A closer look at Ethereum 2.0 and Proof of Stake
The halving of bitcoin isn’t the only noteworthy event in the world of crypto this summer, as we prepare for the launch of Ethereum 2.0 – a long-awaited upgrade to the Ethereum public mainnet.
Due to the immense complexity of the upgrade, it is still in the development and testing phases, which means a concrete launch date has yet to be set. However, industry experts note that as long as everything stays on track, we should see a launch sometime during the summer of 2020.
With that to-be date soon on the horizon, here is a closer look at why ETH2 is so highly anticipated and how its design will set it apart from other forms of crypto.
A game-changing upgrade
There have been several planned upgrades to Ethereum’s mainnet in the past, but ETH2 is different. It is being specially crafted to accelerate Ethereum’s usage and adoption by dramatically improving its performance and the very way it’s earned.
While the current Ethereum network – and several other popular networks like Bitcoin – make use of a Proof of Work (PoW) consensus mechanism, ETH2 is going to leverage a Proof of Stake (PoS) structure that will operate much differently.
Proof of Work vs. Proof of Stake
In a PoW network, miners compete using computing power to try and be the first to solve a block and earn the reward. While these chains are highly secure, they do have their shortcomings, both in terms of scalability and accessibility.
The PoS model, on the other hand, takes the two key aspects of miners and computing power and replaces them with the new factors of “validators” and “stake.”
Validators and stake
The purpose of validators is to effectively replace miners, in that they are responsible for maintaining the state of the network. They select a block and stake 32 ETH toward it by depositing the funds into what is known as a deposit contract.
Validators then run the ETH2 client software and are randomly selected to propose and attest to blocks on the chain. Correctly proposing and attesting to a block will yield a reward equal to a certain percentage of the stake – typically between 4% and 10%.
Advantages of Proof of Stake
So why the shift from PoW to PoS?
For starters, PoS is generally considered to be more energy-efficient in that it doesn’t require massive amounts of power and energy for users to realize a block reward. Investors could theoretically operate from a standard laptop or desktop and still have a fair shot at success.
The penalty for not solving a block is also greater, which incentivizes fair play. In a PoW network, the only penalty for trying and failing to solve a block is the cost of electricity burned. In a PoS network, however, the penalty is the amount of ETH staked. This more concrete concept of risk and reward promotes acting in the best interest of the network.
PoS also promotes decentralization, which has been an issue of late in PoW networks where a few large mining pools with high computing power control a significant portion of the action. When computing power is removed from the equation, it is easier for investors to enter and compete.
Another key component of ETH2 is that it will make use of a base scaling solution known as sharding, wherein the network is divided into many different portions with each one capable of processing its own data.
This accelerates the rate of data processing as users are able to verify data on individual shards rather than having to do so on the network as a whole.
Metrics pointing toward a healthy launch for ETH2
In recent months, several key metrics have forecast positivity in the Ethereum landscape, including a sharp increase in addresses over the past two years and a recent uptick in market activity.
ETH options volume hit all time highs on Deribit with over $20mm being transacted in a single day. Investors are most likely using ETH options to both hedge and speculate on the price of Ethereum going into Ethereum’s 2.0 launch in July. @skewdotcom pic.twitter.com/3H9XLayxNb
— BKCoinCapital (@BKCoinCapital) June 1, 2020
The market is becoming more evenly distributed between both large and small investors, with many trying to stock up on ETH before launch so they will have more to stake – and thus more to gain when the time comes.
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