Ethereum 2.0 (also known as the Consensus Layer or Serenity) is a planned update to the Ethereum network that is supposed to solve its scalability issues by moving to a proof of stake validation system.
When Vitalik proposed Ethereum in 2013 and brought it to life in 2014, he enabled programmers to run protocols, smart contracts and decentralized applications on the Ethereum network, adding a whole new dimension to the blockchain industry.
Challenges with Ethereum
When it first began, there were few users and projects running on the Ethereum network. The concept was revolutionary, and the blockchain community was still very small. Smart contracts were new even for the blockchain industry and people required time to recognize the potential of the concept, as well as understand the limitations that Ethereum faced.
Back then, transactions were fast, cheap and there was little to no congestion.
However, in June 2020, the Ethereum saw a spike in its Gas fees relative to ETH. Gas fees are calculated in Gwei, which is a denomination of Ether. 1 Ether (ETH) = 1,000,000,000 Gwei. Before this, the normal Gas fee would range from 30-50 Gwei. But in June 2020, the Ethereum Gas Fee rose to a whopping 709 Gwei, which was almost 15x the normal rate.
Gas fees were based on an auction system at the time, which led to significant price volatility as the network grew in popularity.
Introducing Ethereum 2.0
Ethereum’s scalability was an issue that was brought up many times. As blockchain technology, and smart contracts in particular, became more mainstream, it became clear that the Ethereum network needed to be able to process hundreds of thousands of transactions per second. Ethereum needed to scale up as more and more applications were being built on it.
The scalability challenge is due to the process of Ethereum Mining which limits the transaction to 7-15 transactions per second. Contrast this with VISA’s network, which is capable of 45,000 transactions per second. The need for every node (Computers participating in the network) to verify every transaction that comes through limits the scalability of Ethereum.
Imagine if you were to do a transaction on the Ethereum network, it will take roughly 30 seconds to get the transaction broadcasted out into the blockchain, of which miners will start solving ‘puzzles’ to verify the transaction. After the transaction is ‘solved’ it will be confirmed by the network.
Depending on the platform that you are sending your ETH to, you may need a minimum of 10 confirmations, although some require more. And this is where the time-consuming portion happens.
Most transactions can be done and confirmed within a few minutes. However, if there is high traffic or issues on the chain, transfers can take hours to days to complete.
Most of this is due to Ethereum’s proof-of-work system. Which means that more and more computing power will be required to verify and approve transactions. Miners will require more hardware to support the network and verify transactions, which naturally, led to a price surge in graphic cards or GPUs, the mining hardware used for Ethereum.
The original design of proof of work is inefficient at scale. Firstly, it takes up a lot of energy which is bad for the environment. When more hardware like computers and GPUs are needed to process and verify transactions, it adds up to excessive use of electrical energy.
The other drawback is the tension between security and efficiency. Proof of work blockchains work best when there is a large enough pool of computers connected to the network. With more computers connected, the chances of suffering a 51% attack are much lower. However, larger pools of miners mean more energy and more hardware spent on transactions.
Scalability through Proof of Stake (POS)
The introduction of Ethereum 2.0 will shift the network from proof of work to proof of stake. Users will stake their ETH to become validators on the network via a process known as sharding.
Validators operate like miners by doing the following:
- Ordering Transactions
- Creating New Blocks
With proof of stake mechanism, it will bring about improvements like better energy efficiency as less energy will be required to mine blocks. One can easily join a staking pool to become a validator on the Ethereum network.
With more nodes joining the network, this means there’s lower chance of a 51% attack or an individual owning 51% of the nodes that verifying transactions.
In this mechanism, validators will be ‘attesting’ and proposing new blocks instead of mining blocks. When a validator attests a block, it is like the validator saying, “This block looks good.” However, when a validator attests a malicious block, they will lose their stake.
On the road to Ethereum 2.0, the Ethereum network has introduced the Beacon Chain, which is a staking validation platform that acts as a central coordination mechanism for validation on the Ethereum 2.0 network. ETH holders can stake their tokens to earn staking rewards.
Staking as a Service with Crypto Exchanges
Crypto exchanges like Huobi do offer a ETH 2.0 staking service where you are able to pledge your ETH to earn some staking rewards.
Joining a staking pool might carry some risk depending on the provider of the pool, lock in period and security that they have.
With Huobi ETH 2.0 staking you will be able to earn HPT and BETH. BETH is now available for trading on Huobi Global with BETH/USDT, BETH/ETH.
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