Ethereum 2.0, what it is and why it is so important

Ethereum 2.0, what it is and why it is so important

Ethereum 2.0

It's been a long time, but the first phase of Ethereum 2.0 is finally up and running. The multiphase upgrade of the popular cryptocurrency aims to address the scalability and security of the Ethereum network through several changes to the network infrastructure, most notably the shift from a Proof of Work (PoW) consensus mechanism to a proof of stake model ( PoS).

Ethereum 2.0, also known as Eth2 or “Serenity”, is an upgrade of the Ethereum blockchain. The update aims to improve the speed, efficiency and scalability of the Ethereum network so that it can process more transactions and alleviate bottlenecks. Ethereum 2.0 launches in stages, with the first update, called Beacon Chain, which went online on December 1, 2020. The Beacon Chain introduces native staking into the Ethereum blockchain, a key feature of the network's transition to a PoS consent. As the name suggests, it is a separate blockchain from the Ethereum mainnet.

The second phase, called The Merge, is expected in the first or second quarter of 2022 and will merge the Beacon Chain with the Ethereum mainnet. The final stage is Shard Chains and will play a key role in scaling the Ethereum network. Instead of arranging all operations on a single blockchain, fragment chains spread these operations across 64 new chains. This also means that it is much easier from a hardware perspective to run an Ethereum node because there is far less data that needs to be stored on a machine.

While Ethereum 1.0 uses a consensus mechanism known as proof-of-work (PoW), Ethereum 2.0 will use a proof-of-stake (PoS) mechanism. In the first type of system, miners use the processing power of a machine to solve complex mathematical puzzles and verify new transactions. The first miner to solve a puzzle adds a new transaction to the record of all transactions that make up the blockchain and is rewarded with the network's native cryptocurrency. However, this process can be extremely energy-intensive.

Bet proof differs in that instead of miners, users can target a network's native cryptocurrency and become validators. Validators are similar to miners in that they verify transactions and ensure that the network is not processing fraudulent transactions. These validators are selected to propose a block based on the amount of cryptocurrency they have staked and for how long they have staked it. Other validators can then certify that they have seen a block. When there are enough claims, a block can be added to the blockchain. The validators are then rewarded for the successful block proposal. This process is known as "minting."

The main advantage of PoS is that it is much more energy efficient than PoW, as it decouples the energy-intensive computer processing from the algorithm of consent. It also means you don't need a lot of computing power to secure the blockchain.

One of the main reasons for upgrading to Ethereum 2.0 is also scalability. With Ethereum 1.0, the network can only support around 30 transactions per second; this causes delays and congestion. Ethereum 2.0 promises up to 100,000 transactions per second. This increase will be achieved through the implementation of chains of fragments.

Ethereum 2.0 was ultimately designed with security in mind. Most PoS networks have a small set of validators, which makes the system more centralized and less secure than the network. Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized and, therefore, secure. The Ethereum Foundation is also establishing a dedicated security team for Ethereum 2.0 to research possible cybersecurity issues in cryptocurrency.

3 Reasons to Buy Ethereum Right Now

a sunset in the background: Landscape art with the Ethereum © Source: shutterstock Landscape art with the Ethereum

The crypto space has finally caught some fire and Ethereum (CCC:ETH-USD) isn’t missing out on the gains. However, its recent run toward $4,000 has had some cold water thrown on it. 

a sunset in the background: Landscape art with the Ethereum © Provided by InvestorPlace Landscape art with the Ethereum

The cryptocurrency industry has had a rough couple of days. Ethereum prices closed lower by 12.5% on Sept. 7, and fell as much as 23.25% that day. This type of volatility makes it hard for cryptocurrencies to become a mainstay. It also makes it tough for investors to hold onto them. 

That said, a 20% shakeout isn’t all that unreasonable when Ethereum rallied 134% from its low on July 20 to its high on Sept. 3. And it gave some amazing trade setups along the way. 

Let’s look at three reasons why Ether is one to stick with. 

Despite Volatility, the Chart Is Finally Bullishchart, histogram: Daily chart of Ethereum © Provided by InvestorPlace Daily chart of Ethereum

Click to Enlarge

Source: Chart courtesy of TrendSpider

Ethereum has had a ton of volatility over recently, but it continues to hold key levels. 


On the crypto’s deep dip, the key $2,900 level held firm, while the 50-day moving average acted as support too. The resulting rebound sent Ether back above the $3,300 area, as it now contends with this zone as support and the 21-day moving average as resistance. 

If Ethereum can clear the high from Sept. 8 and the 10-day moving average, the 78.6% retracement near $3,800 is in play. That’s followed by $4,000, then the all-time high near $4,400. 

On the downside, bulls desperately want to see the $3,300 level act as support, along with the 61.8% retracement. If it fails, the $2,900 to $3,000 area will be on investors’ radar, along with the 50-day moving average. Another dip to this area may be a buying opportunity, but we need to see support hold. If it fails, $2,500 and the 200-day moving average could be next. 

For now, the charts remain bullish — although they also remain volatile. 

Ether Is Actually Practical

Bitcoin (CCC:BTC-USD) was created with a different idea in mind than the fiat currency model we use today. With a finite amount of supply that is released at a rather steady rate, it’s not subject to wild swings in money supply controlled by a central bank. 

As a result, Bitcoin acts as a store of value more than it’s used for practical purposes like transactions. That can be observed in the fact that it’s expensive and slow to use Bitcoin for transactions — especially when compared to a credit card platforms like Visa (NYSE:V) or MasterCard (NYSE:MA). 

It doesn’t help that Bitcoin (along with most cryptos) is incredibly volatile. 

However, that’s where Ethereum becomes a focus. It wasn’t intended to be a store of value, but that’s what it has become in addition to its practical applications. It became a store of value as its market capitalization has swelled to $415 billion, making it the second-largest cryptocurrency behind Bitcoin. 

However, Ethereum is capable of far faster transaction speeds. It can also be used in smart contracts, where the payment is automatically “unlocked” upon completion of certain milestones or contractual obligations. Lastly, Ether is fueling the NFT boom we’re currently seeing. Because of these real-world applications, this digital currency likely isn’t going away any time soon. 

This Cryptocurrency Continues to Evolve

Ether isn’t sitting still and hoping things continue to work in its favor. Instead, the cryptocurrency continues to evolve. For instance, we now have Ethereum 2.0. That begs the obvious question of, what’s the difference? Essentially, it’s an attempt at improving everything we like about Ethereum.

Ethereum is an older version, whereas Ethereum 2.0 is an upgraded system that is introduced with new ways of operations. Ethereum 2.0 is aimed at improving the speed, and efficiency, and a number of transactions.

Instead of using the Proof of Work method like Ethereum, Ethereum 2.0 uses the Proof of Stake method. Meaning that “validators are used instead of miners to verify and authenticate a transaction,” which is faster and more efficient. It should allow the network to verify up to 10,000 transactions per second. 

So why should investors bank on Ethereum?

Its technicals are volatile but still favor the bulls, it has real-world applications and is better than its peers in this regard, and it continues to evolve to meet the market’s needs. 

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

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