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Dec 28, 2020

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Ethereum 2.0 Upgrade

What is Ethereum (ETH)?

Ethereum (ETH) is the second largest cryptocurrency by market cap. While ETH itself is a tradeable asset, the Ethereum blockchain functions as a platform on which decentralized applications (dApps) and new cryptocurrency tokens can be built. Hundreds of dApps have been built on Ethereum so far, along with over 200 000 cryptocurrency tokens including almost half of the top 100 cryptocurrencies.

A brief History of Ethereum

Image via https://www.cnbc.com/2017/06/22/meet-vitalik-buterin-the-founder-of-bitcoin-rival-ethereum.html

Ethereum was first proposed by Russian-Canadian Vitalik Buterin in 2013. Vitalik came up with Ethereum after he tried and failed to build robust dApps on the Bitcoin blockchain. Vitalik realized that creating efficient dApps on a cryptocurrency blockchain would require building a new one – Ethereum. Vitalik eventually dropped out of university to work on Ethereum full-time. Ethereum was officially released on July 30th 2015, roughly one year after the crowdsale of the ETH token.

What is Ethereum 2.0?

Ethereum 2.0 is the next stage of Ethereum’s development. It has been in the works ever since Ethereum launched in 2015, when it was known as Serenity. It involves making huge changes to Ethereum to ensure that it can sustain its growing ecosystem of decentralized applications, tokens, and users. Launched on December 1st 2020, Ethereum 2.0 is expected to take 2-3 years to complete and will exist in parallel with the original Ethereum blockchain until all dApps and assets have migrated to Ethereum 2.0.

What will Ethereum 2.0 change?

The Ethereum 2.0 upgrade will increase Ethereum’s transactions per second from 15 to around 100 000. This is possible thanks to the Beacon Chain. The Beacon Chain uses something called sharding, wherein specific applications are assigned to their own blockchains which connect to the main Beacon Chain. Ethereum 2.0 will also change Ethereum’s consensus from proof of work to proof of stake.

What is Ethereum 2.0 Sharding?

Sharding on Ethereum involves dividing up the blockchain into different sections called ‘shards’. This makes it possible to divide the computing power between clusters of network nodes instead of having to wait for all of them to confirm a transaction.

For example, you could have an Ethereum shard that is specifically for DeFi. This shard would host applications like decentralized exchanges and lending protocols along with the account balances and transaction histories of all their users.

In theory, it will be possible for these shards to interact, though this will not be known until the Ethereum Foundation has added sharding to the 2.0 network which is scheduled to take place later. For the time being, Ethereum 2.0 is operating as a single shard.

Ethereum 2.0 Proof Of Stake Explained

Ethereum 2.0 uses a Proof of Stake consensus mechanism. This means that it will no longer be necessary to purchase expensive equipment to mine ETH. Instead, you will be able to use a regular computer to stake ETH and earn ETH as a validator node on the Ethereum 2.0 network. Validator nodes on Ethereum 2.0 add transactions to blocks and generate blocks.  

Generating a block with transactions requires the consensus of at least 128 other validator nodes which constitute a “committee” for their sharded chain. This consensus must take place within Ethereum 2.0’s 12 second block generation time which is referred to as a ‘slot’. The 128-validator committee is algorithmically changed based on how much ETH they are staking every 32 slots (an ‘epoch’; roughly 6.4 minutes).  

Ethereum 2.0 Staking Rewards

Staking rewards on Ethereum 2.0 range between 5-21% per year. Staking rewards can be earned by becoming a validator by joining an Ethereum staking pool. The exact rewards are determined by network participation and staking pool conditions. While validators will earn more than delegators, they also risk being slashed if they experience too much downtime or act maliciously on the network.

As such, if you decide to become a validator on Ethereum 2.0, make sure that your hardware and internet connection is sufficient. If you decide to delegate on Ethereum 2.0, make sure to check that the staking pool you decide to delegate your ETH to is reputable and trustworthy.

Finally, keep in mind that any ETH you stake will be locked until the next phase of Ethereum 2.0, which is set to take place in 2021-2022. This means you will not be able to withdraw your staked ETH until that time.

Ethereum 2.0 Staking Requirements

The requirements for staking on Ethereum 2.0 depend on whether you decide to be a validator or a delegator on the network. As a validator, you must stake a minimum of 32 ETH, have a strong internet connection, and a good computer. The exact specifications for ‘good computer’ are shown above. Note that you now require a minimum of 300GB of SSD storage.

As a delegator, Ethereum 2.0 requirements depend on the staking pool. There are some Ethereum 2.0 staking pools that require a minimum stake of 1000 ETH, and others which have no minimum stake amount (usually exchanges). There are no hardware requirements for delegating on Ethereum 2.0, nor is it required to have a strong internet connection.   

Again, remember that any ETH you stake as a validator or delegator will be locked for at least 1-2 years.

How will Ethereum 2.0 impact the price of ETH cryptocurrency?

Ethereum 2.0 is likely to have a positive effect on the price of ETH. This is because for the time being, any ETH being staked on Ethereum 2.0 will be locked for 1-2 years. Assuming demand for ETH stays high, a decrease in the circulating supply of ETH will have a positive impact on price.

Some cryptocurrency companies are also looking to develop a tokenized version of ETH that is staked on Ethereum 2.0. This tokenized ETH would be an ERC-20 token that functions as an IOU that could even earn interest in real time (from the staking rewards on Ethereum 2.0).

This tokenized ETH could be freely traded, and once transfers become available on Ethereum 2.0, it could be redeemed for the new 2.0 ETH. If created, there will likely be a very high demand for this tokenized ETH, which will further push up the price of ETH. Note that this assumes that nothing goes wrong with Ethereum 2.0, which could have a devastating impact on the price of ETH.

Sources and Useful Resources

– Ethereum Official Website.

For more information on Ethereum, visit Ethereum’s official website.

– Ethereum Blockchain Explorer

To see Ethereum transactions in real time, visit Etherscan.io

– Ethereum 2.0 Questions

For any questions related to Ethereum 2.0, including current network status, visit the Ethereum 2.0 Launchpad.

– Ethereum Twitter

To keep up with updates about Ethereum and Ethereum 2.0, follow @Ethereum and @vitalikbuterin on Twitter.

– Ethereum Staking Pools

You can use beaconcha.in to explore Ethereum 2.0 staking pool rewards and their requirements. 

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