What Is Ethereum 2.0? Its Effect on ETH Price and How to Buy it

Created in 2015, Ethereum became a new milestone in the history of the blockchain industry. It was the first blockchain platform for smart contracts and decentralized applications (dApps). The emergence of the field of decentralized finance (DeFi) and such projects as MakerDAO, Compound, and Uniswap is largely a credit to Ethereum.

As of the end of 2022, Ethereum still maintains its leadership in the industry, hosting a huge number of dApps. The native Ethereum ETH token is the second digital asset by capitalization in the cryptocurrency market. At the end of November 2022, the total value of all ETH coins exceeded $155 billion.

However, the success of the platform has played havoc with it. The huge number of users and the high load on the Ethereum network led to problems with scalability and transaction speed. In turn, it resulted in an increase in transaction fees. To maintain leadership and provide a better user experience, the Ethereum team, led by Vitalik Buterin, started implementing an update called ETH 2.0.

Key Takeaways

• Ethereum 2.0 is an ongoing upgrade to the original Ethereum network
• As part of the upgrade, Ethereum transitioned from PoW to PoS consensus mechanism
• The current issues with Ethereum’s speed and high transaction fees are going to be tackled with the 2.0 solutions
• Not only Ethereum will become more scalable, but also “eco-friendly” by reducing energy consumption with PoS
• With the new upgrade, more developers will be able to build on Ethereum as not only Solidity will be used but also easier languages such as C++

What Is Ethereum 2.0?

Ethereum 2.0 is a major upgrade to the Ethereum network. It intends to improve the network’s speed, scalability, and efficiency. The upgrade will result in increased transaction volume, and a decrease in gas (fees) costs.

As Ethereum gains traction, the network struggles to process all requests (96% of transactions were reported to go through a “congested” Ethereum network). Ethereum 2.0 is also aimed at reducing this congestion. With the upgrade, Ethereum will be able to handle more transactions and host more DeFi projects. For Ethereum enthusiasts and investors, it is a major event.

Before the upgrade, Ethereum used Proof-of-Work to secure its transactions and prevent double-spending. The PoW is based on a simple idea.

While miners need to solve a complicated problem by spending a lot of computing power, the system quickly confirms the solution using effectively none. So, miners’ computing power ensures the validity of a transaction. Each completed proof-of-work adds a block to the chain.

Of course, computing power is resource-heavy so miners get rewarded for each transaction. That’s where the concept of mining coins came from, and that’s how ETHs were generated before the 15th of September. up till now.

On September 15, 2022, However, Ethereum 2.0 will retire PoW in favor of Proof of Stake — another approach to blockchain consensus. PoS confirms the transaction not by spending computing power, but by staking a certain deposit as proof of the user’s intention. Validators take turns voting on the block, and the vote’s weight depends on the amount of deposit (stake).

Key Features of Ethereum 2.0

Let’s take a look at the fundamentals of ETH 2. These changes will contribute to positive shifts in Ethereum performance.

Sharding

All blockchain systems operate within three values — Decentralization, Consistency, and Scalability. However, due to technical limitations, maintaining all three equally pronounced is impossible. There’s a tradeoff — if you choose two values, the third one has to go. In the case of Ethereum, Scalability was a major problem. To solve this “trilemma”, Ethereum includes sharding in its latest update.

Ethereum 1.0 was a single large chain that was governed by the entire network. Sure, we saw some occasional minor (and unwanted) forks in the past, but overall, the chain was designed to be a single entity. Sharding offers a different approach.

• Large chain is divided into smaller, faster ones. A chain is essentially a “monolith” database — to make a single change, you have to alter a large entity. Sharding breaks it into many smaller chains — and each can execute its transactions independently;
• Shard chains all adhere to the same rules and are controlled by the network. The split, however, from a technological point of view, allows faster data processing and updates;
• Ethereum 2.0 will connect shards with each other via cross-shard communication — hence, more security and consistency, without trading off scalability.

To provide network participants with more flexibility, a new update will also introduce various types of nodes (like a “Light Node”, or “Full Node”), with flexible data capacity and performance parameters.

Staking

Proof of Stake uses deposits to guarantee the honest participation of all network members. If you have a significant deposit staked in the system, you are interested in contributing positively to its growth.

Like Proof of Work, PoS solves the Byzantine fault by giving more incentives for collaboration than you could ever get if playing against the rules.

All network participants are invested in the system (since they deposited stakes) and, therefore, have a voting right.

ETH 2.0 Transaction Time

The current transaction validation system is relatively slow — Ethereum can execute up to 30 transactions per second. On the contrary, the ETH 2.0 version is promised to support 100 000 requests per second.

Increased capacity means lower transaction fees and more use cases for decentralization applications and ETH usage. As Ethereum will become faster, more efficient, and lower cost, more companies, and businesses will likely embrace decentralization, further strengthening the network.

The History of Ethereum 2.0

In fact, Ethereum has been developing non-stop. Since the launch of the project, the Ethereum team has invested in it a lot, continuously improving the network all these years. In general, the development of the project was divided into 4 main stages. Each of the stages symbolizes a certain period of progress — Frontier, Homestead, Metropolis, and Serenity.

• The initial alpha version of the Ethereum blockchain was called Frontier;
• The first Ethereum blockchain upgrade took place as early as May 14, 2016, and the new version of the protocol was called Homestead;
• In fact, Ethereum's transition to PoS consensus began back in late 2017, when the developers launched an update called Metropolis, consisting of two parts Byzantium and Constantinople. This phase ended with the introduction of the Constantinople update on February 28, 2019;
• The Serenity phase, which is still ongoing, began with the Istanbul hard fork, initiated on December 8, 2019. It is the latest iteration in Ethereum's evolution to Ethereum 2.0, consisting of four phases: Phase 0, Phase 1, Phase 1.5, and Phase 2.

Proof of Stake

One of the major changes to the network structure during the Serenity stage was the transition from Proof of Work to Proof of Stake consensus. PoS is more energy-efficient than PoW and requires less equipment. With Proof of Stake, Ethereum’s energy consumption dropped by about 99.95%. So, version 2.0 is more environmentally friendly — it will radically reduce energy consumption and carbon emissions.

The updated network is maintained by validators instead of miners. Each validator should deposit coins as collateral (i.e. stake). The PoS mechanism pseudo-randomly selects which validators will verify the next block of transactions. It is pseudo-random as validators are more often picked among participants with the highest stakes.

Ethereum founder Vitalik Buterin states that the Proof of Stake consensus algorithm is much more secure and efficient than Proof of Work. Because of the higher threshold to enter the network (it is 32 ETH or ~$42,000), many attackers simply will not be able to enter it, which means that it will be much harder to attack.

It is important to note, that despite all its advantages, PoS also carries certain risks. Theoretically, participants with large ETH holdings can seize control of the network. If the “whales” determine the further development of the blockchain at their own discretion, the network will be deprived of decentralization.

Phase 0

Since Proof of Stake validation is powered by beacons, the first step is to create the chain that will manage the process. This technology nominates block proposers, organizes validating committees, controls consensus compliance, and distributes rewards to validators. On top of that, beacons enable communication between validators and shards. It’s a key foundation of the entire Ethereum 2.0.

The Breakdown of Phase 0

The beacon chain connects shard blocks with attestations. Attestations are a collection of votes in a shard that communicates with the block. To assure the immutability of the record, phase 0 relies on The Friendly Finality Gadget, a hybrid proof-of-work/proof-of-stake consensus algorithm.

Once the beacon chain is ready, it has to be supplied with Ether. Validators do this by staking their deposits to the address of the chain. Users approve the deposits — so, the PoS itself is approved by the PoS. When the payment is registered, the system tracks a user as an active validator and grants the participant a voting right.

The Results of Phase 0

After the Beacon Chain stage is concluded, the Ethereum chain will be broken into two. The current chain (pre-upgrade version) and the new one, ETH 2.0, will co-exist together, waiting for the upgrade’s complete execution.

By the end of the stage, the beacon nodes are live in mainnet and testnet. From that point on, validators rely on two main implementations — Prysm and Lighthouse beacon clients. With these systems, validators control their staking process.

Phase 1

So, Phase 0 lays the groundwork for the implementation of Ethereum 2.0 — however, it’s only a basic technical implementation. To improve the design and communication of shard chains, the update roadmap moves onto stage one, also known as Shard Chains. The documentation refers to this phase as a “trial run for shards”.

Setting Up Communication Between Shards

At the end of the Beacon phase, each shard is finalized and ready to run. It’s capable of processing its transactions and altering its data. However, to maintain the security of the system, it’s necessary to assure transparent communication between shards.

Shard communication is achieved with crosslinks — a set of signatures that will be exchanged between shards to notify them about database changes.

The Role of a Validator in Cross-Linking

Validators are necessary both for inter- and intra-shard changes. In other words, they will validate the structure of the shard itself and the cross-messages that the database sends to the rest of the network.

As soon as the transfer of a cross-link message reaches the consensus of the validator network, it is smoothly transmitted to the rest of the system.

The Results of Phase 1

At the end of Phase 1, the shards are connected full-fledged and to validator networks. They can operate safely and quickly, keeping the entire system synchronized. The original pre-upgrade chain will still work simultaneously with ETH 2.0.

Phase 1.5

Phase 1.5 is not an official phase of the Ethereum update. It was the name given to the merging period of the Ethereum 1.0 and Ethereum 2.0 blockchains. During this phase, the original Ethereum blockchain became one of the shards of the new version of the network and officially transitioned to Proof of Stake.

Phase 2

The second stage of the ETH 2.0 update is the final one. This is where the new Ethereum will transition into becoming the dominant chain; at this point, the original will be discontinued.

While, in previous stages, shards were mere data holders, by the end of phase 2, they will be able to execute smart contracts and host the rest of the Ethereum functionality. At this point. Ethereum 2.0 will offer the full range of Ethereum functionality, only with improved speed and scalability.

• Up to this point, the original Ethereum will be kept to execute smart contracts and run dApps. After the last stage, this functionality will finally migrate to the 2.0 network;
• Shards will be able to handle large amounts of data and smoothly communicate with each other;
• All shards will be hosted on the new virtual machines, eWASMs.

Beyond Phase 2

Ethereum's developers are expecting growth in the number of network participants. Therefore, the update will not end at phase 2. In November 2022, Vitalik Buterin presented an update to the roadmap. The updated roadmap includes the team's plans for the next 10 years. The main goal of the protocol is to meet the growing demand. Ethereum is constantly being upgraded to meet the needs of users.

There will be more updates to satisfy the users’ demand. The developers highlight several phases:

1. The Merge;
2. The Surge;
3. The Scourge;
4. The Verge;
5. The Purge;
6. The Splurge.

Arcane Assets Chief Investment Officer Eric Wall noted that the term “shading is not included in the updated roadmap. The team proposes the EIP-4844 , which aims to implement core changes, particularly in transaction format. These changes would be needed further for full shrading.

The team also intends to address "MEV" (Maximal Extractable Value) issues, as well as fully integrate zk-SNARK technology into the blockchain. According to Buterin, the updated diagram specifies the implementation steps for each phase of Ethereum's development and emphasizes the role of quantum sustainability for the future of the blockchain.

Ethereum 1.x

Despite updates and the transition to ETH 2.0, the original Ethereum network continues to operate. All its transaction history, applications, contracts, and balances flowed into the new network in what is known as “The Merge”.

What Is The Merge?

The Merge is the name of the upgrade which included the Ethereum blockchain transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. It is called Merge because the update was a merge of the two independent blockchains previously operating in parallel. The main Ethereum blockchain has “merged” with a PoS blockchain called the Beacon Chain.

Being the largest update in Ethereum history, The Merge took place on September 15, 2022. The update happened thanks to the seven years of the developers’ hard work.

When Is Ethereum 2.0 Scheduled?

The next update called “The Surge” is scheduled for implementation in 2023. An early version of the Ethereum roadmap called for the introduction of sharding, which divides the blockchain into parts ("shards") to increase the scalability of the network.

However, while sharding remains relevant, the focus of the developers has shifted to Rollups and other technically complex solutions. Therefore, it may take a considerable time for Ethereum to fully scale up. Thus, it is difficult to give exact dates for new updates, as even the roadmap does not include any dates.

Why Move to Ethereum 2.0?

The main reason to switch to Ethereum 2.0 is to reduce fees and increase transaction speed, which will benefit the network users. The current high fees and low transaction speed are a consequence of Ethereum's scalability problem. Right now, the Ethereum network can only support about 15 transactions per second. Low scalability and costly financial transactions remain the Achilles' heel of the Ethereum network, despite all its advantages.

In a 2019 interview with the Toronto Star, Vitalik Buterin himself acknowledged the Ethereum blockchain's scalability problems:

“Scalability is a big bottleneck because the Ethereum blockchain is almost full. If you're a bigger organization, the calculus is that if we join, it will not only be full, but we will be competing with everyone for transaction space. It's already expensive, and it will be even five times more expensive because of us. There is pressure keeping people from joining, but improvements in scalability can do a lot in improving that”.

What Changes Will Ethereum 2.0 Bring?

Let's look at some of the most important benefits of switching to Ethereum 2.0:

1. Low transaction fees. When the network is seriously congested, miners may prioritize transactions with higher gas prices to gain more profit. Gas, in Ethereum parlance, is money paid to miners who expend processing power to verify transactions. Gas prices, measured in "gwei," fluctuate depending on the demand on the network.

With Ethereum's transition to the Proof of Stake mechanism, transaction processing will become easier. PoS will prevent situations when too many unprocessed transactions pile up in the queue and miners are forced to demand higher gas prices to verify transactions.

2. Increasing network throughput. Vitalik Buterin estimates that the Ethereum 2.0 update will increase throughput to 100,000 transactions per second.

3. Reduced hardware requirements. Ethereum's introduction of the PoS consensus mechanism means that validators do not need the high-performance devices which are necessary for mining on PoW. Server-level devices are enough for transaction validation.

4. Ethereum ecosystem expansion. Ethereum 2.0 will use Ethereum Web Assembly (eWASM) to replace Ethereum Virtual Machine (EVM). An EVM is a kind of supercomputer, distributed across different computers (nodes) in the Ethereum network. The increasing workload on EVM has led to a dramatic drop in processing speed. However, improving EVMs is difficult because the code is written in Solidity, a difficult programming language to learn.

eWASM will allow developers to choose from other popular (and easier) coding languages such as C++ and Rust. It will motivate developers to use Ethereum and encourage innovation and creativity in the community. In addition, eWASM is going to be compatible with current web standards, so it will be easy to run in regular browsers. Users will effortlessly access decentralized applications from their browsers.

5. Reduced carbon footprint. The Proof of Stake consensus mechanism will reduce power consumption and environmental impact. PoS has already reduced Ethereum's power consumption by 99 percent.

Ethereum vs. Ethereum 2.0: What's the Difference?

Now, with official announcements, proposals, and a roadmap in hand, let’s summarise the features of Ethereum 2. At this point, you already understand the motivation behind the upgrade — simply put, the current state of Ethereum doesn’t catch up to the system’s rapid growth.

The fundamentals of Ethereum remained unchanged: it’s still a cryptocurrency; the network is still powered by smart contracts. However, the use of smart contracts, a consensus algorithm, monetary policy, and the approach to transaction speed and security will be reviewed and improved.

What Are the Risks Associated with Ethereum 2.0 Participation?

Early ETH staking has its drawbacks. While early adoption allows you to be the first in line for getting staking rewards and gives you the benefit of depositing relatively little (it’s likely the staking amount might change after the migration), there are still unknown variables in the equation. So, before committing to ETH 2.0 staking, make sure you understand its risks.

Risk 1. Low liquidity. You won’t be able to use your 2.0 ETH for a while. A full-fledged release might take years.

Risk 2. Problems with Ethereum 2.0. Although there are no particular reasons to distrust the minds behind Ethereum, things can go wrong. The update is ambitious — the team itself admits that the full migration will take at least 1,5 years. During that time, the future of ETH will be uncertain.

Risk 3. Issues in the validating process. As an early validator, you might become a victim of staking bugs. Should that happen, you might get rewards sporadically or in the wrong amount.

Risk 4. Technical challenges. The process of setting up a validator node requires technical expertise, a stable Internet connection, and strict compliance with network rules. For violating requirements, you risk penalties and losing your stake.

That said, being an early staker of ETH has a lot of benefits. Ethereum showed impressive growth this year and it’s not slowing down so far. The network’s APY (annual percentage yield) now is much larger than it's expected to be in the future. By being among the new staking programs’ first participants, you get a headstart on your staking process and jump on the bandwagon of future rewards.

How Will Ethereum 2.0 Change the Decentralized Finance (DeFi) World?

One of the main problems for users of decentralized finance is high transaction fees. During the heights of the 2021 bull run, the cost of transactions during the peak load on the Ethereum network exceeded $100.

Given that Ethereum still accounts for more than 50% of the decentralized finance market, lower transaction fees on this network will make DeFi more accessible to a wider audience.

What Is Ether's Future After Ethereum 2.0?

If you hold Ethereum or have been mining it before, you likely have a lot of questions at this point. How will Ethereum migrate to its 2.0 version? What are the guarantees that Ethereum transactions, smart contracts, and decentralized apps will be working like before on the new algorithms?

To answer this question, let’s turn to the official Ethereum roadmap on Ether migration.

How Much Energy Will Ethereum 2.0 Save?

According to a CCRI (Crypto Carbon Ratings Institute) report, after Ethereum switched to PoS, the network's carbon footprint decreased by more than 99.99% overnight. This number even exceeds the Ethereum Foundation's estimate of 99.95%.

CCRI says that Ethereum's power consumption dropped by more than 99.988%, from nearly 23 million megawatt hours per year to just over 2,600. As a result, CO2 emissions were reduced by 99.992%, from more than 11 million tons per year to less than 870, equivalent to less than the annual energy consumption of a hundred homes in the United States.

The Bottom Line

The start of Ethereum 2.0 marks a paradigm-shifting change, not just for Ethereum, but for blockchain and cryptocurrencies in general. It’s a roadmap that leads the entire ecosystem to higher scalability — and, what’s more impressive, with few-to-no trade-offs. The goal is ambitious, and the community is facing a long journey. However, Ethereum’s financial success in 2020 and 2021 shows that the ecosystem is headed in the right direction.

What can Ethereum holders do to help propel positive change? For one, contributing to the staking system is a good place to start. Multiple open-source projects work on building a Beacon Chain Client, sharding tools, and staking products. The changes are happening right now — so this year could be a unique chance to become an early adopter of the new Ethereum.

And that’s exciting.

FAQ

How To Buy Ethereum 2.0

Ethereum 2.0 coins are the same Ethereum coins as they were before the upgrade. Therefore, you can buy them in any conventional way you used in the past. For example, you can buy ETH on a cryptocurrency exchange, such as Redot.

Will Ethereum 2.0 Replace Ethereum

The question of whether Ethereum 2.0 will replace Ethereum is technically flawed. Ethereum 2.0 is not a new network, it is an upcoming set of updates to Ethereum that will make it much faster and cheaper, as well as will improve its scaling capabilities.

How Will Ethereum 2.0 Affect the Price of ETH

Ethereum 2.0 is estimated to increase the Ethereum value. The increased transaction speed, lowered gas fees, and higher scalability of the system will open new use cases for Ethereum. Consequently, the ETH currency will gain higher adoption and increase its market cap.

How Will Ethereum 2.0 Be More Secure?

With the PoS, the 51% attack is much more unlikely. If a user starts buying out a suspicious amount of tokens, such an increase in demand will cause ETH value to rise. So, each next purchase will become more expensive. This pattern can be easily detected — with PoS, carrying out a spontaneous attack is almost impossible. With PoW, things were different — a lot of server providers and governmental entities have access to tremendous amounts of computing power and can misuse them with little-to-no oversight.

Is There an ETH2 Coin Limit?

Ethereum has no limit on the number of issued coins. The coin cap is unlimited both in Ethereum 1.0 and Ethereum 2.0. At the same time, the original Ethereum creator Vitalik Buterin publicly stated that the formula of ETH2 emission will be somewhat similar to that of Bitcoin, with a diminishing supply of cryptocurrency over time.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.