Ethereum 2.0 updates: Will Ethereum 2.0 kill mining?

Since the announcement of the first phase of Ethereum 2.0 in December 2020, the cost of ETH has increased from $550 to $2,880.

ETH also hit a record high of $4,132 in May 2021 due to an increase in Decentralized applications (DApps), the launch of irreversible tokens (NFT) on the Ethereum blockchain, and overall optimism for the cryptocurrency market in 2021.

Let’s see why Ethereum upgrades stand apart…

What are Ethereum 2.0 updates

Ethereum 2.0 updates focus on three features: transaction scalability, disk space, and resilience.

The updates approach these issues by replacing the consensus algorithm from proof of work (pow) to proof of stake (pos) and by proposing segment chains ideas in blockchain technology.

What is Proof-of-stake?

As a general rule, mining rewards are earned based on a proof-of-work consensus, in which miners compete to validate transactions. Once miners validate the transactions, they are rewarded with ETH tokens (transaction fees).

The proof-of-stake algorithm will remove the competition from the equation and instead, users will be selected to mint new tokens and validate transactions based on the size of their deployed coins and they will no longer receive transaction fees; this approach is called “The London Hard Fork.”

It’s called the hard fork, because it will limit the computational power which is required to run huge computers to solve mathematical equations. These mathematical equations are usually carried out on a large scale during the proof-of-work approach and the new coins can be minted as a reward for transaction verification.

According to the EIP 1559 update, transaction validation awards, also known as gas charges, will be “burned out” after each transaction.

Figure 1: https://www.pinterest.com/pin-builder/?url=https%3A%2F%2Fresearch.aimultiple.com%2Feth2%2F&media=https%3A%2F%2Fresearch.aimultiple.com%2Fwp-content%2Fuploads%2F2021%2F08%2Fimage-2.png&description=Source%3A%20Coindesk%3A%20Since%20the%20activation%20EIP

What are Shard Chains?

Scalability issues are caused by network blockage due to high transaction volumes exceeding the current platform limit of 1545 transactions per second.

The developers claim that fragmentation (the addition of more nodes to the blockchain and horizontal data split to distribute the load) will reduce network congestion and increase transactions per second when creating new chains.

This upgrade phase (chunk chains) will distribute the load on the network across 64 new chains, allowing more transactions to be processed at the same time.

Figure 2:https://research.aimultiple.com/wp-content/uploads/2021/08/image-1.png

The combination of changes to proof-of-stake algorithms and chunk chains results in a significant reduction in the carbon footprint of the mining as users no longer have to use hardware with large computing capabilities to earn mining rewards for transaction completion.

Is Ethereum 2.0 Killing Mining?

Certainly. Although the Ethereum 2.0 updates are not complete yet, the final stages will reduce ETH mining. The “merge” phase, which is scheduled to begin in late 2021, marks the end of proof-of-work mining, during which users will no longer receive any mining rewards; also, there will no longer be a miner removable value (MEV).

Is Ethereum 2.0 a good investment?

By transferring to a proof-of-stake consensus mechanism, there will be minimum mining rewards and maximum burning rate. For example, two days after EIP 1559 was issued, Ethereum ETH burned 14 million US dollars instead to reward validators. That’s a huge change!

The burn rate ensures that there will be a limited supply of ETH in the future, ultimately increasing its price.

From this point of view, ETH 2.0 seems to add good value to the investment.

However, all these developments are public data (cryptography) and should already be included in the ETH price. When the project finally sees the light of day and proves beneficial in the context of scalability and sustainability, other altcoins like dogecoin could follow suit and adopt a proof-of-stake consensus.

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