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What Is Ethereum 2.0? Understanding The Merge – Forbes Advisor UK

Long-awaited update Ethereum Blockchain can finally occur this summer.

At the ETH Shanghai Web3.0 Developer Summit last week, Ethereum co-founder Vitalik Buterin said the “merger” will be completed this summer. With this revolutionary update, Ethereum will switch from a proof of work model to a proof of stake consensus mechanism.

“If all goes well, the merger will take place in August,” Buterin said.

What is Ethereum 2.0?

Ethereum 2.0 is a new version of the Ethereum blockchain, Proof of stake A consensus mechanism for validating transactions through staking rather than Proof of work..

The Ethereum 2.0 staking mechanism replaces the proof-of-work model in which cryptocurrency miners use powerful computers to complete complex mathematical functions called hashes.The mining process requires more and more power to validate Ethereum transactions before they are published. Blockchain..

Proof of work systems devour a tremendous amount of electricity.Bitcoin MiningFor example, it currently consumes electricity at an annual rate of 127 terawatt hours (TWh). This is now higher than the electricity consumption of all of Norway.

ETH’s annual electricity consumption is now about the same as Finland, producing carbon dioxide emissions comparable to Switzerland. Fortunately, the merger is expected to reduce Ethereum’s carbon dioxide emissions by up to 99.95%. Cryptocurrency..

Ethereum vs Ethereum 2.0: What’s the difference?

Since April 2022, Ethereum has been running two parallel blockchains. One works with Proof of Work and the test chain works through Proof of Stake. The merge merges the old Ethereum Mainnet blockchain (ETH1) and the new Beacon chain (ETH2) into one integrated blockchain.

Ethereum developers have recently abandoned the terms ETH1 and ETH2 because of concerns that confuse users before merging.

Some investors who own Ethereum, the native cryptocurrency of the Ethereum network, may have been confused by what looks like two versions of the coin. Coinbase And other common cryptocurrency exchanges.

When a user bets Ether on Coinbase, it will be converted from ETH to ETH2 and the price of ETH and ETH2 will be the same. When the merge is complete, these two versions of Ether are combined into a single token.

Ethereum is moving from mining to staking

Staking is the process of replacing mining and validating Ethereum transactions once the merge is complete.

Staking requires the user to lock a certain amount of cryptocurrency in order to participate in the transaction validation process. In the proof of stake model, the algorithm selects the validator to retrieve to add the next block to the blockchain, based on the amount of cryptocurrency bet by the validator.

Investors must bet at least 32 ETH to become an Ethereum validator. Currently, there are over 300,000 Ethereum validators. The more ETH each validator bets on, the more likely it is that the validator will generate blocks. Each time the validator generates a block, the validator earns a reward on Ethereum to process the validation work.

Currently, Ethereum’s beacon chain staking yield is approximately 4.3% to 5.4% annually (APR).

Ethereum trades for around £ 1,500, with a minimum requirement of 32 ETH of £ 47,000 or more, and staking can be quite expensive for the average investor.

However, private investors can also participate in the staking pool, a collection of Ethereum stackers that combine resources to divide rewards. Most large crypto exchanges also offer staking services to investors who are unwilling or unable to commit 32ETH on their own.

Cryptocurrency energy problem

Critics BitcoinEthereum and other proof-of-work cryptocurrencies often point out the enormous energy costs of especially large-scale mining.

In recent years, investment screening based on environment, society and governance (ESG) Standards are becoming more and more popular. In fact, according to a recent Forbes study, many investors will consider investing elsewhere if they understand that investing in cryptocurrencies is having a negative impact on the environment.

John Warren, CEO of Bitcoin mining company GEM Mining, states that there is no linear correlation between Bitcoin price increases and their energy usage. Bitcoin currently has no plans to move to the Proof of Stake validation model. Warren says this model doesn’t make sense for Bitcoin.

“There is certainly plenty of room for growth in the proof of stake ecosystem, but Bitcoin is the core protocol for all cryptography, so we need the healthiest and most secure consensus model available,” Warren said. say.

He says the energy consumed by Proof of Work validation is an indication of the security and strength of the model.

“Bitcoin can be thought of as pristine collateral. The most important aspect of the protocol is security, which is most effectively provided by maintaining proof of work,” says Warren. ..

Staci Warden, CEO of the Algorand Foundation, states that cryptocurrency energy usage is a major factor in its ability to effectively expand.

“On the supply side, the protocol can only be extended to the extent that it has access to a reliable energy source at a marginal cost that is lower than the marginal profit,” says Warden.

She states that expanding Proof of Work cryptocurrencies requires subsidized or low-cost energy. This is why there was so much pressure on cryptocurrency prices in 2022.

“On the demand side, the scaling capabilities of the proof-of-work protocol are limited by the general public’s willingness to accept fossil fuel-powered proof-of-work protocols in general and their preference for increased availability of carbon-negative alternatives. “Warden says.

Ethereum vs Bitcoin

Bitcoin and Ethereum are the two most popular cryptocurrencies, accounting for a total of 63.6% of the world’s crypto market capitalization.

Ethereum prices have risen 648% over the last three years, more than double the 250% rise in Bitcoin over the same period.

The merger makes Ethereum a more attractive investment than Bitcoin from an ESG perspective, but it does not necessarily threaten Ethereum to abolish Bitcoin as the world’s top cryptocurrency.

Chris Klein, Chief Operating Officer and Co-Founder of the Bitcoin IRA, says Bitcoin and Ethereum are more complementary than competitive in the crypto market.

“Bitcoin and Ethereum serve different purposes. Bitcoin is a proof of work, limited assets, monetary crypto, and Ethereum’s utilities are. [as] Web3.0 backbone. Both serve as important and clear elements of the ongoing digital asset ecosystem, “says Klein.

The next major event on the road to proof of Ethereum shares will come in June, while crypto investors are waiting for a merge later this summer.

Ethereum plans to use the test network Ropsten to complete the major trials of the merger in June. Once the Ropsten upgrade is complete, Ethereum developers will need to upgrade two more test networks before merging the main Ethereum network.

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