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Ethereum 2.0

So Ethereum 2.0 is coming in 2022, it’s gonna be an exciting year for ETH investors, validators, developers, and projects that run on the Ethereum blockchain.

So in this article, we’re gonna talk about what Ethereum 2.0 is, the problems that Ethereum 1.0 is facing now, the changes that have happened on the network and will happen in the future, how they solve Ethereum’s current problems, and what we can do as investors to take advantage of all the changes taking place on the network.

When we talk about Bitcoin, all we think about is money, right?

And that’s all there’s to it. It is a digital dollar that can be used to transfer from one place to another without the interference of middlemen like banks.

Ethereum blockchain uses Eth as the blockchain’s currency. Eth is like Bitcoin, we can transfer it from one person to another but the fees that we need to pay to have our Eth transferred are becoming more and more expensive, which is one of the biggest problems with Ethereum right now.

But when we think of Ethereum, we also think of it as a ledger technology that companies are using to build new programs.

In fact, there are more than 3000 decentralized applications (aka dapps) that are created on the Ethereum blockchain as of the beginning of 2021.

So as you can see, Ethereum has been a game-changer for not only companies around the world, but also for average people like you and me. People even buy houses by just playing the games that were built on the Ethereum blockchain.

1/ The high fee: Think about the internet, when there are too many devices being used on the same network at the same time, this will congest the network, and make the network slower.

And there are no other ways to improve that unless we pay a more expensive plan to get better internet speed or spend more money on a better modem to make sure the upload and download speed is appropriate with the plan we’re paying for.

Doesn’t matter what your chosen method is, you have to spend more money.

The Ethereum network works the same way. When there’re too many projects being built on Ethereum, and too many people use Eth to transfer from one person to another, the network will inevitably also become congested.

And only the people who are willing to pay the extra fee will have their transactions handled first.

In fact, according to Bitinfocharts, the average transaction fee for Ethereum as of the beginning of November 2021 is $51.57, for comparison, the average transaction fee was $5 at the end of 2020.

2/ The excessive use of electricity: Ethereum uses the proof of work consensus mechanism, which requires miners to use high computational power to compete to solve complex problems.

When they are able to solve these problems, they will earn rewards in Eth.

So miners are incentivized to make their computers as powerful as possible, which leads to too much electricity being consumed.

So Ethereum is facing two problems, high fees, and excessive energy consumption. Let’s look at how Ethereum developers are attempting to solve these problems.

To make these problems disappear, they will need to make Ethereum 2.0 a more secure, scalable, and sustainable network.

1/ Scalability:

A network that is scalable can handle more transactions per second without increasing the size of the nodes in the network.

Increasing node size isn’t practical because only those with powerful and expensive computers could do it.

So in order to scale effectively, Ethereum needs more nodes to increase the transactions per second on the network. The goal is 1000 transactions per second. This will not only help Eth users but also make applications on the network faster and cheaper to use.

Plus, using more nodes will make the network become more decentralized, and less prone to attack.

2/ Security:

To make the network more secure, Ethereum 2.0 uses the proof-of-stake consensus mechanism. This will turn miners into validators.

Instead of competing to solve computational problems, they will need to stake Eth in order to be chosen to validate transactions. The more they stake, the higher their chances to get chosen.

The transition from proof of work to proof-of-stake means that the Ethereum protocol has greater disincentives against attack. Because with proof-of-stake, the validators who secure the network must stake significant amounts of ETH into the protocol.

If they try to attack the network, the protocol can automatically destroy their ETH. That means destroying their money, which is something nobody wants to do unless they’re crazy.

3/ Sustainability:

For the network to sustain, Ethereum needs to be greener.

As mentioned earlier, Ethereum uses too much energy to mine new blocks due to mining activities in the proof of work system.

The proof-of-stake system that Ethereum is transitioning into will eliminate this problem. In fact, A recent estimate from researcher Carl Beekhuizen says ETH 2.0 will consume 99% less energy than the current Ethereum blockchain.

(TLDR: the vision for Ethereum 2.0 is higher transactions per second, a more secure network, and less energy consumption with the proof of stake consensus mechanism.)

The whole process is divided into different phases. The first phase or phase 0 actually already started in December of 2020.

It introduced Beacon Chain: This is the chain that introduces proof of stake to the Ethereum network; however, it will not change anything about the Ethereum network that we’re using today until phase 1.

Even though phase 0 has been launched more than a year ago, phase 1 wasn’t ready until Q1 of 2022. This phase is called the Merge.

The name basically tells you what it will do. The current Ethereum chain will merge with the Beacon Chain, then the Ethereum network will completely eliminate proof of work, and transition into proof of stake entirely.

The merge will bring the ability to run smart contracts of the Ethereum network into the proof-of-stake system of the Beacon chain, plus the full history and current state of Ethereum, to ensure that the transition is smooth for all ETH holders and users.

After the merge, we move on to Phase 2. Phase 2 will be shipped sometime this year, and it will be dependent upon how quickly work progresses after Phase 1.

At this phase, Shard chains will be introduced. They spread the network’s load across 64 new chains; they make it easier to run nodes by keeping hardware requirements low.

With shard chains, validators only need to store or run data for the shard they’re validating, not the entire network.

This speeds things up dramatically and allows people to use Ethereum on their personal computer or phone.

So more people are able to participate, and run clients in a sharded Ethereum.

This will increase security because more people joining the network will make it more decentralized, and lower the chances of attacks on the network because everyone has their stake in it.

There are several ways we could do this. The first way is that we can become validators on the network by setting up our own node, stake the Eth that we own, and earn more Eth by validating transactions on the network.

However, there’re a few things you need to keep in mind when doing this. Running our validator node for Eherum requires a 365-day lockup and a minimum balance of 32ETH, worth around $57,600 at the time of this writing.

You also need a really fast computer that is online 100% of the time. If your internet connection fails, you could lose your staked deposit.

If your validator is online and chosen, you earn some amount of ETH as a reward, but if your validator is offline at the time you are chosen, you’ll be penalized for missing it.

So while this sounds like a good way to earn some passive income, it comes with a lot of requirements and losing almost $58,000 just because our connection to the internet fails is something we’re not looking forward to.

Plus, your chances of getting chosen to validate transactions are very low because, with the proof-of-stake model, you need to commit as much Eth as possible to have a higher chance of getting chosen.

Unless you have a company dedicated to just doing this, it won’t be profitable if you do this all by yourself with just one computer and 32eth.

So another way to earn more money with Eth is joining a staking pool on Defi apps.

This is a much much simpler way to earn Eth. There are no hardware requirements that you need to follow, no need to run your own node, and no need to commit 32eth.

Joining a staking pool solves all this for you.

You can join other stakers and stake as low as 0.01 Eth into the pool, every time your pool is chosen to validate transactions, you’ll earn some amount of Eth just for staking them.

This is truly a great way to earn passive income. All you have to do is set up a wallet, transfer your Eth, sit back, relax, and wait for the money to fall into your pocket.

Another way you can earn more Eth is staking on an exchange. Exchanges like Coinbase or Binance also offer staking options for their users. The process is simpler than staking on Defi apps, you just have to create an account with your chosen exchange, transfer or buy your Ethereum into the wallet on the exchange, and stake it.

The return may vary from one exchange to another and they will change over time. For example, currently, Coinbase offers up to 4.5% annual percentage rate on your Eth, Binance up to 20%, Kraken between 4% to 7%, and Crypto.com up to 8.5%. Each platform will have its own requirements, and lockup period in order for you to earn the staking rewards.

Staking will not only earn you money, but it’s also a great way to participate in increasing the security of the network, help the ecosystem grow, and when it is able to grow, more people will put their trust in it, which in turn increases the value of the coin that supports the network.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

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