June 20, 2021

Ethereum 2.0 vs. Ethereum 1.0: here's everything you need to know

It goes without saying that that cryptocurrency scene is about much more than just Bitcoin. Since the coin usually ends up in the limelight and enjoys adoption by companies like Tesla or PayPal, no wonder that most people consider it a prime example of cryptocurrency.

But take a slightly deeper dive into the scene, and you’ll soon discover that it is populated by hundreds if not thousands of other projects. Before long, you’ll realize that Ethereum is pretty much behind everything interesting on the crypto scene.

The ambitions of the Ethereum project are pretty impressive, and the release of Ethereum 2.0 that generates a lot of buzz right now proves that. Read this article to find out all the key differences between Ethereum 2.0 and 1.0 to see where Ethereum stands now and where it’s going.

Let’s start with the basics: What is Ethereum?

The crypto world is much more varied than many give it credit for. The explosion of decentralized finance (DeFi) and non-fungible tokens (NFTs) are good cases that emphasize the prominence of Ethereum on the scene.

Ethereum has been supporting many such projects for years. It was designed to become a complete crypto ecosystem offering a blockchain for hosting all kinds of platforms and currencies. Ethereum describes itself as “a technology that is home to digital money, global payments and applications”.”

Many of the most valuable crypto tokens and projects run on the Ethereum network – some of them with multimillion-dollar market caps on their own. While Bitcoin focuses more on storage and transfer of value, Ethereum aims to create value and encourage the continued growth of the crypto space.

However, this comes with a few challenges.

Ethereum has become incredibly bloated due to its wide range of functionalities. The network often slows down under the weight of the traffic that it needs to handle. This is why everyone is now talking about Ethereum 2.0, the next iteration of this amazing project that hopefully helps it to achieve its full potential.

But before we examine the new version of Ethereum, let’s take a look at how Ethereum is currently being used to better imagine the use cases of its future version.

Ethereum 1.0 – Key use cases

Projects that run on Ethereum are decentralized applications (dapps) that work just like the apps we all know and use every single day. However, there’s one big difference: they don’t have a single point of authority. By taking advantage of Ethereum’s blockchain, they can store transaction history and other data immutably (without having to build their own blockchain – which is expensive).

Dapps development is a rapidly evolving field since the rise of Ethereum, and today thousands of projects have dapps running on the network across technology, gaming, art and collectibles, and – naturally – financial services. Dapps are sometimes considered as part of Web3, the next iteration of the internet following the rise of blockchain.

And it’s all thanks to Ethereum’s platform and its ability to create and issue tokens. Projects can launch their own tokens with the help of Ethereum’s ERC-20 tokens standard. These tokens will be running on Ethereum’s blockchain but can also be traded on the open markets together with other cryptocurrencies. Many of the top 100 crypto tokens actually run on the Ethereum network, such as Tether, Uniswap, or Chainlink.

The popularity of Ethereum as a blockchain for developers landed it at the forefront of the decentralized finance revolution. The Ethereum network is also heavily used by stablecoins – cryptocurrencies pegged to the value of a real-world currency like the US dollar. According to a report from ConsenSys, three-quarters of all stablecoins now run on Ethereum, and the network handled more than $1 trillion worth of transactions in 2020.

The key problem of Ethereum 1.0

Ethereum has experienced its fair share of setbacks during the past few years. For example, a hack 2016 exploited the weakness in one of the projects built on top of Ethereum, resulting in $50 million worth of the coin being stolen.

This was when the founders decided to split the blockchain in order to recover the stolen funds. That fork is known as the Ethereum Classic, and it operates until today.

However, since Ethereum has become so popular across many projects in the crypto scene, its network is now struggling to handle all of the traffic. This problem has become so painful that the network becomes unstable at times. Transaction speed is an issue because the network can handle only 15 transactions per second. The fees paid to get a transaction executed can be incredibly high at times of high demand.

In other words, Ethereum has become the victim of its own success. Since so many users were attracted to it in a short time, its popularity affected its performance.

Naturally, the crypto scene reacted to this problem and offered alternative projects that could serve as alternatives to Ethereum – for example, Charles Hoskinson’s Cardano and Polkadot developed by Gavin Wood. These developer blockchains are similar to Ethereum’s design but have a much higher transaction capacity and can handle much more traffic.

Why is Ethereum suffering from scalability issues?

Ethereum uses proof of work (PoW) as its network consensus. The explosive mixture of heavy traffic and high demand makes blocks harder to mine. This translates into the slower pace of the entire process, making it also much more expensive.

Ethereum miners need to use more power to produce blocks and allow the network to move forward. This means that the fees they charge rise as well. As a result, the network slows down when a lot of people are trying to use it at the same time. Ethereum 2.0 was designed to solve this problem.

Introducing Ethereum 2.0

The goal for Ethereum 2.0 is as follows:

To bring Ethereum into the mainstream and serve all of humanity, we have to make Ethereum more scalable, secure, and sustainable.

This quote from the team pretty much confirms that the network isn’t in good shape today. The process of upgrading Ethereum to the 2.0 version is going to be a long one. It’s divided into three stages. But before we get into that, let’s understand which blockchain consensus mechanism Ethereum is planning to use.

Proof of work blockchain comes with its problems, and to avoid inefficiency, Ethereum is now moving towards a proof of stake (PoS) blockchain. In this type of blockchain, a consensus is achieved in a much more efficient manner. The nodes that want to mine new blocks and claim the reward can stake their crypto for a chance of becoming a validator. It works more or less like a lottery. The more tickets you buy, the greater your chances of winning.

Validators are chosen at random to mine a new block and claim reward, which is usually a cut of all the fees paid for transactions inside that block. This method of achieving consensus means that you no longer need multiple miners using lots of power to be allowed to mine a new block. But switching to the system is going to be a little more complex than you might expect.

Stage I: The Beacon Chain

The first stage of the switch went live in December 2020 and generated a lot of excitement in the Ethereum community. The Beacon Chain focuses on allowing staking to take place on Ethereum. This will allow stakers to run validator software. The mechanism ensures that the control over the network isn’t concentrated among a few validator nodes.

Ethereum hopes that this type of decentralization will also address the problem of the network’s security. The functionality paves the way for the next stage of ETH 2.0 that will rely on the PoS system.

Stage II: Shard Chains

To improve the scalability of Ethereum and allow the network to handle more transactions, the team plans to introduce additional changes known as shard chains. These chains will offload the main chain. Ultimately, Ethereum aims to have 64 shard chains running in parallel to increase the amount of traffic the network can handle.

Shard chains will be assigned validators by the Beacon Chain to further increase network security since no two validators will be able to collude to take over the shard. Spreading the network over shard chains will improve speed and security but also allow users to run clients from a laptop or smartphone to secure the network even more.

Sharding is going to be released sometime this year, depending on how quickly the work progresses after the launch of the Beacon Chain. Once established, the time will come for the final stage of ETH 2.0.

Stage III: The Docking

The Beacon Chain and shard chains will run separately from the main chain. The latter will continue using the proof of work consensus. The docking is then going to join the mainnet with the Beacon Chain and shard chains to finally move the entire Ethereum network to proof of state consensus.

This final stage is expected to happen sometime by the end of this year or in early 2022.

Wrap up

The Ethereum community is eagerly waiting for version 2.0 to appear soon. Assuming that the rollout goes according to plan, Ethereum is bound to scale to new heights in the next few years and cause massive disruption on the crypto scene.

Are you using Ethereum in any of your projects? How do you deal with the problems the network experiences today?

Share your thoughts in the comments section; we’re curious to hear about new Ethereum use cases and see how many of you are planning to switch to version 2.0 as soon as it becomes available.

June 20, 2021