Ethereum 2.0 has been a long-awaited development in the cryptocurrency industry. A recent investigative report from Cointelegraph questions whether Ethereum is still on track to defend its crown as the premier network supporting the world of decentralized finance.
The report clears up misconceptions investors may have and offers a comparative analysis of Ethereum and its competitors. Meanwhile, the Ethereum foundation changed the name of the project to Eth2 earlier this year. Are you trying to manage expectations or educate?
There is again talk of consensus and execution layers
In a blog post in January, the Ethereum foundation stated that developers had been moving away from the Eth1-Eth2 terminology since late 2021. Instead, Eth1 will now be called the “execution layer” and Eth2 the “consensus layer.” This is not a minor turn to more technical language. This is an attempt to manage expectations due to common mistakes.
For people who are only superficially familiar with Ethereum, the name Eth2 might suggest that there will be a single big update that will magically fix the problems and notoriously high gas fees by switching from a power-hungry proof-of-work (PoW) consensus mechanism to a proof-of-stake ( PoS). However, this is a dangerous oversimplification.
The free scaling report published by Cointelegraph Research offers a solid insight into Eth2. Provides detailed information on planned technical updates and what they mean for Ethereum developers, competitors, and investors. The report is freely accessible on the Cointelegraph reporting terminal.
Download the full report here, with graphs and infographics.
The complexity and risk of migrating a multi-billion dollar blockchain project from one consensus mechanism to another has meant that the rollout of Eth2 has been slower than expected and the Ethereum Foundation did not initially give a definitive timeline.. Meanwhile, new competitors with scalable projects have been vying to take market share from Ethereum.
The report also assesses these challenges in detail. In 74 pages, it offers a comparative analysis of the major players, such as Solana, Polkadot, Algorand and Radix, who are trying to snatch the top spot in DeFi. Produced by our industry-leading team of researchers, it offers a balanced view of the overall situation and manages to cut through the noise of social media and the daily press.
Eth2 — Understanding a nuanced reality
The switch from Eth1 to Eth2 is best thought of as a carefully designed series of upgrades that will slowly transition the blockchain into its intended future. The main chain of Eth2, the PoS Beacon Chain, has already launched in December 2020. The merger of Eth1 with the Beacon Chain is expected in the second or third quarter of 2022.
While to a casual observer this might mean that all of Ethereum’s problems will be solved, the upgrade later this year likely won’t have a huge impact on gas fees or network capacity. While PoS will significantly reduce the power consumption of Ethereum, the scalability improvement will only come when data sharding is introduced in 2023. Sharding was initially going to happen before the merger, but has been delayed with the new schedule. The official reason is that scalability is now a lower priority because Layer 2 solutions are available.
The new terminology of “consensus layer” and “execution layer” is intended to banish talk of a mythical point at which Ethereum’s problems will instantly disappear. Associating Eth1 with the consensus layer and Eth2 strictly with the execution layer also shifts the focus away from the third layer called data availability that would have been the subject of the delayed data sharding update.
With the merger due later this year, it can be tempting to think that the days of alternative decentralized finance (DeFi) blockchains are numbered. However, it is important for investors not to jump to conclusions. Since Eth2 will not be an instant magical solution, following the landscape of the competition is still very valuable.
This article is for informational purposes only and does not represent investment advice or analysis or an invitation to buy or sell financial instruments. Specifically, the document is not a substitute for individual investment or other advice.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.