When the Ethereum protocol was launched in 2015 it had incredible success, but it was increasingly clear that a few key upgrades would be necessary to unlock its full potential. With high demand driving up transaction fees and the disk space needed to run an Ethereum client, it was vital to move on from the underlying proof-of-work consensus algorithm due to the negative environmental impact.
Through Ethereum 2.0’s upgrades there will be a gradual change to the architecture of Ethereum to make it more scalable, secure, and sustainable while preserving Ethereum's core value of decentralization. This also means there’s no on-switch for Ethereum 2.0 and improvements will be integrated incrementally started this August and going well into 2022.
The much-anticipated Ethereum 2.0 aims to build on its predecessor Ethereum through flagship upgrades like the Beacon Chain and Shard chains. While the Beacon chain upgrade introduced proof-of-stake process to the Ethereum platform bringing it on the same level as Bitcoin (BTC), Shard chains spread the network’s load horizontally so as to increase transactions per second by creating new chains, that are known as ‘shards’.
Ethereum 2.0 thus refers to a set of interconnected upgrades like the above which aims to make applications based on it faster and cheaper to use while also reducing the computing energy needed. Ethereum 2.0 will thus be an even bigger marketplace of financial services facilitated by the crypto asset ETH and will have rub-on positive effects on its native token ETH in the long run. Currently considered to be the second most popular crypto asset, ETH will benefit from the increased transaction speeds offered by Ethereum 2.0 and eventually even topple BTC in becoming the highest market capitalization crypto asset in the future.
To increase the transaction speeds on the Ethereum network it would have meant increasing the size of the nodes, which are vital network participants who store and run the blockchain with powerful and expensive computers, which would also mean more security.
However, with more nodes there is an increased chance of a coordinated attack where if someone controls most of the network they can force through fraudulent changes. With the Shard chains upgrade though, Ethereum 2.0 aims to achieve both faster and safer transactions by spreading the network load into 64 new chains and improving speeds beyond the current 15-45 transactions per second limit. With more shards or chains, Validators who are the maintainers of the network will only need to 'run' their shard and not the entire Ethereum chain. This will make nodes more lightweight and allowing Ethereum to scale and remain decentralized.
Additionally, by transitioning to the proof-of-stake method the Ethereum protocol has greater disincentives against malicious attacks since validators must stake significant amounts of ETH into the Ethereum protocol which can be automatically destroyed if they try to attack the main network. Ethereum's security model also needs to change with the introduction of Shard chains and this is where the Beacon Chain will randomly assign validators to different shards thus making it virtually impossible for validators to ever collude by attacking a specific shard.
Staking, the act of depositing 32 ETH to activate validator software, is a consensus mechanism that is going to replace the proof-of-work system currently in place. It has been introduced by the Beacon Chain and the Ethereum in place today will run in parallel before merging with the Ethereum 2.0 upgrades. Since Shard chains will be implemented gradually by 2022, mining will continue and the current focus is on merging the Ethereum mainnet with the new system and turning it into a shard so that it’s secured by ETH and far less energy intensive. Staking also means that one need not invest in elite hardware to 'run' an Ethereum node and should encourage more people to become a validator, increasing the network’s decentralization and decreasing the attack surface area.
Once Ethereum 2.0 is completely in place, mining Ethereum tokens will officially end and Staking will become the primary way to create new tokens. Also, the main goal of achieving a digital future where transactions can be executed at a lightning pace and financial inclusiveness is achieved is more plausible and seemingly possible on a global scale. ETH will also probably overshadow the current leader BTC and unlock further value for the entire ecosystem of miners, validators, and investors.
Neeraj Khandelwal is the co-founder and CTO at CoinDCX. The views in this article are his own.