17th March 2022 > > ETH 2.0.

tl;dr

With the last major test successfully completed ETH 2.0 is almost upon us. How exciting is that!

Market Snap (at time of writing)

Market Wrap

Russia defaults on its USD denominated debt, inflation rockets ever higher, US interest rates are heading in only one direction, and in response risk assets rally.

The pernicious effects of quantitative easing (QE) – designed to make the rich richer, and the poor poorer – will be with us for many more years.

Curious Cryptos’ Commentary – ETH 2.0

Regular readers have been avidly following the progress that has been made towards ETH 2.0.

There are many previous CCC’s that have documented the key milestones, but for recent recruits to our cause, it will be worthwhile to have a quick recap on events to date.

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The motivation to move to ETH 2.0 was primarily driven by the ever-increasing congestion on the Ethereum network.

The reasons for that congestion are all positive – ETH has become the mainstay of decentralised finance (DeFi) and a core building block in the development of non-fungible tokens (NFTs), amongst others.

The downside to such congestion comes as no surprise – gas fees rocketed ever higher, to the extent that simple transactions could cost tens of dollars, and complex DeFi could cost hundreds, or even thousands of dollars on occasion.

Layer Two (L2) protocols proliferated as a result, to reduce congestion, to speed up transaction times, and to dramatically lower costs. In general, L2 has worked very well, and will continue to do so.

Polygon (MATIC) is a great example, though I should point out that I have been an investor in MATIC for some time now, so this comment cannot be guaranteed to be impartial.

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The three key changes being wrought by ETH 2.0 are:

- A change in the consensus mechanism from Proof-of-Work (POW) to Proof-of-Stake (POS);

- Sharding;

- Burning of a proportion of the miners’ fees.

Moving from POW to POS results in a dramatic reduction of close to 100% in the energy used to create each block. The reason is simple – instead of miners competing against each other to produce the next block, resulting in a huge waste of computing time and energy, miners are chosen for each block proportionally to their staked holding of ETH.

Sharding is a concept that allows for many different blockchains to exist to allow quicker transaction times, with just a summary of each shard being added to the main blockchain at pre-determined intervals.

Finally the burning of some of the miners’ fees, though not integral to the move to ETH 2.0, addressed a constant criticism of ETH that it is entirely inflationary. It is expected that the issuance of ETH to miners for completing a block will be somewhat mitigated by each block burn.

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Progress towards ETH 2.0 has been swift. Beacon Chain – though only used for testing so far – has been working well since December 2020. There are now 300,000 validators with nearly 10mm ETH worth $28bn having been staked, none of which can be moved until ETH 2.0 is fully launched.

The next milestone has been successfully completed – the Merge.

The Merge on 15th March was between Beacon Chain and the Kiln testnet, the last full-scale testing of ETH 2.0. Tim Beiko, Ethereum developer had this to say:

“Post-merge blocks are being produced by validators, and they contain transactions!”

The Ethereum Foundation issued this press release:

“This merge signals the culmination of six years of research and development in Ethereum and will result in a more secure network, predictable block times, and a 99.98%+ reduction in power use when it is released on mainnet later in 2022.”

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ETH 2.0 could be with us in a matter of months. It will be a landmark event which will give a huge boost to the entire crypto ecosphere.