From the founding of Bitcoin in 2009, to the peak in Bitcoin price in 2017, to now, the world of blockchain has been dominated by Bitcoin, and other altcoins have been relegated to a secondary importance. Non-blockchain enthusiasts brand the entire world of blockchain based on the news of Bitcoin. But the past few years have seen an emergence of thousands of altcoins, revamping of architecture, and wider adoption of the blockchain network. One of the largest changes to the community is the release of Ethereum 2.0.
Vitalik Buterin, a co-founder of Ethereum, realized that for Ethereum to challenge Bitcoin’s dominance, he must adopt qualities of Bitcoin that were desired by the public but were unable to be implemented.
Perhaps the largest of Ethereum 2.0’s transformations is the change of consensus algorithm. Like Bitcoin, Ethereum 1.0 utilized proof of work (PoW), a method that rewards miners with tokens for solving computationally complex cryptographic problems that used a lot of electricity and processing power. But as the past decade progressed, miners became richer and richer to the point where it became nearly impossible for a regular user to become a miner. Miners utilize computers with ASICs (application-specific integrated circuits), or specialized computers for mining. To become a miner in Ethereum 1.0 in 2020, one has to spend hundreds of dollars in expensive equipment and join mining pools (groups of miners who agree to share tokens they mine).
In addition, Ethereum 1.0 was hard to scale, since the blocks added to the blockchain were of fixed length. The network would experience bottlenecks in times of high traffic. The volatility in network latency was simply unacceptable for the industrial-grade financial activity experienced by banks, brokerages, and other financial institutions. Added on with the inaccessibility to regular users mentioned in the previous paragraph, blockchain’s wider appeal stopped growing.
Ethereum 2.0 sought to address the scalability and accessibility issues experienced in Ethereum 1.0 by transition to a proof of stake (PoS) system. This consensus algorithm reverses the trend of a “miner aristocracy”: instead of rewarding more ether to powerful miners, users who had more ether would receive more mining power. In addition, miners would receive rewards through transaction fees, instead of receiving the ether that the entire network uses.
Now, laymen who regularly use Ethereum 2.0 are rewarded with mining power and earn more ether. In fact, people who set up validator nodes can earn passive ether income, which attracts the investor community. Combined with sharding, a method of dividing the processing of transactions to increase the throughput of the whole network, Ethereum 2.0 can process a 1,000 transactions/second instead of ~11 (9,091% increase). The Ethereum 2.0 will create a new token—ETH2—that will power the network.
The blockchain community has taken a sidestep in recent years, as the greater public grew disillusioned to Bitcoin’s perceived radicalism and contrarianism. But steps like Ethereum 2.0 are empowering individuals by increasing per capita buying power. The miner aristocracy is eroding, and the blockchain network will greatly expand in years to come. ∎
Allison, Ian. “ConsenSys Spins Up Staking Service in Anticipation of Ethereum 2.0.” CoinDesk, CoinDesk, 16 June 2020.
Kovačević, Andrej. “Ethereum 2.0 Includes Major Changes That Could End Bitcoin’s Blockchain Dominance: IEEE Computer Society.” IEEE Computer Society, IEEE, 2020.
Kuznetsov, Nikolai. “Ethereum 2.0 Staking, Explained.” Cointelegraph, Cointelegraph, 18 June 2020.
Muzzy, Everett. “What Is Ethereum 2.0?” ConsenSys, ConsenSys, 12 May 2020.