Ethereum 2.0 developers plan to abandon mining and split the blockchain into several chains. Major changes should affect not only the developers of the platform, but also all representatives of the cryptocurrency industry. In the material, we understand why Ethereum needs to change something and what consequences await cryptocurrency users.
Why Ethereum 2.0 release date is unknown
Ethereum developers have broken the 2.0 update into several phases, each of which focuses on a separate innovation. Phase zero includes the replacement of mining with staking and will take place on December 1, 2020.
On November 4, the developers opened a deposit contract. Users are offered to send from 32 ETH to it in order to become validators on the Eth 2.0 network. Validators will participate in the creation of blocks and receive a reward for this. Unlike miners, their income will depend on the amount of the invested cryptocurrency, and not on the processing power.
To launch the first block of the new network, the deposit contract must have more than 524,288 ETH, and the total number of validators must exceed 16,384. The required amount was reached on November 24, so the launch will not be postponed. As planned, the zero phase will begin on December 1 and the validators will start working.
Phase 0 - "The Beacon Chain". After the launch of the first block of the new network, two chains will operate simultaneously: the current Eth 1 with mining and the new Eth 2.0 with staking.
Phase 1 - "Shard chains". In 2021, implementation of Shard Chains technology ("fragmented chains") will begin. The Eth 2.0 blockchain will be divided into 64 fragments that will work synchronously and interact with each other.
Phase 2 - "The docking". In 2022, Eth 1 will become one of the fragments of Eth 2.0. After such a merger, smart contracts will start working on all fragments, and the history of the data will continue without loss.
Why update Ethereum 2.0
Ethereum blockchain is capable of conducting up to 15 transactions per second, which is 2 times faster than Bitcoin. For comparison, the Visa payment system processes 24,000 transactions per second.
The more Ethereum users become, the more operations compete with each other for inclusion in the blockchain. Because of this, the load on miners is growing: they need more and more computing power to generate new blocks. Therefore, the number of processed transactions can drop to 10 per second. To keep the network up and running at the current level, transaction fees have to be increased.
The main purpose of Update 2.0 is to avoid the problems associated with the growth in the number of users.
The first change that the developers came up with is a new consensus algorithm. Blockchain participants agree on each new block before creating it. The security of this process is now ensured by the work of miners. In the future, this will be done by validators - users who have contributed to the deposit contract. If the validator tries to harm the blockchain, it will simply lose the invested funds.
The second, no less important change is the creation of fragmented chains. The blockchain user checks the relevance of his version by comparing it in its entirety. The more blocks there are in the blockchain, the longer this process takes. Dividing the blockchain into fragments will allow comparison in a small area. Ethereum 2.0 will be divided into 64 fragments, which will allow creating 64 blocks at the same time instead of one. Thus, the waiting time for confirmation will decrease several times.
As a result, Ethereum 2.0, as a platform for decentralized applications, should become cheaper and faster by an estimated 64 times. Such changes should affect not only developers, but also all participants in the cryptocurrency industry, since most decentralized applications work on the Ethereum blockchain.
What miners will do after switching to PoS
For miners, an important part of the Ethereum 2.0 update is changing the protection method from Proof-of-work to Proof-of-stake. In fact, the system will no longer need their computing power.
Proof-of-work is a protection method used in most cryptocurrencies. New blocks appear as a result of mining, that is, solving complex cryptographic problems using equipment. For example, Ethereum, Bitcoin (BTC), Bitcoin Cash (BTH) and Litecoin work according to this principle .
Proof-of-stake solves the problem of high energy costs. Instead of mining, staking is carried out, that is, new blocks are confirmed by validators, depending on their share of ownership of the cryptocurrency. The PoS method is used to varying degrees in cryptocurrencies such as Cardano, Stellar, Ripple , EOS and NEO .
At first, the Eth 2.0 chain will work on staking in parallel with Eth 1 on mining. The merger and final abandonment of mining will occur at the end of the second phase of the update, around 2022.
Ethereum can be mined until the final transition to Ethereum 2.0 in 2022
This should be enough time for Ethereum miners to prepare for the upgrade. Mining farms can be sold to invest in staking, or reprogrammed to mine another cryptocurrency.
How to make money on staking
The more ether a user owns, the less profitable it is for him to damage the system and expose his financial resources to risk. If the user can be trusted, then he can be instructed to verify the validity of transactions. This idea formed the basis for staking.
The principle of staking is similar to a bank deposit. In both cases, the client receives income in the form of interest on the amount invested. The only difference is how these funds are used by the organization. The bank needs deposits in order to make money. Ethereum will use the dedicated staking coins to facilitate transactions.
Staking is passive income with interest on locked coins
Ethereum developers have published information about the economy of Eth 2.0. From the first two graphs, it follows that the annual interest rate will change depending on the total amount of locked coins. At the initial stages, with 524,288 ETH in staking, the yield will be 20.3% per annum. When 10,000,000 ETH is accumulated, the yield will drop to 4.6%.
The validator's annual income will also depend on the time spent online. The validator must participate in block confirmation as often as possible, otherwise the reward will decrease. The approximate return can be calculated using the EthereumPrice online calculator .
In order to become a validator you need:
- buy on the ETH exchange. The minimum threshold for participation is 32 ETH;
- register on the official website Eth2 Launch Pad ;
- download the client software (software client);
- deposit from 32 ETH.
Please note that the transfer to the deposit contract is one-sided. It will not be possible to return funds from Eth 2.0 back to Eth 1 until the next update phase.
There are already companies offering users to put their ETH into the pos pool ("stack pool"). However, all of them are difficult to trust, since the official launch of the Eth 2.0 network has not yet taken place. It is assumed that stack pools will pool deposits of less than 32 ETH and split rewards between participants. In this case, you need to be very careful and pay attention to reviews so as not to get caught on a fraudulent resource.
Will Ethereum 2.0 Affect ETH
The increased attention of traders stems from the economic law. Since the coins will be frozen for staking, there will be less of them in circulation and the rate should increase. Combined with the growing popularity of the DeFi sector, some traders are predicting the price of ETH to rise up to $ 10,000.
At the same time, the news about Ethereum 2.0 cannot be unequivocally called a positive factor. Skepticism is caused by the fact that the amount on the deposit contract accumulated slowly. November 24 was the deadline for developers to start rolling out the new network by December 1. More than 50% of the required amount was collected only in the last day. Vitalik Buterin, the co-founder of Ethereum, clarified on Twitter that funds can still be sent to the deposit contract.
Expectations of the market value of a cryptocurrency, in turn, also have an impact on staking. Interest is obtained in the form of coins and does not compensate for the drop in value. Validators can stop the risk of returning the investment for less than the original cost.
Conclusion
On November 4, 2020, the Eth 2.0 deposit contract was opened. The required amount of 524,288 ETH has accumulated on it and the zero phase of the largest Ethereum update will be launched on December 1. The update will be fully completed no earlier than 2022.
The main goal of Update 2.0 is to improve system scalability. In order for the blockchain to grow further, it is planned to divide it into 64 fragments and abandon mining.
Instead of mining in the updated Ethereum, staking will be used. This means that transactions will be confirmed by validators that have a share in the total amount of ETH. It is less energy consuming and safer. In a few years, miners will have to start mining another cryptocurrency.
Such a major update could have an impact not only on the ETH rate, but also on the entire cryptocurrency market.
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