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The Ultimate Guide to Understand Ethereum 2.0 and the Long-Awaited Merge

Ultimate Guide to Understand Ethereum 2.0 and the Long-Awaited Merge
Ultimate Guide to Understand Ethereum 2.0 and the Long-Awaited Merge

Introduction

The long-awaited Ethereum blockchain update is rumored to release this summer.

At the ETH Shanghai Web 3.0 Developer Summit last week, Ethereum co-founder Vitalik Buterin announced that the “merge” milestone would be completed this summer. There is excitement in the air about the merge, which will smoothly transition Ethereum from a proof-of-work model to a proof-of-stake mechanism. Buterin said, “if there are no problems, the merge will happen in August.”

Ethereum 2.0 : Why Upgrade to Version 2 is Important?

Ethereum 2.0 is the soon-to-be latest release of Ethereum’s leading network. It will improve Ethereum in three vital areas; scalability, security, and availability.

Ethereum 2.0 is a new blockchain version that will use a proof-of-stake mechanism to verify transactions via staking.

The proof of stake mechanism will take over from the existing model where cryptocurrency miners use large, high-powered computers to complete complex mathematical functions known as hashes.

The mining process is a computationally-intensive process that requires considerable electricity to verify transactions on the Ethereum network before public blockchains record the transactions. PoW systems are relatively energy-intensive

One use of Bitcoin mining is that electricity consumption is pretty high. That’s currently higher than the power consumption of the entire country of Norway.

ETH currently uses as much power annually as Finland, equivalent to a carbon footprint to match Switzerland. It is a staggering figure, and it’s never been more important to start investing in renewable energy sources.

Ethereum, the world’s second-largest crypto in terms of market capitalization, following Bitcoin, is set to reduce its carbon footprint by 99.95%. The trend follows widespread criticism that it is too resource-intensive and environmentally unfriendly.

Finding the Difference Between Ethereum and Ethereum 2.0 : What’s the Big Deal?

Ethereum has been running two parallel blockchains for the last few years. One of them uses proof of work, and the other is a test chain that operates via proof of stake.

The merge process will combine the Ethereum Mainnet Chain (ETH1) and the new Beacon Chain (ETH2) into one unified blockchain.

The Ethereum development team recently changed their terminology regarding Ethereum’s different blockchains. The team’s concern was that the previous naming, ETH1, and ETH2, would confuse new users coming onto the platform before they had time to understand the distinction.

Some investors may have been baffled by the Ethereum Network’s native cryptocurrency, Ether. One version is on Coinbase and other exchanges, but the other is not.

When users invest their ETH in the Coinbase marketplace, they are converted to ERC20 tokens. It ensures that the price per Ether will always be identical to Ethereum 2X tokens.

Ethereum Transition from Mining to Staking

Staking will be used instead of mining once the merge is complete. In the process of staking, you put some of your cryptocurrency on the line to be able to participate in the transaction verification process.

Anyone with the cryptocurrency can become a ‘validator of transactions’ and add the following block to a blockchain in a proof-of-stake model.  The validator is chosen by a preset algorithm.

Investors must stake at least 32 ETH to become an Ethereum validator. There are currently more than 300k Ethereum validators.

The more ETH a validator stakes, the better chance they have of generating blocks on the network. Validators earn rewards for validating blocks in the form of ETH.

The staking reward on Ethereum’s Beacon Chain currently runs between around 4.3% to 5.4% APR (Annual Percentage Rate)

At the time of writing this article, the price of 1 ETH is 1,801.63. As you require at least 32 ETH for mining, which equals to $57,632, most people aren’t able to stake them because of the high price.

However, there is hope if you want to stake with little money.

Individual investors are allowed to partake in staking pools by pooling their money. The staking pools are collections of Ethereum stakers who combine their resources and split the rewards.

Most large cryptocurrency exchanges also provide staking services for investors who cannot commit 32 ETH of their own.

Cryptocurrency’s Inherent Energy Problem

Although critics of Bitcoin & Ethereum and other proof-of-work cryptocurrencies often point out the considerable energy cost for mining, in actuality, at scale, it often saves money.

In recent years, screening investments based on ESG standards has become more critical.

After realizing its adverse environmental effects, multiple investors have stated their disapproval of investing in cryptocurrency.

John Warren, CEO of Bitcoin mining company GEM Mining, says that there’s no one-to-one linear correlation between Bitcoin’s price fluctuation and its energy use.

Bitcoin doesn’t plan to move away from Proof-of-Work verification, which Warren says won’t work for Bitcoin.

Although the proof-of-stake ecosystem can be improved, it cannot match up to the veracity and security of Bitcoin, which is the central protocol for all other cryptocurrencies. Therefore, it requires a consensus model like Proof of Work (PoW) that cannot be doubted. 

Proof-of-work is verified after the consumption of a lot of energy. Replicating the same energy consumption is hard. Therefore, Bitcoin is considered stronger than any altcoins doing the rounds in the crypto market.

“Bitcoin is a valuable asset, and its priority should be security, which is best delivered by staying with the proof-of-work protocol,” Warren said.

Staci Warden, CEO of the Algorand Foundation, says that every cryptocurrency’s energy usage is a significant factor in its ability to scale effectively.

“On the supply side, it needs reliable energy sources at a cost that is lower than its return,” Warden says.

Experts believe that low-cost energy is necessary for cryptocurrencies like Bitcoin to become more popular. If electricity prices go up, people will start using other currencies.

“On the demand side, a proof-of-work protocol’s ability to scale will be limited by the public’s willingness to tolerate fossil fuel-driven, proof-of-work protocols in general and preference for the growing availability of carbon-negative alternatives,” Warden says

Ethereum vs. Bitcoin: Who’s the Boss?

Bitcoin and Ethereum are the unquestionable kings of the crypto world, accounting for 63.6% of crypto’s global market cap.

Ethereum’s price has climbed 648% in the past three years, which is more than double Bitcoin’s 250% gains in the same time period.

As the ESG rating for Ether becomes higher than that of Bitcoin, it will attract more potential investors. However, it does not make Ethereum a top contender to dethrone Bitcoin.

Chris Kline, chief operating officer and co-founder of Bitcoin IRA, says Bitcoin and Ethereum complement each other more than they compete within the cryptocurrency market.

Bitcoin and Ethereum are both cryptocurrencies, but they are unique in their special ways. Bitcoin stores value digitally. And this value can be transferred anywhere in the world with an internet connection. The beauty of bitcoin is that it doesn’t require you to pay any fees as long as you know what you’re doing. Ethereum, on the other hand, has multiple uses cases like NFT, which are rising in popularity as we speak.

Bitcoin is a crypto that relies on proof-of-work. It is limited in terms of number and value. Ethereum’s utility is to power the Web 3.0 transformation.

The next major event in Ethereum’s path to proof-of-stake is going to be happening toward the end of this summer. While investors await this event known as The Merge, the next major event in upgrade to Ethereum version 2.0 will occur in June.

One of the most significant steps will be taken at the end of this month.

Ethereum is expected to complete a major trial for the merge in June. Their team is using the test network Ropsten.

Once the developers manage to upgrade to the Ropsten network, they will be left with two more test networks to upgrade before they can finally start upgrading the main Ethereum network.

Conclusion

Ethereum is a very popular cryptocurrency in the crypto world. After experiencing the highs of 2021, it is going through a slump like most of the cryptocurrencies in the market. One of the biggest challenges for Ethereum is to get away from its Proof of Work past, which is considered to be harsh on energy resources and also the environment. Vitalik Buterin has promised a bright future for Ethereum after the merge, which is expected to complete by August 2022. Currently, the Ethereum team is working on the Ropsten upgrade, which will kickstart its much-awaited transition. So, what are your thoughts on the latest developments in Ethereum world. Share your thoughts in the comment section.

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