What is Ethereum 2.0?
It’s not often that version 1.0 of something is ever up to much: it’s usually more of a proof of concept than anything else.
Ethereum, apart from being a cryptocurrency and a blockchain, is a giant worldwide virtual computer for digital asset financial transactions.
It was launched in 2015, and quickly became the second-biggest market force behind the first cryptocurrency, bitcoin.
The innovation for Ethereum over bitcoin was “smart contracts” – pieces of code that can do everything from distributing dividends to managing entire “tokens” (coins that don’t have their own blockchain).
It’s been wildly successful so far.
The History of Ethereum 2.0
So, everything’s great, right? Well, not really. The price of success is often greater than the price of failure: and that’s true for Ethereum – it’s a victim of its own success. In the case of Ethereum, that problem is most acutely visible in the cost of transactions on the blockchain: the gas fee, which at times is stupidly high. For a technology that’s supposed to be cheaper than traditional finance, high gas fees break that promise.
The first problem is capacity. A blockchain is called that because it consists of “blocks”, chained together (blocks can never be edited once they’ve been added).
Each block can only store a certain number of transactions in the blockchain, and there’s a limited number of blocks that can be added per minute. That means transactions queue up, waiting to be added to the blockchain.
Why is there a limited number of blocks possible per minute?
That’s because Ethereum is “proof-of-work” like bitcoin. Computers worldwide compete to be the first to solve a mathematical puzzle and win the right to put a block on the blockchain. That means blocks can only be added when a puzzle has been solved – and that takes time.
Aside from the capacity bottleneck, it’s not a good environmental footprint because there are lots of computers all doing unnecessary work. But now that there are enough coins out there from the old system, Ethereum is moving to a new system that relies on those coins: “proof-of-stake”.
Where proof of work demands “miners”, proof-of-stake demands “validators”. Validators sign up to process transactions and get paid in newly minted coins. To do this, they have to prove they’re serious, by “staking” Ethereum into the blockchain: 32 ETH to be exact.
All validators have a chance of being chosen to validate a block for a reward in ETH. If you stake more coins, you have a bigger chance of being chosen and rewarded.
How do I get new ETH?
Mining Ethereum became out-of-reach to the average consumer pretty quickly, relying on investments in expensive equipment (it’s also the reason decent graphics cards became absurdly expensive – the chips on them were ideal for Ethereum calculations for proof-of-work). The forthcoming move to ETH 2.0 is going to eventually result in a glut of great graphics cards at cheap prices. Not something that’s going to end the world recession on its own, but still…
In many ways, the new proof-of-stake swaps one form of inaccessibility for another: while you don’t have to buy equipment, you do have to find 32 ETH – which at the time of writing is about $54,000. And you can’t get that back until they program in a way for you to do so!
While small investors could always hire computing power from cryptocurrency mining companies, it was a wild-west industry. There’s no way you can tell how much of the power you’ve brought is being used to reward you, and mining companies opened and shut like there was no tomorrow.
With Ethereum staking, more reputable companies are forming “staking pools”, in which the company puts up as many 32 ETHs as it can handle, and sells a stake in that to smaller investors who then earn a return. This approach ends up looking a lot like a crypto yield-bearing account, the only difference being the use your investment is put to.
One difference with crypto yield-bearing accounts is that it lets you “stake” in cryptocurrencies that aren’t “proof-of-stake” – like bitcoin. Handy!
How was the upgrade planned?
None of this was a particular surprise to the Ethereum community, they’ve been planning this upgrade for years. The move to proof-of-stake is one in a long line of improvements made over the years, with upgrades being incremental.
In fact, large parts of ETH 1.0 are staying and the term ETH 2.0 is now out-of-date. According to ethereum.org:
“To limit confusion, the community has updated these terms:
- ‘Eth1’ is now the ‘execution layer’, which handles transactions and execution.
- ‘Eth2’ is now the ‘consensus layer’, which handles proof-of-stake consensus.”
So basically, they’re keeping the good bits of the current version, and upgrading the problematic bits.
Ethereum proof-of-stake is already running in test mode and paying out to stakeholders, though no one has any idea what the overall return on staked coins will be when that chain is merged with the existing one, which is very close now.
But what does this all mean for potential or current Eth-vestors?
Should you change your investment strategy?
Basically, no (not unless regulation changes that, and that’s some way in the future).
What you should do is beware of ETH2 scams. These warnings come from the Ethereum website itself:
Unfortunately, malicious actors have attempted to use the Eth2 misnomer to scam users by telling them to swap their ETH for ‘ETH2’ tokens or that they must somehow migrate their ETH before the Eth2 upgrade. We hope this updated terminology will bring clarity to eliminate this scam vector and help make the ecosystem safer.
Some staking operators have also represented ETH staked on the Beacon Chain with the ‘ETH2’ ticker. This creates potential confusion, given that users of these services are not actually receiving an ‘ETH2’ token. No ‘ETH2’ token exists; it simply represents their share in that specific providers’ stake.”
Do you need to swap your tokens?
No. There is no ETH2 token, and you will never need to swap ETH for ETH2. If a company is talking about ETH2, they might be talking about your share of their stake… but that’s not a token.
The whole Ethereum upgrade has been designed not to disrupt currently running apps and make sure users’ ETH isn’t disrupted.
You can buy ETH and earn interest at AQRU
ETH is cheaper than it’s been for a while, and you can earn interest on it without dealing with staking pools by buying it and investing it at AQRU.
After verification, you can fund your account with GBP or EUR (minimum deposit of 100 euros equivalent applies), and buy ETH from AQRU without commission and at a competitive exchange rate. Press the “invest” button, and you’re earning (you can also buy ETH by debit card using in-app provider “MoonPay”, but fees apply).
So, good luck with your ETH-ical investing. We’re all validating on you!