The core development team of Ethereum, is currently working on a significant upgrade—Ethereum 2.0. There are currently many technical jargons that have confused people as regards this subject, especially persons who are not tech-savvy. This has made it quite difficult for many people to really understand what the new development is about. This article would be focused on breaking down Ethereum 2.0 into simple and basic pieces that every person would be able to understand.
What is Ethereum 2.0?
Ethereum 2.0, also called Eth2 or Serenity, is a long-anticipated upgrade to the Ethereum public mainnet. It is expected to launch in 2020. It involves re-constructing the entire Ethereum platform in order to have a new and more scalable version. The implementation of Ethereum 2.0 is expected to start in the summer of 2020, and it would most likely run for another year or two until all three phases are completed. The special and significant thing about this upgrade is the moving of Ethereum from Proof of Work (PoW) to Proof of Stake (PoS) consensus.
Proof of Work (PoW) Explained
Right from the time of creation, Ethereum and many other cryptocurrencies— such as Bitcoin and Litecoin— have used the Proof of Work (PoW) consensus. The architecture of Proof of Work is such that miners run nodes and expend computational energy to solve complex mathematical problems in a competition to mine the next block. In this competition, whoever solves the complex mathematical problem first, receives the block reward. The time and money that miners need to run hardware and expend electricity on PoW chains, are compensated by block rewards.
These block rewards are distributed to miners who successfully mine a block into existence. Although PoW chains are generally secure, they often face scalability and accessibility issues. This scalability issue is set to be fixed by the implementation of Proof of Stake (PoS) network via shadding. Currently, Ethereum can only process a limited amount of information in a given period. This is because, each block is mined sequentially, and there is a finite amount of data that can be recorded in each block. This is known as the block size.
On the issue of accessibility, becoming a miner requires a lot of things. it will cost an individual a fortune to purchase and set up all the necessary devices needed. To be a successful miner and earn good reward, one needs to reside in an area where cost of electricity is low as mining requires much electricity. In Ethereum 2.0, one of the goals is for PoS to offer a fair leveled ground for more individual validators to participate.
Proof of Stake (PoS) Explained
Proof of Stake (PoS) is one of the consensus mechanisms used by some blockchains. The first blockchain project to implement this consensus method was Peercoin, after which other projects like Blackcoin, ShadowCoin and NXT followed suit. In PoS, those that hold the network’s tokens, have the right to earn rewards for validating blocks. This is unlike Proof of Work (PoW) which assigns block confirmation rights to those that demonstrate the largest amount of computing power. In PoS, once a validator agrees to stake his or her tokens, the stake is locked up. In many cases, it will be forfeited fully or partially if the validator does not act in the interests of the network.
Theoretically, the platform is open for anybody stake tokens; but practically, who gets chosen to validate blocks and earn staking reward will be determined by a set of protocols. one gets the right to validate a block and earn rewards based on the proportionate value of his or her stake. For instance, someone with 5% stake of the total value will get to validate 5% of all blocks. However, coin age which is the length of time that the stake has been locked up as well as randomization, may also criteria to look into when selecting a validator in the network. The major advantages of the PoS algorithm are energy efficiency and security. People are encouraged to be validators since it is easy and affordable. This, along with the randomization process, makes the network more decentralized.
How Staking Works on Ethereum 2.0
To become a validator on Ethereum 2.0, the minimum amount one needs to stake is 32 ETH. Each user that want to participate in this process, will be expected to deposit the funds into the official deposit contract that has been developed by the Ethereum Foundation. Validators will be expected to run Ethereum 2.0 client software. One interesting part of this process is its cost effectiveness in the area of setting up the devices needed in the system. Unlike in the PoW system where the cost of setting up a mining rig is so exorbitant, a consumer-grade computer or laptop can be used to run a PoS system. However, it will be necessary that validators stay online always, or face minor penalties. validators will be selected randomly to bet on the block on the Ethereum 2.0 blockchain and whoever correctly proposes and attests to blocks, will be rewarded with ETH according to the percentage of his or her stake.
Advantages and Disadvantages of Proof of Stake (PoS)
Proof of Stake is more energy efficient. This is because it removes the high-powered computing from the consensus algorithm.
The mind-blowing benefit in PoS architecture is the opportunity to earn passive income from holding cryptocurrency which is staking. Also, users have the opportunity to engage in almost every events concerning the project.
However, one of the downsides of the PoS system is that, by staking, users lock up their cryptocurrency holdings for a defined period. This means that if there is a sudden market crash or surge, they would be unable to take advantage of such an event, to either cut losses or take profit.
Furthermore, in a situation whereby people decide to participate in a staking pool, someone else might be taking custody of their cryptocurrencies; and this is usually accompanied with great risk. One of the generally accepted and recognized rules in the crypto world is the issue of users’ private keys. Every user is expected to guard his or her private keys with all diligence and never to allow another party have access to them.
Proof of Work (PoW) VS Proof of Stake (PoS)
- In PoW, those that validate and create blocks are called miners; whilst in PoS, those that validate blocks are known as validators.
- In PoW systems, more cryptocurrencies are created as rewards for miners, while PoS systems often use transaction fees as a reward to validators.
- In PoW, to add each block to the chain, miners must compete to solve a difficult puzzle using their computers’ processing power; while in PoS systems, competition is virtually non-existent, as the block creator is chosen by an algorithm based on the validator’s stake.
- In PoW, in order to add a malicious block, you need to have a computer that is more powerful than 51% of the network; whilst in PoS, in order to compromise the network, you need to own 51% of all the circulating pieces of cryptocurrency on the network.
- In PoW, creation of blocks is known as “Mining”; while in PoS, block creation is known as “Forging”.
Ethereum 2.0 will primarily benefit the scalability, throughput, and security of the Ethereum public mainnet. Ethereum 2.0 will not eliminate any of the data history, transaction records, or asset ownership of the Ethereum 1.0 chain.
Is Ethereum at the Forefront of the Crypto Market?
In recent times, the word on the crypto market has been that Ethereum might surpass Bitcoin as the world’s leading coin. Popular names like Goldman Sachs have reported that Ethereum could overtake Bitcoin as the dominant cryptocurrency. Other popular names have also seconded this notion, with Todd Morley, a crypto and blockchain investor, stating that he thinks Ethereum has “much higher utility” than bitcoin, and is “where the action is.”
Analysts have gone further to state that ETH could rise by 40% against BTC. This analogy came to be after the June 27th, 2021 rock-bottom of 0.0552 BTC, by 21.28%. It revealed that most traders have chosen to sell their Bitcoin assets to seek opportunities in the Ethereum market recently. Following this analogy, Ethereum has already surged by more than 160% against Bitcoin.
Owing to imminent scantiness in Ethereum and price stability in Bitcoin, investors and traders see huge prospects in the Ethereum market. Ethereum’s poor supply in dissemination (due to its price increase) against growing requests would make it more appreciated than it is today. Currently, Ether has a market cap of $233.77 billion. The decentralized finance market, which is mostly built in line with Ethereum, saw an amassed profit of 9% on July 4th, 2021. The total market value of Decentralized Finance market coins is $75.7 billion, as seen on CoinGecko data.
While the price of ETH is still some substantial reach from BTC, the distance is reducing and Ethereum’s hold is jammed with the kind of supply Bitcoin did not have at the same point in time. Analyst Simon Peters believes that Ethereum has what it takes to become the dominant store of value, however, it will take a few years. Bitcoin and Ethereum have often run on similar interests that elucidate the confused faces of many traders across the world.
Lately, Ethereum has been drifting into another path, working on building considerable development away from Bitcoin’s pace. Simon Peters added that it is also key to remember that Bitcoin had a six-year head start. He said, “If you look at where the market cap of Bitcoin was six years ago it was approximately $5 billion, whereas Ethereum at a similar point in terms of its life cycle has a market cap of $300billion.”
In retrospect, investors and traders will be looking at which coin has the most room for growth and potential. Ethereum is making moves to address its financial scheme with the forthcoming release of the EIP 1559 Ethereum Improvement Proposal). According to Abdelhamid Bakhta, one of the six authors of the EIP 1559, he said the main purpose of this development is to achieve block elasticity which would mean that the capacity of the platform is doubled.
Several analysts claimed Ethereum’s next stop would be around $3,000 and once that mark is hit, the mark of $5,000 would be within reasonable reach over the coming months. Popular opinion shows that most analysts believe that Ethereum will overtake Bitcoin eventually, however, there are still words of caution. Susannah Streeter, senior investment and market analyst was quick to state that although Ethereum has made great strides in recent times, its future direction is far from certain. She went further to say that traders should be careful about getting caught up with the news surrounding Ethereum, as it is still a bet.
What is Ethereum 2.0 staking Everything you need to know about it
One of the most talked about features in the Ethereum 2.0 upgrade is the change from proof of work to proof of stake. The change in consensus mechanism which will make transaction validations easier and quicker will significantly improve trading in ethereum and use of DeFi applications.
PoW or proof of work is the current consensus mechanism, which requires heavy computational power to run.
PoS or proof of stake solves this problem by reducing the amount of computational power and energy required to solve this problem. The new consensus mechanism only requires validators who run simple computer software to validate transactions. The software could easily run on a smartphone and anyone could be a validator by staking a specific amount of ether.
What is Ethereum 2.0 Staking?
Staking is simply depositing 32 ETH, so as to have the right to become a validator. A validator is saddled with responsibility of validating transactions, and adding new blocks to the blockchain while earning new ETH.
This whole process of earning ETH as a validator is called PoW. To understand staking, it is important to understand how PoW works.
How proof of stake works
Proof of stake is a kind of consensus algorithm first introduced in 2011. A consensus algorithm is a system that allows users to coordinate in a decentralized setting. It ensures that all agents in that decentralized setting can agree on a single source of truth. More simply, a consensus algorithm is a system that maintains agreement in a distributed setting.
The proof of stake algorithm randomly selects a validator to add the next block, validators could also be chosen based on size of stake or the age of the ether staked. This process of adding a new block is called forging, as opposed to mining, which is the term used in proof of work.
Validators with bigger stakes stand a chance of being the one to forge the next block. So that the process does not neglect validators with smaller stakes, more methods of selection are employed. Randomized block selection and coin age selection are two of the most popular selection methods.
Randomized block selection method, selects validators based on lowest hash values and highest stake. This makes the next validator predictable.
Coin age selection method will choose the next forger or validator based on how long their tokens have been staked for.
Proof of stake has its own rules and methods based on the cryptocurrencies preference.
Essentially the stake is a motivator for the validator not to create fake transactions. A whiff of fraudulent behavior by the network and the validator stands a chance to lose his staked ETH.
How to stake in Ethereum 2.0
However, staking pools give a group of ETH holders the chance to bring their resources together and stake as one validator.
This group of holders combine their stakes and share the reward proportionally to the contribution each brings to the pool.
Staking can also be done with cold wallets. Offline crypto wallets otherwise known as cold wallets can also be used for staking. Large volumes of crypto are usually kept in cold wallets which are not susceptible to hacks, ETH can be staked securely on them while the holder earns on rewards. If the staked coins leave the wallet the rewards will stop.
Proof of stake opens a new way for people to get into the blockchain space with ease. The staking pools make it even easier for those that do not have funds but desire to be validators, to take part in the PoW process.
While staking isn’t without risk, it is a very lucrative way to earn passive income. However, it is important to DYOR before venturing into staking.
Ethereum 2.0 is here. What it means and what will happen to your Ethereum
The ethereum 2.0, also known as Eth2 or serenity, is a major upgrade on the ethereum blockchain that had been hinted for several years, and now it’s finally here. The upgrade is set to make ethereum more secure, scalable and sustainable, but the major topic on Eth2 is the switch from Pow (proof of work) to PoS (proof of stake).
Why is PoS better than PoW?
Validating transactions on the ethereum 1.0 blockchain was done in a decentralized way, the same way it’s done on bitcoin. This consensus mechanism is known as proof of work. The mechanism requires miners to use computer hardware processing power to solve extremely complex mathematical puzzles to validate new transactions. The miners are rewarded with cryptocurrencies for every validation they complete. Whilst this process works fine it, however, requires a lot of computational power and energy. This is a problem which the proof of stake system is set to solve.
Proof of stake does not need as much power to validate transactions. Rather than having miners who were required to solve mathematical puzzles, the new consensus mechanism on the ethereum network will use validators to propose new blocks on the ethereum blockchain. The right to propose validations of a new block then requires a stake of ethereum. A validator is required to have a stake of at least 32 ETH.
The validators will be selected to propose a new block based on the amount of ethereum that has been staked and how long it has been held for. Other validators will then attest to seeing a block. Once there are enough attestations to the validator’s claims, he’s then rewarded with ethereum. This process is called minting or forging.
Is PoW available on the ethereum blockchain now?
Eth2 is still in Phase 0. This is the first stage of the launch accompanied by the beacon chain launch. This beacon chain is ethereum 2.0’s proof of stake blockchain. Validating the validators is a simpler way to look at this first stage. All validators will be verified along with their stake of ETH.Phase 1 of Eth2 will come in 2021. In this phase, we’ll see the integration of the PoS consensus mechanism.
Other phases of Eth2 and the implementation of shard chains.
Phases 1.5 and 2 are the stages where the real beauty of Eth2 will be seen. Slated for 2021/2022, this stage will reveal the scalability level of Eth2 as a major improvement over ethereum 1.0.
The Ethereum 1.0 network can only support roughly 30 transactions in one second, which causes congestion on the network. Eth2 will, however, support over 3,000 times this number. Capable of supporting over 100,000 transactions in one second, trading the currency will see fewer delays. This remarkable increase will be achieved through something called shard chains.
Sharding is a multi-phase upgrade to improve ethereum’s scalability and capacity. Shard chains spread the network’s load across 64 new chains. Ethereum 1.0 blockchain had a single chain of blocks. This made it secure but at a cost. It was slow and inefficient. With sharding, that one chain is now split into 64. This is why it supports a lot more transactions than the current single-chain block.
How is Eth2 more secure?
Ethereum’s co-founder, Vitalik Buterin, claimed that running an attack on the ethereum network will be more costly when it moves to proof of stake consensus mechanism. Vitalik said this in October 2019 in his keynote at Devon 5. Whilst Vitalik might be right, the proof of stake consensus mechanism makes for a more centralized system open to more security breaches. Jelurida’s co-founder, Lior Yaffe, however, pointed out that security audits of Eth2 are being carried out by blockchain security firms.
A research team set up by the Ethereum foundation, will constantly research cybersecurity problems on ethereum 2.0. In a tweet, the ethereum co-founder pointed out that an attack on the new proof of stake is a myth after a scenario emerged that an attack on 51% of the proof of stake could be fatal for Eth2. A total of the 524,888 ETH staked which equates to 32 ETH per validator only needs 51% of it attacked to bring Eth2 to its knees according to claims.
The co-founder has however dismissed such a scenario calling it a “myth”. He says attackers will either get slashed or soft-forked away which will cause them to lose their coins, making an attack on the new PoS very costly.
ETH holders are to do nothing about their ETH, as nothing will happen to it. The price of ETH might, however, see a price surge as the market optimism about the new upgrade could push prices higher. Subsequent stages of the launch will see more implementations of the upgrade. The upgrades which propose a faster and more secure ethereum network will therefore be put to practical use.
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