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Let's take a look to a coin that needs no introductions. Even if you are someone relatively unfamiliar with the crypto ecosystem, you've probably heard of Ethereum.
The de facto number two, and indeed probably the most famous cryptocurrency after Bitcoin. Ethereum forever changed the use cases of the blockchain. From an open ledger to facilitate only peer-to-peer transfer of money, the blockchain became a platform upon which smart contracts and decentralized applications, the famous dApps, could be built.
After all, the much expected Ethereum 2.0 is scheduled to launch this year. But more on that later.
In our Ethereum analysis, where we answer the question: What is Ethereum?
"A global, open-source platform for decentralised applications".
That's the one-line description on ethereum.org. With thousands of games, decentralised exchanges and finance apps running on top of the Ethereum blockchain, not to mention tokens, it's right on point.
This extended functionality for the blockchain was envisioned in 2013 by Vitalik Buterin.
In the months that followed, Vitalik joined forces with several other people in order to launch the new blockchain, but usually only he, and to a lesser degree Gavin Wood, are referenced as the co-founders of Ethereum and the Ethereum Foundation.
The Ethereum mainnet was launched in July 2015 and was very quickly widely adopted, which led Ethereum to climb to number two of the market cap within just a few months from the launch, and with the exception of very brief periods, it has kept that place ever since.
Ethereum, of course, is not the only smart contract blockchain out there. Several "competitors" have emerged during the years like EOS, Tron, Algorand, Cardano and many others, which look to build on the successful model of Ethereum while overcoming some of the limitations.
Ethereum, however, is still the most popular smart contract blockchain, with almost half of the top 100 coins running on Ethereum Network.
But Ethereum also have shortcomings, with the most significant being its limited scalability. This became abundantly clear during December 2017. But it wasn't the increased transactions due to the bull run that brought the network to its knees. It was a game, the infamous Cryptokitties, where the users spawn, collect, and exchange digital kittens. It was the first dApp that tested and broke the network's limits.
During that time, transaction fees skyrocketed and many transactions never made their way into the blockchain. The reason for this congestion is because every action in the game and every dApp, is a transaction on the blockchain.
With thousands of kitties being "born", sold and bought every second, and the network being able to facilitate only 15 transactions per second, the herd of kitties overwhelmed it.
Cryptokitties' popularity has declined since then, but today another industry has emerged to saturate the network: Ethereum DeFi or Decentralized Finance.
This is a collection of dApps, with Compound Finance being the most popular amongst them, that offer traditional banking products on the blockchain, without the needs for banks.
User can lend their ETH, and other Ethereum ERC20 tokens, usually stablecoins like DAI and USDC, and other users can borrow them, by providing collateral with their own crypto. The borrower pays an interest, which goes to the lenders as reward. And of course, everything happens automatically and on-chain, with the use of smart contracts.
In that way, one can get access to money without having to liquidate their own funds, and most importantly, without having to go through a bank.
This is DeFi's most significant promise:
"To bring banking services to the millions of the unbanked."
Although DeFi gets the lion's share for congesting the network, it's Ethereum overall popularity that led to it.
Most Tether tokens are now ERC20 tokens. Decentralized exchanges like the Uniswap and Kyber Network, run exclusively on Ethereum. Even whole virtual worlds like Decentraland, live on the blockchain. The applications of smart contracts are endless and Ethereum is the spear's head. It's only natural that the limits would be reached, especially if we consider that it was designed more than 5 years ago, when even the word "cryptocurrency" was unknown to most.
The much expected upgrade to Ethereum will change significantly the way Ethereum works and promises to solve the scalability issue, making Ethereum capable of supporting the tremendous workload from all these smart contracts.
The most significant change that Ethereum 2.0 will bring is that it will transition Ethereum from a proof-of-work consensus mechanism to proof-of-stake. Right now, blocks are validated and added to the chain by miners who run expensive mining equipment and consume a lot of energy in an attempt to be the first to solve a mathematical problem and add a block to the chain. This high cost is necessary to keep miners honest and secure the network. With proof-of-stake, the energy cost is replaced by a financial commitment.
With Ethereum 2.0 staking involves blocks committing 32 ETH to the network. By staking that amount, you become a validator, which gives you the opportunity to add new blocks to chain. This can be done even with a laptop, of course, you get rewarded for your efforts in securing the network.
The other significant change Ethereum 2.0 will bring is the introduction of shard chains. This are individual blockchains that run in parallel with the main chain called the Beacon chain.
Each shard chain's purpose is to take on part of the load of validating and adding new blocks to the chain, while Beacon chain makes sure all shard chains are up-to-date with the latest data.
This way, the network is able to process an increased number of transactions per second. Additionally, the nodes in each shard will need to download and process only the transaction history of that shard, not the whole network.
These two characteristics combined will increase the capacity of Ethereum and aim to solve the scalability problem. Ethereum will become "a super highway of interconnected blockchains", as the Foundation calls it on ethereum.org.
The new version of the network will launch in 3 phases:
Phase 0 - Introduction of Beacon chain
Phase 1 - Introduction of Shard chain
- validate transactions
Phase 1.5 - Current ETH mainnet will become shard
-Full transition to Proof of stake
Phase 2 - Shard chain smart contracts processing
- Shard chain communication
- Developers can uniquely design shards on their own ways
The concluding of the release of the new version is the most uncertain at the moment, as it's placed at some point after 2021.
As is reported on Ethereum's official website, the phase is currently "very much in the research phase".
With Ethereum 2.0 explained, what's your take on it? It's been talked about and expected for years. Now that's it's around the corner, do you think it will bring the promised scalability and silence the voices of Ethereum's critics?