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What Is Ethereum 2.0? How Will It Be Different?

By Samuel Becker · September 17, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is Ethereum 2.0? How Will It Be Different?

It’s hard to imagine the U.S. government announcing the “Dollar 2.0.” But in the wild world of cryptocurrencies, that wouldn’t be an unusual occurrence. When it comes to some cryptocurrencies, like Ethereum, it’s inevitable — Ethereum 2.0 is in the works.

While Ethereum has, in some respects, joined Bitcoin as a fairly mainstream cryptocurrency, it’s overdue for an upgrade. Read on to learn what those upgrades will look like, what they’ll do to your Ethereum holdings, and ultimately, what it means for your portfolio.

Recommended: Guide to Investing in Ethereum

What is Ethereum 2.0?

To understand Ethereum 2.0 and its upgrades, you must have a basic understanding of what Ethereum is. Here’s the short version: Ethereum is an online platform built on blockchain technology (essentially a decentralized ledger) that programmers use to store data on decentralized networks. It has a native currency, “ether,” which powers transactions on the platform. So, using blockchain technology, Ethereum allows developers to build decentralized applications (DApps).

Now, as for Ethereum 2.0, the upgrades will address some core issues with the Ethereum network. It’s like upgrading the software on your phone or computer, in a sense, in that the new version of Ethereum will resolve some existing issues and make it easier for Ethereum 2.0 to gain more widespread adoption.

Limitations of the Current Ethereum

Ethereum 2.0, or Ethw, aims to “make Ethereum more scalable, more secure, and more sustainable,” according to its creators .

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 the changes will take several years to be fully adopted.

When Is the Ethereum 2.0 Release Date?

There is not a hard and fast Ethereum 2.0 launch date. The transition to Ethereum 2.0 has already begun, with the introduction of the Beacon Chain occurring in December 2020. The next phase will be “the merge,” followed by “sharding,” and then, finally, the transition to eWASM.

What Are the Upgrades to Ethereum?

The Beacon Chain

The Beacon Chain upgrade launched in December of 2020. The Beacon Chain introduces a new staking concept to the platform. It launched before many other upgrade components because it’s a cornerstone to Ethereum 2.0’s system. The Beacon Chain needed to be in place for other components to work on top of it.

The Ethereum Mainnet Merge

“The merge,” as some call it, concerns the marriage of the existing Ethereum mainnet ( Ethereum’s main network) with the Beacon Chain’s proof-of-stake protocol. The Ethereum 2.0 team working on these upgrades refers to this as “the docking.”

Developers expect “the docking” to take place sometime during 2021 or 2022. Once it happens, miners will no longer need to mine ETH, and will instead move to a staking system in order to earn additional Ethereum tokens.

These two steps — the launch of the Beacon Chain, and the mainnet merge — pave the way for the final part of the transition: The introduction of shard chains.

Shard Chains

By introducing shard chains, 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 horizontally to spread the load of the transactions on the network.

Sharding reduces congestion and speeds everything up, 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.

The introduction of sharding will likely occur sometime in 2022.

Launch of eWASM

The final stage of the rollout will include the introduction of eWASM (WebAssembly) code to the renewed platform. eWASM will replace Ethereum Virtual Machine (EVM), the engine on which the platform runs now, and which powers the action on the network. The launch of eWASM should make the network faster and more efficient.

Ethereum 2.0 Staking

Recall that Ethereum 2.0 will represent 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?

Understanding Proof-of-Stake

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. But 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 with Bitcoin, to earn rewards. Mining eats up a lot of resources, which is one reason Ethereum 2.0 is moving to proof-of-stake.

Recommended: Is Crypto Mining Still Profitable in 2021?

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.

Status of the Ethereum 2.0 Project

It’s still early days for Ethereum 2.0. The Beacon Chain has launched, but we’re waiting for the “merge,” or “the docking,” to take place. Developers expect this to occur sometime during 2021, but it could happen during 2022.

The Ethereum 2.0 project is being released in phases, so it’ll be some time before the full transition is in effect. You can visit Ethereum’s website to check on the current status of the project.

What Will Happen to My ETH?

There is no immediate impact to ETH holders from the Ethereum 2.0 project. While the network is getting upgrades, there’s no change to ETH itself. Be suspicious of anyone who says otherwise, as scammers may try to take advantage of the transition.

Some ETH proponents have positive ethereum 2.0 price predictions. They believe that the upgrade will increase the value of ETH making your holdings worth more over time.

The Takeaway

Ethereum 2.0 is an upgrade to one of the largest and most popular cryptocurrencies. While the multi-year rollout of the upgrade has just begun, developers hope it will make the cryptocurrency bigger and safer, while reducing its environmental impact, setting it apart from other types of cryptocurrency.

If you’re interested in trading Ethereum before the Ethereum 2.0 update comes out, a great 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.

Photo credit: iStock/Pekic

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