What Does the Ethereum 2.0 Upgrade Do?

Ethereum is a popular cryptocurrency and was the first with smart contract functionality. The ease of creating smart contracts has led to Ethereum enjoying widespread use for DeFi platforms and NFT trading. However, the Ethereum network has also experienced congestion in the past, with high ‘gas’ fees making transactions prohibitively expensive. Ethereum 2.0 is a series of upgrades to the Ethereum 1.0 network intended to — among other things — reduce the cost and delay of transactions by changing the underlying technology on which Ethereum runs.

While there are several improvements included in Ethereum 2.0, there are two major changes to how the network operates in particular. The first is the switch away from the proof-of-work (PoW) model. Ethereum 1.0 — much like Bitcoin — uses a PoW model to secure the network. In PoW, miners compete to mine blocks for a reward, including transactions on the network in these blocks. While this approach is secure, it uses a significant amount of energy. PoW-based networks like Bitcoin and Ethereum 1.0 have faced challenges growing in the past due to the costs associated with the energy consumption of PoW.

Ethereum 2.0 switches to a proof-of-stake (PoS) model. Instead of competing to mine blocks, users who want to earn fees can stake their Ethereum to act as ‘validators’. In a nutshell, validators secure the network by creating and checking blocks — and they are motivated to act truthfully to preserve their stake. With this PoS system, the energy consumed to create a block is much lower than Ethereum 1.0’s PoW model. The cost of sending a transaction is reduced as a result.

The second major change in Ethereum 2.0 is the implementation of ‘sharding’. Sharding drastically increases the speed and amount of transactions the Ethereum network can process. Ethereum 1.0 — like the vast majority of cryptocurrency protocols — requires nodes in the network to store the entire blockchain and add new transactions to it themselves. Because each node has a copy of the blockchain, malicious actors can’t easily attack the network by changing the blockchain or knocking out a central server. However, this also limits how many transactions the network can process to around 7–15 per second. This contributes to the congestion Ethereum 1.0 faces and drives up the price of using the network.

Ethereum 2.0’s sharding involves breaking the Ethereum blockchain into individual shards. Each shard has its own smaller history of transactions. When taken together as a collective, the shards form the entire Ethereum blockchain. Transactions are processed in parallel on individual shards, rather than using consecutive blocks on one single blockchain. This allows many more transactions per second to be processed. Sharding also lowers the barrier to entry for nodes to join the network. Nodes only have to store a small part of the blockchain, rather than the entire thing. This means that each node will need much less storage space to secure the Ethereum network.

The updates in Ethereum 2.0 transform the underlying network to a large extent without affecting the day-to-day experience of the average user. All wallets in Ethereum 1.0 remain the same in Ethereum 2.0 — so nobody loses their funds. Most people who use the Ethereum network are not required to do anything for the upgrade. Only users who mine or run nodes have to change how they operate for Ethereum 2.0. The Ethereum 2.0 upgrades mean that the Ethereum network is more energy-efficient and suffers from less congestion. For the average user, this translates into lower fees and faster processing of transactions — which is a welcome change for DeFi platforms and NFT traders.

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