Ethereum Reaches A New Milestone As It Prepares For ETH 2.0

There have been plenty of great developments in the Ethereum blockchain. This has been good for its native currency ETH (Ether) and has restored confidence in holders toward the end of the first quarter of 2022. This has led to a rally in ETH price to above the $3K level, starting in March 22. Some analysts take this as an ominous sign that ETH has turned bullish once again, but what is really the motivation behind it?

Toward the end of 2021, Ethereum developers released the Kintsugi Merge test network. This is a more realistic approach to testing how the Ethereum network will be like post-merge (i.e. when the Beacon Chain merges with the mainnet). This allows developers to test the features of the network in an environment that supports PoS (Proof-of-Stake). This is where smart contracts can be tested without any additional costs to developers.

Ethereum developers have also released the Kiln public test network in March of 2022. This is the final test network before the transition to PoS. This is where developers can test their applications and tools before deploying on the mainnet. Node operators and stakers can also test on Kiln, to evaluate the performance on a simulated blockchain.

Toward the end of March 2022, the number of ETH 2.0 validators has reached 300,000+ with over $28 Billion TVL (Total Value Locked). That is based on the valuation of ETH (~$2900-$3,000 circa March 1, 2022). The total amount of ETH locked (requires 32 per validator) has reached 9.6 Million ETH. At the price of ETH in March 28, 2022 at $3,300.62 (10:46 PM EST), the total value locked would be $31.6 Billion. The value of ETH increases with the market, and any surge also brings up the TVL for the validators.

Ethereum is receiving not just retail support, but institutional as well. Macro guru Raoul Pal has become more bullish on his outlook of Ethereum. He believes it is on track to outperform Bitcoin based on its performance. Pal is looking at long term metrics that show that the market Ethereum is capturing covers a much larger base than Bitcoin. This includes the derivatives and money markets, where billions of dollars are sitting. Should even a small percentage of the money flow into the DeFi space, where ETH is a major currency, it can create network effects that can further drive ETH value higher.

Other reports are coming that banks are positive on Ethereum. It seems banks like JP Morgan had at one time been very critical of cryptocurrency. The sentiment has changed, and they now invest in projects that involve cryptocurrency like Ethereum. Perhaps the recent developments in how Ethereum will become more energy efficient and how it is a platform that facilitates a decentralized financial system opens opportunity for capital investments.

The transition to a new consensus mechanism can greatly impact Ethereum network performance. A faster and more energy efficient system gives it a positive outlook compared to Bitcoin and other energy intensive cryptocurrency that use PoW (Proof-of-Work). The more important matter that investors are keeping an eye on is how the move to ETH 2.0 will improve the network’s overall performance. This attempts to solve the problems of scaling, which Ethereum competitors (e.g. Solana, Harmony, Avalanche) have already been addressing. A more stable network with the capability to process more transactions will be huge for Ethereum, and can establish it as a dominant platform for years to come.

The Ethereum Altair Upgrade – Merging PoS With The Beacon Chain

The Ethereum Altair upgrade was completed on October 28, 2021. This is part of the transition to ETH 2.0, as PoS (Proof-of-Stake) consensus mechanism merges with the Beacon Chain.

The upgrade implements the following:

  • light-client support to the core consensus.
  • Setup of beacon state incentive accounting.
  • Fixes validator incentives issue.
  • Penalties for offline or inactive validator nodes per EIP 2982.

Over 95% of the network participated at the time of the upgrade’s first epoch. This is the first upgrade to the Beacon Chain since going online in December 2020 and could also be the last before the merge with PoS on the Ethereum mainnet.

According to IntoTheBlock researcher Lucas Outumuro:

Through the Altair upgrade, Ethereum sets the base for this vision, enabling the upcoming merge of the proof-of-work chain and the Beacon Chain. Finally, these are expected to benefit Ether holders and stakers by making it deflationary while offering higher returns to validators.”

The recent London Hard Fork had introduced a base fee as part of EIP 1559 with a coin burning mechanism that adds a deflationary feature to Ethereum. During the first 48 hours of that upgrade, $30 million in ETH were burned from the network’s circulation. As of 10/30/21, 681,030 ETH have been burned that is valued at $3,013,073,269. This puts pressure on supply as it decreases and drives the price of ETH higher due to market demand.

With ETH 2.0 set for deployment in 2022, Altair is part of the preparation. Altair is a hard fork, which means that the 250,000+ validator nodes who didn’t upgrade are now considered offline. Their ETH will then slowly diminish at about 10% per year. This was included in Altair as a sort of way to push for moving towards the upgrade. This not only benefits the validators, but the network as a whole as it comes to an agreement to pave the way for Ethereum’s next phase.

EIP 1559 And Ethereum As A Deflationary Currency

An issue with Ethereum is about to be addressed regarding its non-capped supply of ETH (Ether) with EIP 1559. The proposal aims to introduce a new protocol for addressing the transaction fees on the network targeted for release in July/August 2021. In the proposed change, during a transaction a small amount of Ether (ETH) is “burned” every time it is used to pay for gas fees. This token burn can somehow control the circulating supply of ETH as well, leading to a more deflationary money supply. The burned tokens are removed from circulation forever but new ones can still be created. Overall, this can add some controls on the amount of ETH being put out in circulation as form of inflation control.

Transaction fees are not consistent on the Ethereum network. They fluctuate every so often, but when there is high network demand the fees surge to sometimes ridiculous levels. For the seasoned trader it may not matter, but for retail and new traders it can be too much for smaller sized transactions. More experienced traders may deal with large transactions where the cost of gas does not matter as much. The prices are still high and there needs to be some improvement in which issues like scaling and layer 2 solutions aim to resolve.

TxFee = Total Gas Used * Gas Price Paid

As of March 7, 2021, the average cost of a transaction is $15.53. Just a few months earlier on January 17, 2021 the transaction fee was only $5.41. That goes to show a sudden increase of 187%, which could have been worth at least 2 transactions back in January or earlier in 2021. The demand for ETH in the DeFi space and hodling portfolios due to the good news coming out about ETH2.0 is helping to drive prices and at the same time increasing network activity. The congestion is expected, as the same thing happened back during the cryptokitties and ICO era. This puts plenty of strain on the network, but it has problems scaling since it can do at most 15 tps (transactions per second). The promise of ETH2.0 is a bring faster consensus with more efficiency through a staking protocol (i.e. Proof-of-Stake) to scale the network.

EIP 1559 is an improvement proposal to help make transaction fees more consistent and prevent it from getting to such high levels that many are not willing to pay. Currently with Proof-of-Work, the miners can determine the fees and increase it in order to prioritize a transaction. Nodes called miners set the price of gas used to process transactions, based on the supply and demand of computational resources available from the network. It is in units called Wei or Gwei, just smaller denominations of ETH. The proposal is to use what is called a BASEFEE, that is set based on the network’s level of transactions. What it aims to provide is a market rate rather than a reference based on prices that users are paying for. This structure eliminates the guess work often involved in calculating the transaction fees.

Some see this as adding deflationary measures because of the token burning feature. As tokens are created, they are also destroyed. That keeps the circulating supply in check and prevents any inflationary pressure, according to some analysts. This form of negative inflation could lead to less ETH in circulation, thus increasing market price. While this looks good to traders and core developers, some miners don’t exactly agree with the proposal. They don’t derive the same benefit as much since the token burn benefits token holders more than miners. The miners lose out on their profits that would have been the burned tokens.

The outcome may push for EIP 1559 despite the protests. Ethereum plans on moving away from mining and into staking, so it does make more sense to implement the protocol rather than continue with the current system. Mining will also become more difficult as specified in the protocol for ETH2.0 (e.g. difficulty bomb), that nodes would rather switch to staking since mining will be less profitable until it is totally no longer possible due to the increase in difficulty level. That leads to questions about whether the miners will hard fork Ethereum, but that may be a horrible idea. If no one supports the fork then the miners have a lot to lose, while the mainnet remains profitable with new nodes entering the network. EIP 1559 will surely be activated with > 50% consensus, but the miners can signal a no to the network and not activate it. What is important that still needs to be addressed are the high transaction fees, The hopeful resolution is that the miners and developers come to some agreement to determine transaction fees which really needs to be addressed to further the momentum of growth on the network.

Ethereum 2.0 – The Path To Serenity

The Ethereum blockchain has undergone significant updates in preparation to a new version. The following software updates have been made since the project first started:

Frontier (July 2015)
Homestead (March 2016)
Metropolis (Byzantium in October 2017 and Constantinople in February 2019)
Istanbul (December 2019)

The next iteration is Eth2 or Ethereum 2.0 which will introduce the Serenity update. It is set to begin in late 2020 and deploy in phases. (Learn more at Ethereum.org)

It will change the Ethereum protocol, moving away from the Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). It will launch in multiple phases, as developers begin deploying the necessary changes to the Ethereum blockchain. The main purpose for this transition is to bring more efficiency and scalability to the network, to process more transactions and operate with more efficiency and stability. Scaling has long been a problem of blockchain-based networks, because they have to rely on decentralization which doesn’t process transactions as efficiently at the rate of commercial business applications. That is part of a tradeoff with scalability, since blockchains are more decentralized and secure.

Eth2 will still be decentralized, but improve their consensus mechanism from mining to staking. This will allow validators to contribute based on their proportion of ETH (ether) on the network rather than providing compute resources. There is no more need to solve random puzzles using hash power. Instead the staking method allows validators of blocks to commit a portion or all of their ETH to validate transactions. Their incentive will be based on the amount they staked. It is more energy efficient as well, not requiring expending large amounts of energy to produce one block. Eth2 randomly selects validators in a fair and decentralized manner.

At present, the Ethereum network can process between 15 to 30 tps (Transactions Per Second). With Eth2 it will increase the transaction velocity up to 100,000 tps. This would be possible (in theory) with the implementation of the Ethereum 2.0 upgrades. Even if in the real world it isn’t exactly 100,000 tps, a higher transaction velocity is still the best outcome. The underlying element to increase the number of transactions involves the use of shard chains (sharding will be explained later).

Among other changes to the network, the beacon chain and sharding will also be deployed as part of the EIP (Ethereum Improvement Proposals). Beacon chain is a feature that coordinates the PoS implementation on the Ethereum blockchain. Sharding aims to improve the storage of data on the network, to scale to higher capacity and faster access to data. Rather than to have all nodes on the network storing the blockchain state, shards are created to store system state in a distributed and decentralized manner for more efficient operations. If all nodes had to keep store of the world state of the blockchain, it certainly slows down the network since each node has to perform updates whenever there are changes. That can take plenty of time when you have many nodes.

The idea is to keep the network open to all who want to stake without barriers in order to maintain a decentralized network. Ethereum 2.0 will require 16,384 validators, which means a more decentralized and secure network. The more nodes there are, the more security to the network through coordinated participation of each node. This is because those who have staked their ETH face losing what they staked if they do not cooperate with other nodes or if they attempt to attack the network. It is a coordinated game theory example of contributing resources for the greater good. However, there are also consequences and not just incentives.

Despite all the efforts by developers, the project has been facing delays. This is not a major setback, but has been expected due to the complex nature of the system. It has been in development for years and it could still take longer to deploy and implement. It does keep the momentum for driving the value of ETH higher, along with the surge in the DeFi (Decentralized Finance) space which is based on Ethereum’s ERC20 token standard. As transaction volume increases and ETH gas costs decrease, the value of ETH would show a likely bullish trend. The market is so volatile though, nothing is certain. The transition to Ethereum 2.0 will be undergoing phases, so they won’t happen over night. It is best to keep an eye out on the developments, because any progress would surely be a good signal to the rest of the market.

Ethereum 2.0 Spadina Testnet Is Set To Launch

The Ethereum 2.0 or ETH 2.0 journey continues with the Spadina Testnet launch. This is part of the Ethereum 2.0 roadmap to improve scalability, security and programmability. Spadina will run in parallel alongside the Medalla Testnet. Developers can use both networks to test Ethereum 2.0 features. This paves the way to ETH 2.0 which is expected to launch later this year, but this is not always certain. Many factors (e.g. bugs, divergence in viewpoint, etc.) can arise that could lead to delays, as often happens with the development community.

The genesis for the Spadina testnet has been set to September 29, 2020 (“dress rehearsal” v0.12.2 Ethereum 2.0 multi-client testnet “Spadina v0.12”) with a genesis time of 1601380800 (12 PM UTC). Once the testnet is up, developers can begin testing deposits and beacon nodes on the network. The testnet uses only 1,024 validators which is far less than what would be required on the mainnet (16,384 validators).

The purpose for Spadina is further test the crucial features for ETH 2.0 Serenity Phase 0. This includes deploying smart contracts for making deposits and generating the genesis block on the network. Depending on how successful and confident developers are during the testing, it can very well continue into 2021 or lead to the release of ETH 2.0 much sooner. This requires more understanding and participation from the community to determine if the upgrade can be implemented on the Ethereum mainnet.

ETH 2.0 introduces the Beacon Chain with sharding and the Proof-of-Stake (PoS) consensus mechanism. These are upgrades that address scalability problems in the Ethereum protocol. The target is 100,000 transaction per second (TPS). The challenge is to scale without sacrificing too much security and decentralization. With PoS, mining will be replaced by staking, introducing a new incentive system to reward nodes that contribute to the security and efficiency of the Ethereum blockchain.

Ethereum Denominations Explained

Ethereum’s digital asset is Ether (ETH). It is a cryptocurrency whose fiat counterpart would be the Dollar, Euro or Yen. Ether can be spent on electronic payment systems, just like a form of digital medium of exchange. Its balance is then updated on a blockchain, where a digital wallet’s history is maintained that logs all transactions from the beginning to the present. Just like the Dollar, Ether can also be broken down into smaller denominations or fractions of the digital asset. The Dollar can be divided into cents, with denomination in penny (1 Cent), nickel (5 Cent), dime (10 Cent) and quarter (25 Cent). Ethereum also has its own denominations that are a fraction of Ether. Even Bitcoin (BTC) has smaller denominations called Satoshis.

The following table lists the various denominations of Ether, starting with its lowest unit called Wei. The table lists the values in Wei and Ether.

Denominations of Ether

The units are expressed with nicknames taken from pioneers in computing (Ada Lovelace, Charles Babbage, Claude Shannon, Nick Szabo, Hal Finney, Wei Dai) and Ethereum’s co-founder (Vitalik Buterin). The smallest denomination is Wei, which would be written as 0.000000000000000001 Ether for 1 Wei. That is 10 to the negative 18 in exponential form. The more commonly used denomination is Gwei, which is a billionth of a Wei or 10 to the negative 9 in Ether.

To get a better understanding of denominations, here are the values of 1 for each unit in Ether.

1 Wei = 0.000000000000000001

1 Kwei = 0.000000000000001

1 Mwei = 0.000000000001

1 Gwei = 0.000000001

1 Twei = 0.000001

1 Pwei = 0.001

When calculating gas, which is the unit of computation on the Ethereum blockchain, an entire Ether would be too much value. Therefore, like the way a Dollar can be divided into cents or a fraction of the currency, Ether can be denominated into smaller values. That way the cost of computation is kept low for transaction fees that occur during smart contract execution. The default maximum gas value is set to 21,000 gas units, which is in the denomination of Gwei. That would be worth 0.000021 Ether.

Denominations or fractions of a currency are a more fundamental way of dividing into more logical units of cost. Rather than a whole Ether to spend, a smaller denomination can be used as charges for a transaction. This lowers fees, making the system usable for payments and transfers.