The Road to Ethereum 2.0

Today, Ethereum reached a new milestone! As of right now, there are more than nine million ETH deposited in the Ethereum 2.0 deposit contract. This equates to around $30 billion in capital going towards securing the new and improved Proof of Stake network. In this piece we will discuss what this milestone means for Ethereum 2.0

Ethereum 2.0

Ethereum 2.0 represents the next generation of Ethereum, in which the network switches from its current Proof of Work consensus mechanism to the new and improved Proof of Stake protocol. Eventually, the current Proof of Work Ethereum mainnet will succumb to what is known as the “Ethereum Ice Age.” At this point, the cryptographic puzzles required to mine Ethereum will become so difficult to solve, that there will be little reason to participate in the network as a miner. This is thanks to the Ethereum “Difficulty Bomb.”

The Difficulty Bomb

The Ethereum difficulty bomb is a component of the network which competes with the miners to solve the same puzzles, meaning miners are not just competing against each other, but the network itself. This is all done to drive miners towards the new and improved Ethereum 2.0 network.

As Ethereum mining equipment is so expensive – and in the case of Ethereum ACIS miners – incredibly specific, this Ethereum ice age incentive effectively pushes miners in the direction of becoming validators on the Ethereum 2.0 blockchain. Essentially, miners can either validate on Ethereum 2.0, or they can let their expensive, specialized equipment go to waste.

Network Bottlenecking

Although this may seem harsh, it’s important to keep in mind how expensive it is to transfer funds over the Ethereum blockchain. This is because of network bottlenecking. When Ethereum was primarily used as a store of value, it was a relatively fast and inexpensive means of exchanging currency. Of course, as Ethereum has evolved into the development platform that it is now, network gas fees have become considerably higher. This is due to the number of smart contracts and NFTs which now inhabit the Ethereum blockchain. By switching from a Proof of Work to a Proof of Stake consensus mechanism, network bottlenecking will be significantly reduced, as will network gas fees.

Mining vs Validating

Mining Ethereum entails powerful computers using large amounts of energy to compete amongst one another for the opportunity to mine a block of Ethereum. In the Proof of Stake Ethereum 2.0 model, miners who switch over will have to stake Ethereum, to validate transactions on the network, and priority will be given to those who have staked the greatest amount of Ethereum. A good portion of Ethereum miners were not too happy about this transition to Ethereum 2.0 because switching over to validation means they will be making significantly less money.

EIP 1559

Ethereum miners used to be able to set the gas fees as they saw fit, up until August 4th, 2021, when EIP 1559 went live. Prior to EIP 1559, total gas fees accumulated on the Ethereum network had reached a whopping $1.3 billion; half of which went directly to the miners as an extra $650 million stream of revenue, at the cost of those who were simply building and transferring funds on the blockchain. Keep in mind, that $650 million was on top of what they were already earning from mining the blockchain.

EIP 1559 barely passed – with a 51 percent vote – but once it did, the gas fees on the network were redirected away from the miners’ pockets and sent back to the network to be burned. This did nothing to lower the gas fees, but it did act as a deflationary pressure on the network. This allowed the market cap of Ethereum to increase more easily.

Conclusion

Today marks a milestone as there is now 280,000 active validators, providing security, building blocks, and keeping the network alive. This transitionary process from Ethereum to Ethereum 2.0 is great news for the Ethereum community, as it means the network is once again becoming the playground of fish, rather than whales.

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