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What is Ethereum 2.0 and what can Aussie investors expect?

·4-min read
An Ethereum coin sits on top of Bitcoins on a black background.
Ethereum 2.0's rollout is set to be completed by July. (Source: Getty)

Crypto took the world by storm in 2021, and while many threw their hard-earned cash at digital currencies with hopes and dreams of striking it rich, the majority didn’t really understand what they were investing in.

This makes sense, of course, when we consider the early adopters of Bitcoin now being worth millions of dollars for taking a chance on something so unheard of at the time.

Thankfully, since 2009 and Bitcoin’s release, we now have a much better understanding of crypto and blockchain-based currencies as a whole. So, as we move well and truly into the 20s, we can make more informed decisions about the currencies we invest in.

If you’ve heard of Bitcoin, you’ve undoubtedly heard of Ethereum, the blockchain created in 2013 by crypto-baron Vitalik Buterin for use in applications both in and outside of currency.

After a wildly successful seven years, which saw the blockchain reach number two in market capitalisation, the developers are working on the next-generation, Ethereum 2.0, which is slated to be completely rolled out by July of this year.

So what does this mean for the currency? And, what do current and prospective investors need to know about Ethereum 2.0?

New Protocols

A key difference between Ethereum 2.0 and the first iteration is the transition from Proof-of-Work (PoW), protocols to Proof-of-Stake (PoS), and one of the most confusing aspects of cryptocurrencies and blockchain in general, is understanding what these terms mean.

In a nutshell, both PoW and PoS refer to consensus mechanisms within the blockchain - or the actions the tech uses to validate transactions, add them to the blockchain, and create new tokens.

A room of computers dedicated to farming cryptocurrency.
Mining cryptocurrencies has traditionally required a lot of energy consumption. (Source: Getty)

PoW was pioneered by Bitcoin, and when someone refers to ‘mining’ when discussing crypto, they’re talking about PoW protocols. In short, ‘mining’ is the act of being the first computer of many to solve a cryptograph - hence, crypto - and receive a token in exchange.

Sadly, this mechanism uses a lot of real-world energy in processing, and has had issues with scaling or handling large volumes of simultaneous transactions, which are two of the key reasons why Ethereum 2.0 is transitioning to using a PoS protocol.

PoS, on the other hand, verifies transactions through a number of validators, or individuals who have staked their own crypto in exchange for a chance to validate a transaction and earn more tokens.

This simplified, but equally secure, process means less energy is consumed and more transactions can take place simultaneously.

Anyone who has experience with Ethereum knows just how frustrating the high network ‘gas’ fees can be, so this transition will likely solve that pain point.

For other less-adopted cryptocurrencies, a PoS protocol can run into issues if there aren’t enough validators on the network. Ethereum 2.0, however, should bypass this challenge due to the legion of validators already up and ready to validate.

In addition to the transition from PoW to PoS, Ethereum 2.0 will introduce ‘sharding’, which is the splitting of a blockchain into multiple blockchains, or shards.

Essentially, this action spreads the burden of transaction verification across multiple portions of the chain, which will further insure against network congestion and increase total transactions per second.

New Possibilities

Now that we have an understanding of the flagship features of Ethereum 2.0, we can see what the potential impacts of these changes are.

The transition to PoS and introduction of sharding will reduce congestion and high gas fees, enabling the crypto asset to leap one of its biggest hurdles - its issues with scalability.

Furthermore, this transition will address the high amount of energy required for PoW protocols. This aims to reduce the criticisms around high energy consumption.

Free of these shackles, Ethereum 2.0 will strive beyond the legacy of its first iteration, as long as competing PoS blockchains, like Cardano or Solana, don’t prove too much competition in the meantime.

With the support of the masses behind it and barring any issues with rollout or execution emerge, Ethereum 2.0 has potential to retain its crown, in the short-term at least.

Ray Brown is a market analyst at CoinSpot

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