Ethereum 2.0 is the latest upgrade to the Ethereum blockchain network, shifting it from a proof-of-work to a more efficient proof-of-stake consensus mechanism.
As Ethereum gained widespread recognition and adoption within the crypto space in recent years — it’s the second-largest crypto project after Bitcoin — some elements of the network required upgrades. As one of the most innovative blockchains in the DeFi space, Ethereum struggled with transaction times and scalability, among other issues.
The move from a proof-of-work consensus system to a less energy-intensive, more efficient proof-of-stake model aims to address those challenges. This massive overhaul has been termed The Merge.
What Is Ethereum 2.0?
To understand Ethereum 2.0 and its upgrades, you must have a basic understanding of what Ethereum is.
What Is Ethereum?
Ethereum is a form of crypto, of course, but Ethereum is best known as one of the most successful programmable blockchain platforms, with the capacity to support smart contracts, dApps (decentralized apps), non-fungible tokens (NFTs), and other DeFi projects.
The Ethereum native token is the Ether (ETH), and it’s used to fuel operations on the blockchain.
The Ethereum platform launched in 2015, and it’s now the second largest form of crypto next to Bitcoin (BTC), with a market capitalization of about $193 billion, as of Jan. 30, 2023.
Ethereum’s History of DeFi Innovation
The larger idea for Ethereum was to create a programmable blockchain that would enable a sort of free market environment, where developers could create decentralized applications (dApps), smart contract, and other DeFi programs without any control or interference from a third party.
Historically, Ethereum relied on a proof-of-work (PoW) consensus mechanism in order for miners to validate transactions and earn Ether (ETH) or gwei, a denomination of ETH used to pay for DeFi goods and services on the network.
In proof-of-work mining, high-powered computers solve complex mathematical puzzles needed to validate blocks of data or transactions.
Ethereum users can also create code used to build dApps and smart contracts. Smart contracts can execute transactions without a middleman, like a bank or regulator, once certain conditions are met. This innovation set Ethereum apart from other crypto projects, and it has inspired other crypto platforms to launch similar features.
Limitations of Ethereum
Because the Ethereum network has long attracted developers and other innovators, it has experienced growing pains, so to say, that have limited its ability to scale efficiently. In particular, Ethereum has been criticized for long transaction times and high fees.
Ethereum 2.0, or The Merge,”aims “to improve the network’s scalability, security, and sustainability,” according to its creators. As such, it’s hoped that improvements in those areas will be the primary ETH merge impact.
Those goals address several of the network’s key limitations: It needs to be faster, less vulnerable to threats, and eat up fewer resources. Of course, there are challenges to put these changes in place. Programmers have spent many years working on Ethereum 2.0, and though some changes have already been implemented, others will be phased in over the coming years.
How ETH 2.0 Solves Some Limitations
The most critical element of the move to Ethereum 2.0 is the transition from a proof-of-work algorithm that allows the network to be more nimble and efficient. While the proof-of-work system is still used by other crypto networks (most notably Bitcoin), many others are adopting alternatives.
The move to a proof-of-stake consensus mechanism eliminates the need for miners, which reduces the amount of resources required to keep the network’s integrity in check.
While the discussion about proof-of-work versus proof-of-stake algorithms is worthy of a conversation in and of itself (see below), the adoption of a the proof-of-stake system by Ethereum helps solve many of the issues (again, scalability, security, and sustainability) that the network previously experienced.
When Was Ethereum 2.0 Released?
The upgrades to the Ethereum network are being implemented in phases, and many features of the new network were established by late 2022.
The transition began with the introduction of the Beacon Chain in December 2020. During 2022, other upgrades were phased in, including a merge with Ethereum’s mainnet with the proof-of-stake Beacon Chain. The next phase will include a blockchain management strategy known as sharding sometime in 2023 or 2024.
What Are the Upgrades to Ethereum?
As noted above, the move toward Ethereum 2.0, or the Merge, has been accomplished in stages.
The Beacon Chain
The Beacon Chain introduced a new staking concept (proof-of-stake) to the platform. It launched before many other upgrade components because it’s a cornerstone to Ethereum 2.0’s system and needed to be in place for other components to work on top of it. The Ethereum merge date was in September 2022.
The Ethereum Mainnet Merge
The merge concerns the marriage of the existing Ethereum mainnet (Ethereum’s main network) with the Beacon Chain’s proof-of-stake protocol, as discussed.
This change is now live, and as a result, crypto mining is no longer needed to generate ETH, and instead, the network uses a staking system in order to create additional Ethereum tokens. This change has reduced the network’s energy consumption by more than 99.9%.
These two steps — the launch of the Beacon Chain, and the mainnet merge — paved the way for the next part of the transition: The introduction of shard chains.
By introducing shard chains, which is scheduled to happen within the next year or two, the Ethereum network will have more capacity and speed, giving it the ability to handle more traffic.
“Sharding” is a bit technical, but it basically means that a database will split up to disperse the load of transactions on the network. Sharding reduces congestion and speeds up transactions, allowing the network to store and process more data in a shorter amount of time. Plus, more people will be able to participate on the network after it is sharded.
Ethereum 2.0 Staking
Remember: Ethereum 2.0 represents a full transition to a proof-of-stake protocol from a hybrid system that uses both proof-of-stake and proof-of-work.
Staking, in general, is the process of locking up cryptocurrencies to earn rewards. It’s like putting your cash in a savings account and accruing interest. Staking is a process used to validate data and transactions in a blockchain network, which is why and how Ethereum uses it.
Recommended: What Is Crypto Staking?
With a proof-of-stake system, users validate block transactions based on the number of coins they hold. Basically, the more ether a user has, the more mining power they possess. As discussed, mining isn’t necessary under a proof-of-stake algorithm (not the case for proof-of-work).
That means that the process requires less energy and mining power — fewer resources overall — to keep the network running.
The Difference Between Proof-of-Stake and Proof-of-Work
Proof-of-work, conversely, is the original algorithm used by blockchain networks. On this protocol, users “mine” new coins, as they would on the Bitcoin blockchain, to earn rewards.
Mining is extremely energy intensive, which is one reason Ethereum 2.0 is moving to proof-of-stake.
Recommended: Is Crypto Mining Still Profitable in 2023?
A proof-of-stake algorithm will also bring less risk onto the network, has stronger support for sharding, and is more efficient — all upgrades over the proof-of-work system.
Summary: Ethereum vs Ethereum 2.0
To wrap it all up, Ethereum 2.0’s rollout is designed to make some significant improvement over the old Ethereum network, and make it more secure, sustainable, and increase its scalability. Here’s a brief rundown of the major differences, as they relate to crypto investors:
Ethereum vs. Ethereum 2.0
|Proof-of-work algorithm||Proof-of-stake algorithm|
|Required mining to generate ETH||Users stake tokens to earn ETH rewards|
|Slower and more resource-intensive||More secure and energy-efficient|
What Will Happen to My ETH?
There is no immediate impact to ETH holders as a result of the rollout of the Ethereum 2.0 project. While the network is getting upgrades, there’s no change to ETH itself, and investors shouldn’t need to do anything. Be suspicious of anyone who says otherwise, as crypto scammers may try to take advantage of the transition.
As for how the rollout has impacted prices for Ethereum? It’s hard to say for sure, as there are numerous factors affecting crypto prices at any given time. You can, however, check the ETH price now to get a sense of the value of your Ethereum holdings.
Ethereum 2.0 is a series of upgrades to the Ethereum network, which introduces a new proof-of-stake system that makes the network, as a whole, more efficient and secure. While the multi-year rollout of the upgrade has begun, hopes are that Ethereum will become bigger and safer over time, while reducing its environmental impact, setting it apart from other types of cryptocurrency.
If you’re interested in trading Ethereum, a one way to get started is by opening a brokerage account on the SoFi Invest online trading platform. You can use it to trade several types of cryptocurrency, as well as to purchase other investments, such as stocks or exchange-traded funds (ETFs).
Has Ethereum 2.0 come out yet?
Ethereum 2.0 is a series of upgrades that are being rolled out in phases, some of which have come out, or have gone live. The process is not complete, though, and likely will finish within the next couple of years.
Did Ethereum 2.0 replace Ethereum?
Yes and no. Ethereum and Ethereum 2.0 are still more or less the same as they were, but the network has changed or been replaced, in a sense. Ethereum 2.0 isn’t so much a replacement for Ethereum, as it is an upgrade to its system.
How are Ethereum and Ethereum 2.0 different?
The most impactful difference between Ethereum and Ethereum 2.0 is the introduction of a proof-of-stake consensus system, which makes the network faster, more secure, and more scalable, while reducing the amount of resources needed to generate new ETH.
Photo credit: iStock/Pekic
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