When Ethereum launched, it leveraged the blockchain technology pioneered by Bitcoin while opening up the programmability beyond simple transactions. And it proved successful. Developers began onboarding and creating a wide variety of applications on the Ethereum network. The beginning of the decentralized Web 3.0 started to take shape. With the growth of Ethereum came great opportunities—and a few roadblocks.
Let’s start with the fundamental problems all smart contract platforms face. The co-founder of Ethereum, Vitalik Buterin, coined the phrase “trilemma” as an explanation for the shortcomings of large networks. Basically, there are three goals for a network, but with current limitations, it’s only possible to tackle two at a time.
The goals? Optimal scalability, high security, and decentralization. Vitalik originally argued that only two are possible at a time. For example, if your network wants to scale and prioritize security, then it will lack decentralization. These goals help pinpoint the main hurdles to overcome in developing the roadmap for Ethereum 2.0 and what it sets out to achieve.
So what’s the current problem?
The problems are simple, but identifying the solutions is complicated. Let’s take a look at the current state of Ethereum 1.0.
The biggest hurdle at the moment lies in scalability. Ethereum became the de-facto smart contract platform, meaning a large percentage of dApps (decentralized applications) built by programmers operate on the Ethereum network.
Currently, Ethereum can handle 15 to 45 transactions per second. This would be functional for a single use-case, but as the network expands, so do the billions of dollars of diverse transactions. Remember, a transaction is categorized as any time a wallet or service interacts with Ethereum’s blockchain to complete an exchange. This could be one user sending funds to another, or it could be a dApp confirming the transfer of an NFT.
A byproduct of the scaling problem is expensive transactions. In order for miners to prioritize what transactions to process first, gas fees increase competitively. Basically, this means that if you want to hurry your transactions, you pay additional ETH to bump your transaction to the front of the queue, driving up prices for all users.
Another long-term concern historically has been supply. A large draw for Bitcoin investors is the hard cap of 21 million BTC. Once they’re all mined, that’s it. No more inflation. No more supply. Ethereum currently has no cap on supply, although it has now introduced an exciting solution on inflation.
Lastly, as climate change and sustainability become more pressing issues, Ethereum seeks to minimize its footprint to create a more efficient backbone to Web 3.0, ETH 2.0.
How does Ethereum 2.0 offer a solution?
So now that we understand the problems, let’s explore how Ethereum 2.0 offers promising solutions. Here are a few of the ways ETH 2.0 sets out to be better, faster, stronger, and more sustainable.
More energy efficient: proof of stake
Ethereum 2.0 plans to move away from proof-of-work mining toward proof-of-stake. Proof of work mining is a consensus method or way for computers around the world to agree on transactions and code. In proof of work, people all over the world contribute to the network and push their computers to the bleeding edge to process transactions and earn Ethereum by doing so. This uses quite a bit of energy, specifically when the network is as large as Ethereum--the largest virtual machine on earth.
That’s where staking comes in. Staking is part of a different consensus method, called proof of stake. Simply put, participants in the network lock up their tokens as collateral to check and verify the network. Without getting too into the weeds, this uses at least 99% fewer resources than the previous proof of work consensus method.
Scaling up: Sharding
By far the biggest upgrade to be made with Ethereum 2.0 is how it will handle transaction throughput. Today, the Ethereum network can process just over 15 transactions per second (TPS). When the network implements all the upgrades, ETH 2.0 could achieve up to 100,000 TPS. For reference, VISA can reach up to 30,000 TPS for its entire global network.
Scaling to this size will provide incredible speed at low gas prices (fees for the network). And while it may sound like overkill, if Ethereum becomes the foundation for a new internet infrastructure, then every user on the majority of dApps will be using the network. To summarize, scaling to this size enables Ethereum to be what it originally set out to be and more.
Inflation control: EIP-1559
In August, Ethereum made the first of many large changes it has planned for the year with the introduction of EIP-1559. This change addressed one of the common criticisms of Ethereum, especially when compared to Bitcoin: it cannot be a store of value so long as the supply of new ETH is unbounded, whereas Bitcoin is capped to just 21 million BTC forever.
EIP-1559 did not set a supply cap on ETH, but it did activate a mechanism to curb the total supply growth over time by removing some ETH of circulation each time a transaction is made, also known as burning. This change also improved transaction speed and ensured ETH’s viability as a form of payment for Ethereum’s computing resources and interactions within the network’s wide system of dApps.
Even More Decentralized: No more expensive mining
One last thing to note, proof of work networks become increasingly more intensive to participate in. To sum it up, mining coins becomes more computationally intensive over time, demanding advanced equipment that discourages participation from everyday users--think server-farm-sized warehouses.
Switching to proof of stake empowers more users to participate in validating the Ethereum network. All you need is 32 ETH and a computer to receive staking rewards. Don’t have 32 ETH? Join a mining pool where everyone stakes together and divides the rewards. Remember, in crypto, more user participation means the network is more decentralized and less susceptible to foul play.
What comes next and what you should do
The blockchain space is notorious for big promises and bigger delays, but ETH 2.0 is fast approaching. If you hold ETH on a private wallet, you will need to keep an eye out for when the update happens to swap your 1.0 tokens to 2.0.
The easiest way to prepare for the update is to buy and hold your ETH on Voyager. Voyager handles the swap on the backend so you don’t have to worry. Plus, when you hold ETH on Voyager, you can automatically earn yield on your portfolio when you maintain the minimum monthly average balance.
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