Ethereum 2.0: A New DeFi Round
In 2014, five visionary minds came together to lay the groundwork for a platform and a programming language aimed at facilitating any developer who wishes to build and publish next-generation distributed applications on the blockchain. The platform was named Ethereum and had its mainnet frontier launch in July 2015.
Launched with the Proof-of-Work mechanism, Ethereum showed immense potential as a global, open-source platform for decentralized applications. Developers could use it to codify, decentralize, secure, and trade just about anything including voting, domain names, financial exchanges, crowdfunding, company governance, contracts and agreements, intellectual property or smart properties.
After the mainnet frontier launch, the platform went through at least four planned upgrades between March 2016 and December 2019. However, none of these updates was meant to change the consensus mechanism of the platform. The upgrade to Ethereum 2.0 — which is to be launched on December 1, 2020 — is a pretty radical shift. It plans to move away from the Proof-of-Work mechanism to the Proof-of-Stake consensus mechanism. Along with it, it is aimed at enhancing the platform’s scalability, sustainability, and safety.
From PoW to PoS: The Reasons Behind the Upgrade
Proof-of-Work (PoW) mechanism has been one of the most adopted consensus mechanisms. Bitcoin, Ethereum, Litecoin — all popular crypto protocols were developed on PoW. In PoW, miners need to run nodes and spend computational energy to solve complex mathematical problems and mine the next block. Consequently, mining in PoW requires considerable investments in terms of hardware and electricity. Although the combined computational power that goes into mining blocks makes PoW extremely secure, it also makes the PoW chains less accessible and less scalable. Introducing the PoS mechanism for Ethereum 2.0 is aimed at solving these issues and making ETH 2.0 mining more convenient.
Let’s have a look at what the new protocol is!
What Are the Main Features of Ethereum 2.0?
As we have already seen, the vision behind bringing in Ethereum 2.0 is to solve the issues of scaling and accessibility. In other words, it is aimed at eliminating the drawbacks related to clogged networks, diminishing disk spaces, and excessive electricity consumption. The platform needs to get rid of these issues without losing its own decentralized nature.
Participation of Validators (Not Miners)
In the Proof-of-Stake (PoS) mechanism, validators replace the miners. Instead of acting like miners and just burning electrical energy, validators would participate in the platform’s PoS system by staking at least 32 ETH as “skin in the game”. First, the validators would have to deposit the funds into the official contract the Ethereum Foundation has developed. After that, they would have to download and run the Ethereum 2.0 client software. Once they start doing it, some of them will be randomly selected to get access to the blocks on the upgraded blockchain.
To maintain safety and security, penalizing actions will be taken against Ethereum 2.0 validators who fail to stay online and execute their computational responsibilities — or those attempting to compromise the network. For validators being absent, the blockchain would reduce block rewards. For validators aiming to compromise the integrity of the network, all or some of their 32 ETH tokens will be stashed.
Being Parallel (Not Sequential)
In Ethereum’s PoW mechanism, the blocks are mined sequentially and each block can accommodate a fixed amount of data. It makes the process pretty slow as transactions often need to “wait” for the next block to be mined. Ethereum 2.0’s PoS mechanism solves this issue by distributing the blockchain into 64 parallel but intercommunicating chains.
This process is called sharding; it allows the upgraded chain to process 64 blocks at a time and helps to solve scalability-related issues.
When is Ethereum 2.0 Coming Out?
There will be three major Ethereum 2.0 upgrades. Each of them has different timelines to release.
- The Beacon Chain: Often cited as the Ethereum 2.0 release date, December 1, 2020, is actually the date of the beacon chain launching. Acting as a separate new chain, it will introduce the staking opportunite and prepare the ground for the next upgrades.
- Shard Chains: Scheduled to be released in 2021, shard chains will solve the scalability-related issues by spreading the network load into 64 new blockchains. Shard chains are expected to enhance the transaction speed up to 100,000 transactions per second.
- The Docking: The purpose of this phase is to “dock” the main-net Ethereum with the beacon chain. This would enable staking for the entire network and put an end to energy-intensive mining.
Ethereum 2.0 Price
Speculation around Ethereum 2.0 price suggests that the upgrade would positively impact the price of ETH. The upsurge in price will be driven by increased demand for Ethereum transactions as well as their decreased costs.
For validators wanting to participate in staking, it would mean the acquisition of 32 ETH that currently costs a little more than $13,000. Once the upgrade is launched, the validators are expected to earn an annual return anywhere between 5% and 15%.
To learn more about Ethereum, one may choose from several online courses. These courses are especially useful for those willing to learn about developing production-ready Blockchain-based apps. Also, they help developers to keep up with all the changes coming up.
Ethereum 2014/15 introduction set the stage for the DeFi revolution. Developers got a unique opportunity to create distributed applications and publish them. The world of decentralized finance became more expansive and client-oriented. Ethereum 2.0 is expected to introduce a new DeFi round by removing the entry barriers provided by the current protocol and making it far more scalable and accessible.