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Ethereum 2.0, also known as Eth2 or ‘Serenity’, is a multi-phased upgrade to the Ethereum blockchain, focused on improving the network’s infrastructure through several changes, the most notable of which is the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
The upgrade focuses on improving three key issues faced by the current Ethereum network, namely:
Blockchains such as Ethereum and Bitcoin require transactions to be validated in a decentralized way. Currently, Ethereum and other cryptocurrencies use a Proof-of-Work consensus mechanism to achieve that – the PoW mechanism requires miners to solve mathematically complex puzzles in order to verify new transactions. The first miner to solve a puzzle gets rewarded with the blockchain’s native currency. Because of the computational power required to solve these puzzles, this process is highly energy intensive.
With Proof-of-Stake, on the other hand, users can become validators by staking the network’s native cryptocurrency. Validators are similar to miners in that they verify transactions. The more cryptocurrency you stake, the more likely you are to be selected to propose a new block to be added to the blockchain.
This process is a lot less energy intensive as you no longer need large amounts of computing power for the consensus algorithm.
The second main reason for the upgrade to Ethereum 2.0 is scalability. The current Ethereum setup is secure but very slow and inefficient, due to its setup as a single, consecutive chain.
To tackle this issue, shard chains will be introduced – shard chains will enable the blockchain to be split up, allowing for transactions to be processed across multiple chains in parallel, thereby increasing speed and efficiency, which allows for greater scalability.
While a lot of PoS networks rely on a small pool of validators, Ethereum 2.0 requires a minimum of 16,384 validators, thus making it less centralized and more secure.
The Ethereum Foundation is also setting up a dedicated security team for Ethereum 2.0 to research possible cybersecurity problems and audits of the code are being carried out by organizations such as Least Authority and Quantstamp.
Overall, the upgrade to Ethereum 2.0 will allow for greater, more efficient use of the network, thus further enabling the widespread adoption of crypto and decentralized applications.
At DeFi Consulting Group, we specialize in helping family offices and other institutional investors understand and gain access to Crypto and Decentralized Finance. Reach out to our team for guidance on how to effectively approach this space.
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