Ethereum 2.0

Ethereum has a long and storied history, with many developments and incidents to mark both significant positive changes and setbacks. The most important change that happened in mid-September of 2022 is a shift from the proof-of-work (PoW) to the proof-of-stake (PoS) model, which aims to improve the security and scalability of the blockchain network. The process has been completed, and Ethereum has officially moved to a PoS model. 

The changes come under “Ethereum 2.0,” an all-encompassing term that describes Ethereum’s next evolution into a better-performing, more accessible network. The upgrade also adds sharding, which allows transactions to be processed simultaneously across smaller chains, resulting in faster transaction speeds.

Key Takeaways

  • Ethereum 2.0 is a major upgrade for the Ethereum network, shifting the network to proof of stake (PoS) from the proof-of-work (PoW) model.
  • Ethereum 2.0 aims improve the network’s scalability, accessibility, and security.
  • It also adds sharding, a means of allowing transactions to run in parallel through a number of smaller chains.

What Is Ethereum 2.0?

Ethereum 2.0 is a broad term used to cover several improvements to the Ethereum network, which tackle some of its most pressing technical hurdles. Ethereum 2.0, or ETH2, is an informal name—the Ethereum Foundation prefers to refer to Ethereum 2.0 as the consensus layer and ETH 1.0 as the execution layer.

Ethereum 2.0 has been taking shape over several years and is not a one-off event. It started with the launch of the Beacon Chain in December 2020, which allowed the staking of Ether, the native token of the Ethereum network. The process of staking entails holding tokens for a period of time as a means of supporting the crypto network’s security and validating blocks within the blockchain network. These investors receive rewards for this practice through a process known as proof of stake (PoS).

In other words, Ethereum has moved from proof of work (PoW) to a proof-of-stake model or consensus mechanism, where the latter aims to improve the security and scalability of the blockchain. 

When Is Ethereum 2.0 Scheduled?

The second phase began earlier in 2022 through a series of “merges” with testnets, culminating in a merge with the Ethereum mainnet slated for September 2022. These merges are simply integrations of the Beacon Chain with various testnets. Ethereum is now officially working on a PoS model after the merge.

All of the latter changes relate to the consensus model of the network, but the Ethereum 2.0 upgrade will also involve the implementation of sharding, which tackles the scalability of the network. Sharding follows the merges and is the final phase of the Ethereum 2.0 transition. This phase should be complete by 2023.

There are plans for changes after sharding; however, these are not the current immediate focus. The improvement of the Ethereum network is an ongoing process.

Why Move to Ethereum 2.0?

The Ethereum 2.0 upgrade is complicated and has involved the best efforts and minds to see its execution. The reason for the enormous push for this change is because the Ethereum network has been bogged down by a few technical limitations—namely scalability, accessibility, and security.

Improvements in these areas are key to Ethereum reaching a wide level of adoption. Ethereum is the home to smart-contract-based decentralized applications (dApps), and these have applications in finance, real estate, supply chains, and governance, among many others. But to have that impact, the applications must be able to handle network interactions on a large scale.

What Changes Will Ethereum 2.0 Bring?

The Ethereum network has seen bottlenecks, simply because of the sheer activity on it. For instance, the gas fees, which are paid to miners for their work, sometimes reach extraordinarily high levels. It can improve after Ethereum 2.0, as validators who stake Ether will be responsible for securing the network. These validators have to lock in 32 Ether as part of the bargain. While 32 Ether is still a high barrier to entry, there are alternative ways for those with smaller holdings of Ether or the technically unaware to join in.

Proof of stake is faster and more eco-friendly than proof of work, as it consumes far less power. It is expected that PoS will increase the network’s scalability and decrease its energy usage by roughly 99.95%.

Currently, the network can handle about 25 to 30 transactions per second, but Ethereum 2.0 promises to handle 100,000 transactions per second.

That level of scalability will be achieved through the implementation of the sharding technique. This change will see 64 “shard chains” put to use, which run through transactions in parallel. It is theoretically 64 times as quick in recording transactions as the current Ethereum network.

With proof of stake and sharding, Ethereum has completed the biggest evolutions in its history. It is not without reason that many market analysts and industry insiders are playing up the transition, as it will have a profound effect on the operation of various niches, not the least of which is decentralized finance (DeFi).

How Will Ethereum 2.0 Change the Decentralized Finance (DeFi) World?

There is no doubt that Ethereum 2.0 is the most significant change yet for the network. It sets the stage for a future where Ethereum can comfortably handle applications in a wide variety of verticals and makes it more accessible to the public. Ethereum 2.0 makes it possible for Ethereum to become a more globally used network across a wide range of verticals.

What Is Ether’s Future After Ethereum 2.0?

Ether’s price has been improving with news of all the merges on testnets, but as with any development in the crypto market, it’s hard to make a completely accurate estimate of how it will impact prices.

How Much Energy Will Ethereum 2.0 Save?

After shifting from proof of work to proof of stake, the energy consumption on the Ethereum network will be reduced by 99.95%. This indicates that staking is 2,000 times more efficient than traditional mining. 

The Bottom Line

Ethereum 2.0 is a major upgrade for the Ethereum network, shifting the network to proof of stake (PoS) from the proof-of-work (PoW) model, and making the network more efficient. The Ethereum Foundation described the change like this: "Imagine Ethereum is a spaceship that isn't quite ready for an interstellar voyage. With the Beacon Chain, the community has built a new engine and a hardened hull. After significant testing, it's almost time to hot-swap the new engine for the old mid-flight."

This change could have wide-ranging impacts across the crypto industry. In particular, it may put more pressure on Bitcoin to curb its energy use. The White House recently introduced a statement to indicate it's got its eyes on bitcoin for possible future regulation, saying "Bitcoin is estimated to account for 60% to 77% of total global crypto-asset electricity usage... There have been growing calls for PoW blockchains to adopt less energy-intensive consensus mechanisms."

Investing in cryptocurrencies and other initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date when this article was written, the author does not own Ethereum.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. “The Ethereum Upgrades.”

  2. “The Beacon Chain.”

  3. “Sharding.”

  4. Ethereum Foundation Blog. “Ethereum’s Energy Usage Will Soon Decrease by ~99.95%.”

  5. “Live Ethereum TPS Data.”

  6. Twitter. “@VitalikButerin 9:46 AM · Jun 30, 2020.”

  7. The Ethereum Foundation. "The Merge."

  8. The White House. "Crimate and Energy Implications of Crypto-Assets in the United States."

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.