The Arrival of ETH2, and Why It Matters

Authored by Makara


Published June 25, 20217 min

For the past couple of years, the crypto world has been looking forward to Ethereum’s smarter, faster, and more streamlined new iteration in an update called ETH2. ETH2 has no official release date, unless you count promises of “soon,” but it appears as though soon is finally here. At least partially: Some aspects of the new network began running in December 2020, and the actual moment of transition (which has the sci-fi-worthy name of “The Merge”) should be in 2021 or 2022. When that happens, Ethereum will go from an energy-intensive Proof of Work (PoW) system to a much faster and (much much) more environmentally friendly Proof of Stake (PoS) system. Proponents say this shift will improve the security of the network, allow for more transactions, lower fees, and reduce electricity consumption by an astonishing 99.95 percent. That sounds pretty impressive. It also sounds pretty complicated, which is why we put together this explainer.

Proof of Stake vs. Proof of Work

PoS and PoW are “consensus algorithms,” which means they ensure trust among participants by requiring a majority to approve of every new transaction before it is officially recorded, or mined. Both systems are designed to be reliable even if one or more of the computers in the network fails, and both prevent fraud by making it prohibitively expensive to cheat. In a PoW system, the expense comes in energy cost. PoW requires potential miners to guess billions of character combinations until they find the correct one. That takes an enormous amount of computing power, which takes an enormous amount of energy. This blocks one of the main ways to cheat the system because, if you were able to control a majority of the computational power in that system, it would require so much energy as to outweigh any financial incentive. In a PoS network, however, participants stake their own money as collateral in order to verify transactions and earn fees. The penalty is simple: If you get caught cheating, you lose your stake.

The Benefits of Ethereum 2.0

There’s that whole environmental impact thing, of course. That would really be enough on its own. But since a PoS system means there is no longer a need to wait for all that hardware to guess billions of combinations, it also speeds up transaction times and reduces fees. This is a huge benefit, making ETH2 nearly as efficient as payment systems like Visa or Mastercard. The adoption of ETH2 should also reduce power-related risks, such as fires or overloading the grid, and allow miners to operate anywhere—which is especially important given the recent hostility toward crypto and miners in China.

The Beacon Chain and The Merge

The first part of the switch to ETH2, a piece of code called the “beacon chain,” rolled out on December 1, 2020, and is already operating on a PoS model. Right now, users who want to try validating a block need to stake at least 32 Ether (approximately $62,000 at the time of writing) in order to be chosen, although they have a better chance if they stake more. This money, as well as any rewards earned, will be locked in a sort of holding tank until the entire network fully transitions. The beacon chain is currently operating independently of the main Ethereum blockchain, which still works on the PoW model. Sometime this year or next, the parallel chains will come together, fusing Ethereum’s entire history with the new PoS model. This is The Merge. From that point on, the beacon chain will coordinate all of ETH2. It will be the authority that chooses validators at random once they have put up their stake. It will also oversee the dozens of subchains (called “shard chains”) that are being created to speed up transactions and allow the new network to scale to a larger number of users.

Why ETH2 Is Important

Proof of Stake is a completely new approach to crypto that directly addresses many of the biggest challenges this asset class has faced. It’s good for the environment, good for users (since transactional costs should decline dramatically), and good for the speed and number of transactions that can be processed. It also distinguishes Ether from all the PoW cryptocurrencies out there and further distinguishes it from Bitcoin. For those anxiously awaiting The Flippening (the hypothetical moment when Ether overtakes Bitcoin as the cryptocurrency with the largest market share), ETH2 is a giant step toward that possibility.