Ethereum 2.0: What Does the Upcoming Ethereum Upgrade Mean for Investors?

Ethereum 2.0 is on the way. It’s actually been a part of the project’s roadmap for a while now, even though the average crypto investor is probably just hearing about it over the last year or two. Vitalik Buterin, the chief founder of Ethereum, says it’s actually been in the works since 2014. What is the Ethereum 2.0 upgrade and why is it necessary? And more importantly, why should you as a progressive investor care?

These are the questions we’re going to answer in this post.

 

Why Is the Ethereum 2.0 Upgrade Necessary?

The foundation of the Ethereum network was put together in 2014 by eight different founders. The goal of the Ethereum blockchain is two-fold. First, it is meant to give developers an avenue for raising funds in order to build decentralized applications on their own without the involvement of a central authority. Smart contracts are an innovation that helps this. But secondly, and perhaps more importantly, Ethereum’s goal is to be a faster and more secure alternative to Bitcoin.

While the first version of Ethereum is certainly accomplishing that goal, the mission of the broader blockchain technology space is much bigger than that. It involves providing users with greater transaction speed and scalability that will rival traditional payment networks like Visa and MasterCard, which can process more than 1,500 transactions per second.

At the moment, the Bitcoin network processes about 7 to 10 transactions per second, and the Ethereum network can process up to 30 per second. Both networks, and many other altcoins for that matter, have improved on their respective transaction speeds over the years, but they all still pale in comparison to Visa and MasterCard.

That’s why Ethereum 2.0 is necessary.

What Is the Ethereum 2.0 Upgrade All About?

The chief reason Ethereum needs upgrading has to do with the way transactions are confirmed on the blockchain. Ethereum 1.0 uses a proof-of-work consensus algorithm to validate transactions. Proof-of-work consensus algorithms require a large amount of computing power. Computers solve complex cryptographic puzzles that validate transactions as genuine. As the number of transactions registered on the blockchain grows and the complexity of the computations increases, so does the energy required to solve the cryptographic puzzles. This slows down transaction speeds, clogs up the network, increases transaction fees and makes it less practical for a larger number of users to engage in exchanging value on a blockchain.

With Ethereum’s 2.0 upgrade, the consensus algorithm will move to a proof-of-stake model. In a proof-of-stake consensus model, nodes connected to the blockchain are called validators. They validate transactions in a randomized order and stake their tokens to the network as a kind of collateral. When they successfully validate a block of transactions, they get a reward. The more coins they stake to the network as collateral, the more transactions they can validate and the greater reward they can earn.

That said, decentralized technology is supposed to be for everyone and one of the things the Ethereum 2.0 upgrade is trying to accomplish is to make it so that anybody who possesses at least a certain threshold of Ethereum tokens (32 to be exact) can participate in validating transactions and thus earn rewards. Assuming that one Ethereum token is currently worth $500 Canadian, that means you will need $16,000 worth of Ethereum tokens in order to participate in earning between 2% and 18% per annum in staking rewards.

 

The Risks of Staking on Ethereum 2.0

As with any form of investing there is a certain risk that goes with staking value to the Ethereum network in order to try to earn some of those precious tokens. Validators who make mistakes risk losing all their value. Ethereum 2.0 is built to penalize malicious actors and those who don’t validate transactions properly, severely. This helps to make the network more secure, but it also means if you’re going to contribute a significant amount of value to the network, you better know what you’re doing.

We are not going to cover the mechanics of staking coins to a network and validating transactions in this blog post. Just know that staking coins to the Ethereum network requires you to be connected to the network for a considerable amount of time throughout the day and you need to acquire the knowledge necessary to validate transactions.

Considering that you also need 32 Ethereum tokens to participate, the whole idea may be too rich for your blood anyway. That’s why you shouldn’t be surprised if major crypto exchanges offer you the opportunity to take part in Ethereum staking pools in the very near future.

Keeping Ethereum secure by penalizing validators for validating transactions incorrectly is one way to help keep the network secure and help avoid the consequences of double spending attacks. But there is another aspect of Ethereum’s upgrade we have yet to talk about. That’s sharding.

What Is Sharding?

In order to understand what sharding is, you need to have a basic understanding of why a blockchain is secure and how it all works. The details of it can be very technical, but here’s quick a 5,000-foot view.

The reason why a blockchain is called a blockchain is because it’s literally a chain of blocks. The blocks contain groups of data. That’s why a blockchain can hold data related to anything, not just currency. The point is that in a blockchain, blocks of data are tied together. In order to uncover the origins of a transaction or to attempt to steal anything, a malicious actor would have to break into a block by breaking every link in the chain that particular block is connected to.

This makes it nearly impossible to break a chain over time because blockchains get bigger and bigger as more transactions take place. This means the blockchain becomes more secure over time, but the fact that these chains get bigger and bigger is why transaction speeds get slower and slower, and transaction fees go higher and higher.

That’s why the concept of sharding is an important part of the Ethereum 2.0 upgrade. Sharding breaks the blockchain into segments called shards. Shards allow nodes on the Ethereum network to validate transactions and add them to the blockchain using only that shard as a snapshot of what’s happening on the blockchain in order to validate those transactions. This means that nodes no longer need information relevant to the entire blockchain in order to add to it, making the process of validating transactions and adding them to the blockchain more efficient from both a technical and energy consumption standpoint.

A Side Note on Sharding Takeovers

Dealing with malicious actors within a trustless environment is always a challenge in the world of decentralized technology. A sharding takeover is when a malicious actor corrupts the validators in a given shard. Ethereum’s upgrade tackles this issue by assigning nodes to specific shards and then reassigning them on a regular basis using random number generation. This way a node never stays tied to a shard long enough to do anything malicious. Couple that with the severe penalties that exist for incorrectly validating a transaction and it’s easy to see how the Ethereum 2.0 upgrade will deter sharding takeovers and malicious events from happening on the network.

So now you know that a proof-of-stake algorithm makes validating transactions and adding them to the blockchain more efficient and randomly assigning nodes to shards prevents attacks and makes the network more secure. There is one more piece to the puzzle however that brings everything together. That’s the beacon chain.

Ethereum 2.0: The Beacon Chain

Ethereum 2.0 will be faster and more efficient not only because of sharding, but because of the fact that the sharding process itself will take place on 64 parallel chains that take the load off of the Ethereum network. This allows the transaction speed of the network overall to increase exponentially from where it is now.

It’s a cool concept, but these 64 parallel chains need a way to connect to the main Ethereum network. That’s where the beacon chain comes in. The beacon chain acts as the central hub of Ethereum 2.0’s consensus algorithm. It monitors the staking activity of validators and messages sent through the network. It’s a new chain that didn’t exist on Ethereum 1.0. It acts as a bridge directly to the 1.0 network. What this means for investors like you and users in general is that the transition from Ethereum 1.0 to Ethereum 2.0 is going to be seamless. You won’t have to change your wallet for another one. You won’t have to exchange Ethereum 1.0 tokens for Ethereum 2.0 tokens. Your experience as a user won’t change at all, apart from the fact you’ll be able to stake your tokens and earn a return on investment.

 

Will Ethereum 2.0 Make Investors Wealthier?

Take a minute to think about what the world of decentralized finance is doing for the value of Ethereum and its token. Consider how all of the technical aspects of the innovation described above are going to not only improve the security and scalability of the Ethereum network itself, but also reward investors and make Ethereum tokens more of a scarce commodity. An exponential increase in the value of Ethereum tokens is practically inevitable.

Certain parts of Ethereum 2.0 are in the advanced stages of testing and other aspects will be rolled out throughout 2021. If you’re ready to take a chance on the project, now is probably as good a time as any to do so. Remember though that this blog post isn’t investment advice and you’re taking your own risks.

That said, if you’re a cryptocurrency believer and you’re ready to dive deeper into the rabbit hole, work with a Canadian-based crypto exchange. Netcoins is a cryptocurrency exchange in Vancouver that sells Bitcoin, Ethereum and a handful of other cryptocurrencies. Getting started is as simple as registering an email address and password, verifying yourself and registering to use a credit card or bank account to get on the Ethereum 2.0 train.

Looking to buy and sell ETH? Netcoins is Canada’s first publicly owned crypto trading platform to be fully regulated. Simply create an account with Netcoins, fund it with an e-Transfer (more funding options available) and head to the trade page to buy ETH. Sign up today!

Happy investing!