Is Ethereum 2.0 worth the wait?
Ethereum is a decentralized, open-source blockchain system and smart contract platform. When Ethereum launched, it leveraged the blockchain technology pioneered by Bitcoin, while opening up the programmability beyond simple transactions; and it proved successful. Developers began onboarding and creating a wide variety of applications on the Ethereum network.
Much of the Decentralized Finance (DeFi) world was originated and resides/operates on the Ethereum blockchain. Much of the beginning of the next iteration of the internet, decentralized Web 3.0, has been taking shape on the Ethereum blockchain. But while the growth of Ethereum has provided great opportunities— it has also presented itself with a few roadblocks.
The Trilemma
Let’s start with the fundamental problems all smart contract platforms face. The co-founder of Ethereum, Vitalik Buterin, coined the phrase “trilemma” as an explanation for the shortcomings of large networks. Basically, there are three goals for a network; but with current limitations, it’s only possible to tackle two at a time.
What are the goals? 1. Optimal scalability; 2. High security; and, 3. Decentralization. Vitalik originally argued that attainment of only two at a time are possible. For example, if your network wants to scale and prioritize security, then it will lack decentralization. These goals help pinpoint the main hurdles to overcome in developing the roadmap for Ethereum 2.0 and what it sets out to achieve.
What’s the current problem?
The problems are simple, but identifying the solutions is complicated. Let’s take a look at the current state of Ethereum 1.0.
The biggest hurdle currently lies in scalability. Ethereum became the de-facto smart contract platform, meaning a large percentage of dApps (decentralized applications) built by programmers operates on the Ethereum network.
Currently, Ethereum can handle 15 to 45 transactions per second. This would be functional for a single-use case, but as the network expands, so do the billions of dollars of diverse transactions. Remember, a transaction is categorized as any time a wallet or service interacts with Ethereum’s blockchain to complete an exchange. This could be one user sending funds to another, or it could be a dApp confirming the transfer of an NFT.
A byproduct of the scaling problem is expensive transactions. In order for miners to prioritize what transactions to process first, the amount of gas fees increases competitively. Basically, this means that if you want to hurry your transactions, you pay additional ETH to bump your transaction to the front of the queue, driving up prices for all users over time, which is exactly what has transpired.
Another long-term concern historically has been supply. A large draw for Bitcoin investors is the hard cap of the creation of no more than 21 million BTC. Once they’re all mined, that’s it. No more inflation. No more supply. Ethereum currently has no cap on supply, although it has introduced an exciting solution to inflation.
Lastly, as climate change and sustainability become more pressing issues, Ethereum seeks to minimize its ecological footprint to create a more efficient backbone to Web 3.0; and that is ETH 2.0.
How does Ethereum 2.0 offer a solution?
Now that we understand the problems, let’s explore how Ethereum 2.0 offers promising solutions. Here are a few of the ways ETH 2.0 sets out to be better, faster, stronger, and more sustainable.
Energy efficiency: Proof of Stake
Ethereum 2.0 plans to move away from proof-of-work mining toward proof-of-stake. Proof of work mining is a consensus method or way for computers around the world to agree on transactions and code. In proof of work, people all over the world contribute to the network and push their computers to the bleeding edge to process transactions and earn Ethereum by doing so. This uses a lot of energy, especially when the network is as large as Ethereum--the largest virtual machine on earth.
Enter Staking. Ethereum is moving closer to its transition to Proof-of-Stake (PoS), an event that is being called “The Merge”. Staking is part of a different consensus method, called “Proof of Stake”. Simply put, participants in the network lock up their tokens as collateral to check and verify the network. Without getting too into the weeds, this uses at least 99% fewer resources than the previous Proof of Work consensus method.
Scaling up: Sharding
By far the biggest upgrade to be made with Ethereum 2.0 is how it will handle transaction throughput. Today, the Ethereum network can process just over 15 transactions per second (TPS). When the network implements all the upgrades, ETH 2.0 could achieve up to 100,000 TPS. For purposes of reference, VISA can reach up to 30,000 TPS for its entire global network.
Scaling to this size will provide incredible speed at low gas prices (fees for the network). And while it may sound like overkill, if Ethereum becomes the foundation for a new internet infrastructure, then every user on the majority of dApps will be using the network. To summarize, scaling to this size enables Ethereum to be what it originally set out to be and more.
Inflation control: EIP-1559
In August, Ethereum made the first of many large changes it has planned for the next year with the introduction of EIP-1559. This change addressed one of the common criticisms of Ethereum, especially when compared to Bitcoin: that it cannot be a store of value so long as the supply of new ETH is unbridled, whereas Bitcoin is capped to just 21 million BTC, forever.
EIP-1559 did not set a supply cap on ETH, but it did activate a mechanism to curb the total supply growth over time by removing some ETH from circulation with each transaction, also known as burning. This change also improved transaction speed and ensured ETH’s viability as a form of payment for Ethereum’s computing resources and interactions within the network’s wide system of dApps.
Even More Decentralized: No more expensive mining
One last thing to note, proof of work networks become increasingly more intensive to participate in. To sum it up, mining coins becomes more computationally intensive over time, demanding advanced equipment that discourages participation from everyday users--think farm-sized server warehouses.
Switching to proof of stake empowers more users to participate in validating the Ethereum network. All you need is 32 ETH and a computer to receive staking rewards. Don’t have 32 ETH? The easiest way is to buy and store your ETH on BlockFi and automatically receive a 5% APY on your balance. BlockFi in essence does the staking for you. While you may not receive as much as if you did the staking yourself, letting BlockFi do it for you and receiving a 5% APY in return is a lot simpler, and 5% is no small return in today’s interest rate environment.
What’s next and what should you do
The blockchain space is notorious for big promises and even bigger delays, but ETH 2.0 is approaching fast. The Ethereum 2.0 Altair Beacon Chain update had a successful start, with 98.7% of the nodes upgraded at the time. A successful Altair upgrade to the Beacon Chain was seen as an important step in clearing the way to the merge with the Ethereum mainnet and the transition to a proof-of-stake consensus mechanism in Ethereum 2.0.
The Merge is the hard fork that will finalize Ethereum’s transition to the proof-of-stake Beacon Chain and will be the next Ethereum hard fork after Altair. These changes are important for the network but they do not particularly excite the Ethereum community. This is because Altair is still a transitionary stop that’s needed to take Ethereum to The Merge, the hard fork that will complete the transition of Ethereum 1.0 to Ethereum 2.0.
Initially, Altair and London (the hard fork that implemented a burning mechanism into Ethereum) was scheduled to be launched at the same time so that Ethereum and Ethereum 2.0 nodes could upgrade their software in one go. At around that same time, the Ethereum difficulty bomb was scheduled to go off. However, everything got shifted and rescheduled – London took place on August 5, 2021, Altair happened on October 27, 2021, and the difficulty bomb ‘explosion’ is now scheduled for December 1, 2021.
The date for The Merge has not yet been officially announced, but I can assume that it will happen pretty simultaneously with the difficulty explosion on Ethereum 1.0 – as it will make Ethereum 1.0 un-minable, and transactions on it will no longer be verifiable.
So, shortly after Altair, I would expect an official confirmation of The Merge date to come out from the Ethereum development team – because after Altair, there will be no more real obstacles in order for the Merge to happen. But no set date has been given as yet.
The reason I tell you all this is if you hold ETH in a private wallet, you will need to keep an eye out for when the update happens, to swap your version 1.0 tokens to version 2.0. The likely easiest way again is to buy and store your ETH on BlockFi as BlockFi will inform us once there are updates and likely handle the swap on the backend so you don’t have to worry about it. I will also be notified by BlockFi and post an update once they inform regarding this update as well. Plus, remember that when you hold ETH on BlockFi, you automatically earn a 5% APY on your balance too.
Action to Take: Buy Ethereum (ETH) up to $5,000
(Written with contributions from articles written by Charlotte Siller and Brian Quarmby.)