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1. Introduction to Ethereum
Ethereum is an open-source, decentralized blockchain technology powering thousands of decentralized applications (dApps) and smart contract functionality. Ether ($ETH) is the native cryptocurrency of the platform. First proposed in 2013 by programmer Vitalik Buterin, the Ethereum project was developed in 2014 through crowdfunded, and the creation of its genesis block in July 2015 marked the official launch of the project.
While Bitcoin is considered the pioneer in blockchain technology, Ethereum has expanded beyond Bitcoin’s innovation by building a programmable cryptocurrency that allows the application to more than just a payment system. Ethereum constitutes an ecosystem that includes various dApps, from decentralized finance (DeFi) and stablecoins to non-fungible tokens (NFTs) and games. Additionally, the Ethereum blockchain allows other cryptocurrencies to operate as an ERC-20 token and utilize the network for initial coin offerings (ICO).
2. Understanding Ethereum's Limitations
Like any other cryptocurrency, Ethereum is yet to be perfected. Because there are so many advantages and popularity of this blockchain, the Ethereum network has many transactions being processed through its public blockchain network, resulting in Ethereum's inability to scale during the congestion of transactions. Ethereum technology needs every node to process each and every transaction on the network. This causes a scalability challenge as Ethereum mining have restriction in block generation, approximately 7 – 15 transactions per second.
Ethereum miners, who work to process transactions and protect the network from attack, are the foundation of the Ethereum blockchain. For these miners to work, they are paid by measuring the quantity of the work done, and the transaction payment is called Gas Fee, which is set by the user (who can set a high or low gas price). Unfortunately, as Ethereum can only process a limited amount of Gas Units at a time and heavy usage at a given time can cause the network to be overloaded, miners tend to prioritize transactions with higher gas prices to maximize their rewards.
3. From PoW to PoS
Earlier this year, the Ethereum Foundation announced its plan to move from the “proof-of-work” model (PoW) to the “proof-of-stake” model (PoS), and the switch is expected to be fully completed by the end of 2021. According to the founder, Vitalik Buterin, the shift to PoS is a decision to solve the environmental issues as the proof-of-stake model does not put the miner’s dependency on their computing power.
One of the main differences between the PoW and PoS is the mechanism use to reach consensus across the network. Using the PoW, the probability for a miner to mine a block depends on how much computational work is done, while the PoS gives a higher probability to validate a new block based on how many coins they are staking. PoW miners compete with one another using computational power, which causes increased usage of electric power and environmental issues. Ethereum believes that the PoS mechanism to be more cost and energy-efficient in comparison to the PoW mechanism.
4. Staking ETH 2.0
ETH 2.0 is revolutionizing the original consensus mechanism with significant improvements of Proof-of-stake and sharding. Through PoS mechanism, staking is a process where validators are selected to create a new block to secure the blockchains. The probability of being selected to become the validator depends solely on the number of coins the validator holds and stakes. As of July 6th, Ethereum 2.0 requires a validator to stake at least 32 ETH, approximately $73,600 to become a validator of the new network. Anyone who fulfilled the minimum stake amount can participate in staking and earn rewards relative to their staked amount. The more coins a validator has, the higher the probability of being selected by the public. The good news is that since users are required to stake a minimum amount of ETH as collateral to validate a transaction and create new blocks, it makes it much harder to cheat or attack the blockchain. As more validators enter the system, the more secure the network will be.
5. What to Expect from ETH 2.0
The good news is that implementing the proof-of-stake and sharding will also increase the number of transactions per second. The sharding mechanism will allow validators to validate transactions in different shards through sub-chains and all the nodes for transactions will no longer be stored in a single blockchain. This allows the creation of hundreds if not thousands of shards to process more transactions per second, which is a significant increase from the 15 transactions per second on the ETH 1.0. Low scalability means users will have to pay a higher transaction fee to speed up the process. Furthermore, the change from proof-of-work to proof-of-stake is seen as a solution towards Ethereum 1.0 high gas fee. The change in the mechanism will also reduce the electric power needed to create new blocks and significantly eliminates the environmental issues.
A more secure and better ecosystem will attract more investors to use the Ethereum blockchain as more decentralized applications with highly scalable projects can be developed at a lower cost. With the higher number of transactions per second and a lower barrier to entry, we can expect to see a rise in ETH price as the ETH will be more widely used and utilized.
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