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What is Ethereum 2.0 (Eth2) about, and how will it affect you?

by Erina Azmi -

What is Eth2?

Eth2 refers to the latest infrastructure upgrade of the current Ethereum blockchain (Eth1), which would improve the network’s scalability, efficiency, and sustainability by ironing out the existing bottlenecks and enabling the network to process more transactions.

How does Eth2 differ from Eth1?

Eth2 aims to solve three issues that have been haunting Ethereum: 

  1. Scalability
    The Ethereum network currently processes about 14 transactions per second (TPS). When demand surges, network users outbid each other in an attempt to have their transactions processed first.

    The increase in the network’s activity would cause the ecosystem to become congested and result in a spike in the gas fee. This became apparent during the DeFi summer, when, during a yield farming frenzy in June through August, gas fees averaged 300 - 400 gwei (that’s about $5 to send ETH, and much higher for complex transactions).
     
  2. Efficiency
    Due to the ability to process only 14 TPS, it can cost up to $50 to interact with certain Ethereum DeFi protocols during peak demand times. This makes interaction within the Ethereum ecosystem a very expensive and, at times, inefficient process, as old transactions must be re-submitted with higher gas fees to be processed.

    One of Eth2’s manifestos is to achieve up to 100,000 TPS, which is higher than that of Visa’s 65,000 messages per second (MPS).
     
  3. Sustainability
    Currently, the Ethereum network utilizes a consensus mechanism known as Proof of Network (PoW), which requires miners to solve mathematical equations using computational power. It is a very energy-intensive process, with an estimated annual consumption of 12.8 TWh (which is comparable to that of Paraguay).
     

The solution?

To solve the three issues, Eth2 will be introducing two main upgrades:

  • Proof of Stake
    Eth2 will introduce Proof of Stake (PoS), where the process of building blocks on the chain is entirely virtual. In PoS, the miners are referred to as validators, and they are to stake Ether as part of validating the blocks. Because the validators do not need as much electricity compared to miners in PoW, it will be much less energy-intensive and require fewer resources to run to nodes. This, in turn, will help with the network’s sustainability and scalability issues.

    Difference between Proof of Work (PoW) vs. Proof of Stake (Pos)

  • Shard Chains
    Eth2 will introduce Shard Chains to enhance the throughput and bandwidth of the Ethereum blockchain. Sharding is the process of breaking large data into small chunks spread across multiple servers. Therefore, in Eth2, shard chains are created by “splitting” the Ethereum blockchain—dividing the data processing responsibility across several nodes.

    At the moment, all transactions and data verifications by the miners in Eth1 are done in a single chain with 14 TPS. However, the downside that arises from a single chain is the bottleneck effect on the network as the activity on-chain increases. The introduction of the shard chain would address the issue.
     

When will Eth2 be released?

Eth2 phases

So that Eth2 will be set in motion smoothly, it will be rolled out in three phases (Phases 0,1, and 2):

Phase 0 – Beacon & Staking (1st December 2020)

  • To trigger the first phase of Eth2, at least 524,288 ETH must be deposited into the deposit contract by November 24th. This has already been reached.
  • Eth 1.0 holders can deposit 32 ETH into a staking contract as a commitment to Eth 2.0 (Here’s how much you can make.)
  • The Eth2 genesis date has been rolled out on 1st December 2020 at 12:00:23pm UTC.
  • Stakers validate blocks on Beacon Chain via Casper Proof-of-Stake.
  • The Beacon Chain does not do much by itself; it cannot validate or execute transactions yet.
     

Phase 1 – Sharding (est. 2021)

  • Multiple chains (shards) will be deployed to facilitate scaling.
  • Computational loads are spread across multiple chains rather than being dependent on a single chain, as in Eth 1.0
  • Beacon Chain is the Beacon that “points the way” for all shards to maintain sync and data integrity within shards.
     

Phase 1.5 (still part of Phase 1) – Migration of Eth1 to Eth2 (est. 2021)

  • Migration from Eth1 to a shard on Eth2 via docking.
  • The Eth1 mainnet becomes a shard to transition its consensus mechanism from PoW to PoS.
     

Phase 2 – Execution Environments Ready (est. 2022 and onwards)

  • Allows for the processing of transactions, tokens, and smart contracts.
  • Ethereum 2.0 is finally ready to launch!
     

Which phase are we in right now?

We are currently in Phase 0. It was rolled out on 1st December 2020 at 12:00:23pm UTC.

Eth 2 phase
(Image source: https://ethereum.org/en/eth2/)

Can I still participate in the staking and earn rewards?

Yes, you can still stake your ETH and become a validator, despite there is already enough ETH in the deposit contract.
 
However, kindly conduct thorough research before you commit to the staking and become a validator, as sending ETH to the Beacon Chain during Phase 0 is a one-way and non-reversible transaction. You can withdraw your staked ETH only when it reaches Phase 1 (shard chains).

Caution: Do not blindly send ETH to the deposit contract!

Please refer to the resources below to learn more about staking from the official sites:
https://ethereum.org/en/eth2/staking/
https://launchpad.ethereum.org/

Is Eth2 a separate blockchain?

Yes. Currently, Eth2 upgrades are being rolled out on a separate chain (Beacon chain and its shard chains), but it will eventually be merged during Phase 1.5 into one chain via “the docking”.

However, in Phase 0, nothing can be developed on top of the chain, and no transactions can be carried out yet.

What will happen to Ethereum 1.0?

Eth1 will continue as it is and operate in parallel until it merges with Eth2 in Phase 1.5 and becomes Eth2 shard.

Can I buy Eth2 Ether?

No, you can’t. Currently, there is no new version of the ETH token. Eventually, Ether from Eth1 and Eth2 will merge in Phase 1.5.

What will happen to my Ethereum holdings?

For Eth1 Ether holders, there is no need to do anything, and no action is required to migrate your ETH from Eth1 to Eth2. In Phase 1.5, during the docking, Eth1 will merge with Eth2 as the infrastructure upgrades in the background.

Do I need to do anything when Eth2 is rolled out on 1st December?

Nope! As mentioned previously, ETH holders don’t need to do anything. No migration, upgrade, or change is required.

Where can I learn more about Eth2?

Here are the resources that we have used to create this article. They are the same resources we have used to keep ourselves up to date.

You can learn more about Eth2 here:

https://ethereum.org/en/eth2/
https://ethos.dev/beacon-chain/
https://consensys.net/knowledge-base/ethereum-2
https://blog.ethereum.org/

 
If you want to know more about staking, you can refer to:

https://ethereum.org/en/eth2/staking/
https://launchpad.ethereum.org/


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Erina Azmi

Erina Azmi

Erina is CoinGecko’s market research analyst. Current expertise is finance and crypto - DeFi. Previously in research consulting and often did market analysis.

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