problem that PoW poses is its demand for high computing powers (miners) and electricity (work) in its bid to build blocks on the Ethereum blockchain. This means that securing the blockchain consumes more energy and also becomes more complex owing to the amount of complex puzzles that need to be solved. 

What Will Happen?

Ethereum users are expected to experience scalability, security, and sustainability with the Ethereum upgrade. The Eth2 upgrade will not erase any of the user’s data history, asset ownership, and transaction record present on the existing Ethereum chain. Also, the upgrade promises the same functionality as the previous one and many more benefits.

Benefits of PoS

Proof-of-Stake is an upgrade of the existing consensus mechanism on the Ethereum blockchain. Previously the Ethereum blockchain relies on electricity and miners in order to build blocks on the blockchain and secure it which is a complex process and also energy-consuming. With the introduction of PoS, block building has become simpler and more energy-efficient. 

Roadmap

The Ethereum 2.0 upgrade is scheduled to be completed in three major phases: Phase 0, Phase 1, and Phase 2.

In the first phase, Phase 0, there would be the implementation of “Beacon Chain”, which would be responsible for the storage and management of the registry of validators. This phase would make use of the PoS consensus mechanism. The current PoW will not be discarded but would run concurrently with the new Ethereum PoS Chain, which would ensure that there is no break in data continuity.

Phase One (1) will start in 2021 and will feature the integration of Shard Chains. This will guarantee improved transaction time on the network as Shard Chains are able to allow more than 100,000 transactions per second on the Ethereum network compared to the 30 transactions per second that were obtainable. 

For the third and final phase, Phase two (2), the upgrade will be launched somewhere between 2021 – 2022. Although what this phase will introduce is not clear yet, users of the Ethereum blockchain will experience the inclusion of Ether accounts and enable withdrawals and transfers. This phase will witness the turn-off of the PoW completely. 

Staking

What Is Staking?

Staking is the deposition of 32 ETH for the purpose of activating the validator software. Validators are responsible for the storage of data, processing transactions, as well as adding new blocks to the Ethereum blockchain. This ensures the security of the blockchain for users to earn new ETH. This process is referred to as Proof-of-Stake, which is being introduced by the Beacon Chain. 

How It Works

When an Ethereum blockchain user stakes 32 ETH, it is used to validate the transactions on the network. The staked ETH also acts as a guarantee that the validator will be operational and honest. In return, stakers are rewarded for their efforts with Ethereum. In simple terms, validators would get Ethereum as passive income and also get ETH payouts gradually over time. 

According to current calculations, the annual ROI of Ethereum staking stands at approximately 5.6 percent. This is good news for those who stake ETH because they can enjoy the benefits of passive income as they personally hold their funds on the validator node. There is also a depreciation in the value of APR based on the total amount of ETH deposited.

State of Staking Today

Although it is possible to stake less, it is, however, mandatory to stake 32 ETH to become a validator. Staking is important to the Ethereum ecosystem as it helps to guarantee its network.

Types of Staking Available

• Staking Pools

Staking pools allow users to stake virtually any amount of ETH by partnering with other stakers. It also allows users to avoid running their own nodes and also has a significantly lower barrier of entry.

• Staking Services

Staking services refers to staking on Ethereum via various services. This option permits users to stake and unstake at their own convenience. Users of staking services are not allowed to withdraw their assets currently. However, this feature will be available to users as soon as Ethereum 2.0 launches transactions. 

• Liquid Staking

Liquid staking was introduced to mitigate the risks associated with the absence of liquidity, complexity, and centralization. This type of Ethereum staking allows users to stake any amount and also unstake without enabling the requirement of transactions.

Liquid staking allows derivatives that represent the users’ entire locked assets 1:1. This will ensure that the value will be transferred in the form of staking derivatives while continuing to secure the network with the underlying assets the derivatives represent.

• Running A Validator

Self-staking or running a validator has several limitations such as immovability of staked funds, set minimum amount (32 ETH) required to participate, and the individual responsibilities of operating the validator. This type of staking comes with a risk of being penalized for being offline or slashed for dishonest behavior.

Validators could have their stake slashed if the system detects that their actions could be harmful to the wider community/network. An example of an activity that could lead to slashing includes proposing or attesting to two different conflicting blocks in the same slot or casting a vote which “surrounds” or is “surrounded” by a previous one.

As a form of punishment, these validators will have a portion of their staked 32 ETH taken from them and also get ejected from the network.

Aside from slashing, the Eth2 network has penalties for being offline which can be viewed here. 

In terms of complexities, users that stake their ETH on the Ethereum network deposit a contract for the purpose of securing the network and they cannot unstake their ETH until transactions are enabled. This leaves speculators on the sidelines until the transactions are enabled. Users may potentially have to wait for a long time before they can get back their staked ETH as no official date has been set for the upgrade of this phase.

Decentralization of Assets

The decentralization of assets would make the market open and would eliminate the presence of centralized authorities. Services that are slow owing to human errors would now become automated and safe because they are now under the supervision of a code. It is also important for Eth2 clients to replace all their existing centralized elements with decentralized ones.  

Conclusion

If Ethereum 2.0 is executed properly, it would create a network that is capable of handling 100,000 transactions per second. It would also create a sustainable network that is more energy-efficient and one that introduces smart contracts to the broader world, thus increasing the utility of Ethereum in the real world.

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