Ethereum’s full upgrade to version 2.0 is the most highly anticipated event in the crypto world as we speak. The most notable change will rely on the switch from the proof-of-work (PoW) to the proof-of-stake (PoS) consensus algorithm.
What will this change mean, and how will it affect crypto miners and investors? Let’s unravel all the important details you need to know about Ethereum’s switch to 2.0.
What Will Be the Direct Consequences of Ethereum’s Merge?
According to Vitalik Buterin, Ethereum’s founder, and other blockchain experts, the most important features that ETH2 will bring to center stage will be: security, scalability, and sustainability; Ethereum is now one of the most secure trading networks. After fully employing proof-of-stake, Ethereum will become more secure due to a large number of validators that will make the platform more decentralized – the equivalent of increased security.
In terms of scalability, proof-of-stake promises to reach a much higher processing power compared to 15 transactions per second – the average number it can handle today.
But here are the essential things you should keep in mind regarding Ethereum’s upgrade.
Migrating to PoS (Proof-of-Stake) – A More Environmentally-Friendly Mechanism
Ethereum’s current way of mining for blocks requires high energy consumption on the network and inevitably high electricity bills for miners. Moving to proof-of-stake is basically Ethereum’s answer to the numerous heated debates about cryptocurrencies’ impact on the environment. It’s also a direct advantage for Ethereum. Since its DeFi protocols became more popular, this has caused several bottlenecks in the blockchain, making fees spike. PoS will overcome this issue. And it’s not just DeFi transactions. Ethereum’s ecosystem has become more complex, covering stablecoin smart contracts, NFT minting and sales, and likely other developments Ethereum will integrate.
Like mining, proof-of-stake requires users to validate their transactions. But with the increased scalability, Ethereum will be able to process a larger number of transactions simultaneously.
Gas Fees Won’t Go Down
Along with becoming friendlier with the environment, many people would naturally expect gas fees to become significantly lower. Cryptocurrency experts are divided on this matter, but the majority claim this is only a myth.
Here’s the explanation. A congested network is what makes gas fees to be really high in today’s Ethereum. The merger to Ethereum 2.0 would mean a higher processing speed with transactions, which translates into reduced chances of congested networks, resulting in low gas fees. It seems, though, Ethereum’s upgrade won’t work on this logic.
Ethereum’s 2.0 won’t increase the computing power of the network, so it won’t have the expected magic effect to reduce the gas fees either. ETH’s merge will change the way it makes blocks, reducing the time of producing them. However, this will have little to no effect on gas fees.
From an economic point of view, layer 2 solutions will be the only ones that can have a positive effect on gas. You can build these layer 2 networks on top of Ethereum and batch all the transactions into a smaller footprint. Currently, this is the most convenient fix to benefit from a higher transaction capacity in a fast time frame and with reduced gas fees.
On the other hand, Ethereum investors hope ‘Shard chains’, which is the next phase on Ethereum’s roadmap after the merge (in theory, coming into force in 2023), will lead to lower gas fees.
Sharding promises to split the entire Ethereum network into multiple, separate portions called ‘shards’. This will reduce network congestion.
It’ll depend on the balance between supply and demand. The chances are that Ethereum’s transaction volume will increase as more innovations are added to this blockchain’s ecosystem. So, gas fees might not change much, even with sharding.
Miners Will Become Validators
Along with proof-of-stake, the concept of ‘mining’ will fade away, and ‘staking’ will take over to approve transactions on the Ethereum blockchain. That means miners will no longer have to mine but validate new transactions, and they won’t need expensive hardware to do that.
Validators will stake their own crypto, if and when their transactions are validated, they get a reward. Here’s how proof-of-stake consensus will unfold:
- validators lock-in a certain amount of cryptocurrency
- when winning participants validate their transactions, other validators need to confirm that the block is accurate
- the network then updates the blockchain
- the blockchain network will reward those participants who’ll invest more (based on the validator’s amount of crypto in the pool and the time they’ve kept it there)
All in all, PoS becomes more straightforward than PoW, making users entirely responsible for validating the transactions on the network.
You Won’t Get to Withdraw Staked ETH Immediately
If you want to withdraw the amount of ETH deposited in the “beacon chain”, you’ll have to wait maybe a little longer than expected. According to Vitalik Buterin, withdrawing capabilities will require around six months after Ethereum’s 2.0 release. So, the merge will be followed by a post-merge clean-up phase until ETH2 is complete.
Also, you won’t be able to trade, send, or sell the amount you have staked with a validator.
Bottom Line – It’s a New Chapter for Ethereum
Ethereum’s merge will mean the final goodbye to proof-of-work and the beginning of more sustainable blockchain technology. These are the sure things.
As for the remaining questionable details, the blockchain community has already started to argue and make various predictions. Some blockchain experts stated this is the perfect time to learn more about blockchain technology and crypto, especially if you have little knowledge about them.
Others believe more people will jump in and speculate, be drawn in by DeFi’s higher interest rates and leave traditional banking behind.
What seems within the realms of possibility is that PoS will make more businesses accept cryptocurrency payments and we’ll witness a widespread adoption of blockchain technology.
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