ETH2 is a series of upgrades aimed at making the Ethereum protocol more scalable, secure, and sustainable. These upgrades will be launched in phases as shown below, and the completion date is 2023. Before analyzing the positive and negative impacts of the upgrade decision, this article will explain about the upgrade process and how it intends to improve the protocol.
Convert from PoW to PoS
PoW and PoS are both called consensus algorithms. Unlike centralized databases, the blockchain protocol distributes data to millions of participants according to an encrypted set of rules. In the absence of a centralized authority, a consensus mechanism must be in place to verify transactions and record new information on the blockchain. These mechanisms are often time consuming and energy intensive, although they create a trustless ecosystem.
Bitcoin is based on PoW. In this system, miners use their computational power to solve complex math puzzles. The first miner to solve the puzzle will receive a block reward in Bitcoin. For some, the shortcoming of this consensus algorithm is its high energy consumption. The Bitcoin network consumes more electricity than mid-sized countries like Switzerland, Israel and Argentina.
ETH2 moves from PoW to PoS through the Beacon Chain. Staking is the act of sending tokens and running authentication software. Individuals must stake a minimum of 32 ETH or send it to the staking pools and receive a corresponding income distribution. Alternatively, people can run the authentication software themselves or outsource a cryptocurrency company like Binance or Kraken.
According to the software, the deposited ETH will confirm the transactions and the account is rewarded with additional ETH. Instead of new Bitcoin entering the market through a PoW algorithm-solving miner, new ETH joins through volunteers staking their tokens.
For many people, this method is safer and more sustainable. To do a 51% network attack, someone must own 51% or more of all ETH instead of handling the power on the network. Thus, about 123 billion dollars is needed to consider attacking the network in this way. Additionally, PoS is considered more sustainable because it reduces the need for energy-intensive mining rigs.
Instead, anyone can run the authentication software with 100GB of storage on a laptop, smartphone or tablet. While reducing the amount of energy used is an advantage, Ethereum has to pay a heavy price.
Scalability and shard chains
Once a certain volume is reached, every digital asset will have problems with size. Too much activity leads to network congestion. Bitcoin faced block size debates in 2017, which ultimately led to the Bitcoin Cash hard fork, but also Segregated Witness and Lightning Network used as the solution. Ethereum’s scaling solution involves the addition of shard chains (shards). The shard chain divides the network into 64 chains, increasing the processing power on the base layer 64 times. Combined with zk-rollups, a layer 2 solution similar to Lightning that bundles transactions before settling them on the main chain, Ethereum will scale in the right time.
One downside of the ETH2 implementation is the lengthy time it takes. The shard chain is set to launch this year, but if similar to phase 0, it could be delayed. Currently, the high gas fees on the Ethereum network require a quick solution that the plan cannot fulfill.
Every ETH transaction requires computational power to execute. Therefore, there is a fee for each transaction. This fee is called the “gas price”, a metaphor for cars that need gas to travel. The chart below shows the gas fees of ETH since 2018. Since there are many users joining the network in this bull market, network congestion has caused gas fees to skyrocket. In March, a reddit user claimed to have been charged $ 45 for a $ 100 transaction.
As a result, developers and users can switch to Tron, EOS, Cardano, or another smart contract protocol if gas fees remain rising as it is unlikely that a scaling solution is imminent. High gas fees will hamper the development of Ethereum-based smart contracts until a solution expands. Although this acted as a drag, it was not seen as a disruptive tool.
PoS and centralization
Despite those advantages, the most negative aspect of the transition to Proof-of-stake is the concentration of power it is capable of generating. Proof-of-stake gives an advantage to those who already own significant amounts of ETH. For Bitcoiner, this goes against the character of the entire blockchain space.
First, users must stake ETH until the transition to ETH2 is completed around 2023. The more ETH you have, the more you can stake. The more ETH you stake, the more ETH you earn. Also, a soft fork on the Bitcoin network cannot happen without a majority of miners voting in favor. Though energy-expensive, forcing miners to incur high operating costs creates a more rewarding incentive structure.
Without miners, Ethereum governance is determined by the amount of ETH owned. So in addition to getting more ETH by having more ETH, having more ETH will provide greater voting power. It is unlikely that this transition will result in a group of ETH investors and developers altering the system for their benefit. However, Bitcoin is designed to replace inequality of opportunity in inheritance finance. Proof-of-stake in Ethereum is no different from the accessibility of capital privileges offered to institutional investors and corporations.
In short, the transition to ETH2 has many advantages, but no shortcomings.
Pros: Chain shard and zk-rollups provide the scaling solution that the protocol desperately needs. Additionally, Bitcoin detractors will often complain about its energy consumption. Proof-of-stake will make Ethereum more energy-efficient than Bitcoin, despite the cost.
Cons: The shard chain will not be finalized by 2021, and the entire transition will run until 2023. Investors may incur higher than average gas fees for then.
ETH2 allows early investors and large holders to accumulate more ETH than retail investors. It also gives them greater voting power. For the Bitcoinists, this is blasphemy. However, while PoS works as opposed to the properties of blockchain technology, there isn’t anything too dangerous here. In the balance between energy efficiency and absolute equal opportunity, Ethereum developers chose the first.