The fees associated with conducting transactions on Ethereum, referred to as “gas” fees, are subject to market forces and have recently shown a significant upward trend. This creates ongoing challenges that make it more expensive to use decentralized applications (dApps). All users of the Ethereum blockchain are impacted by this, including those who seek to generate Dai, lock Dai in other DeFi protocols, or just send tokens to another user.
Ethereum 2.0, commonly known as Eth2, is an ambitious series of network upgrades that will finally address the chronic gas fee issue (and other concerns). This would allow the platform to perform thousands of transactions per second and expand to globally-useful levels. Taking Dai and the Maker Protocol to new performance heights will enable them to continue to develop.
What precisely is Ethereum Gas?
On top of the Ethereum blockchain, open-source DeFi apps like the Maker Protocol can be constructed. Ethereum is a decentralised distributed computing platform that operates on a global scale. Every completed transaction is validated or processed by miners using computers. This includes straightforward token transfers to more involved interactions with decentralised applications (dApps). Miners can set transaction fees and decide whether or not to accept a transaction based on the amount of ETH a user is willing to pay because gas fees compensate miners for the energy required to complete transactions. Miners can prioritise transactions based on the amount of ETH a user is willing to pay. To put it another way, customers who want their transactions to be finalised swiftly have the option of paying more significant gas fees.
Due to the gas problem with Ethereum, transaction costs have increased at an unsustainable rate. When this article was written, the price of a direct Dai transfer was close to $6, while the cost of launching a Maker Vault was just over $75. As a result, the usage of Dai on a smaller scale became uneconomical, which acted as a barrier to the broader use of DeFi services.
The New Model Based on Proof of Stake
By moving to a proof-of-stake consensus model, Ethereum’s developers hope to lessen the dependency on specialised hardware and the system’s high power consumption, which is required by the present proof-of-work consensus model (PoS).
The Proof of Stake (PoS) system, which will be implemented on a distributed ledger that is going to be known as the Beacon Chain, will make it possible for the decentralized Ethereum network to reach a consensus, which will help to maintain the network’s safety while also allowing for the reduction of excessive amounts of energy consumption.
If you have 32 ETH, you can become a validator. Validators are tasked with processing transactions, adding new blocks, and storing data. Users who do not own 32 ETH required to stake on their own can participate in staking pools. PoS is supposed to increase decentralisation.
Chains of shattered shards
The network will be able to handle a great deal more transactions than it does at the moment, which will result in lower transaction fees. This is because there will be less competition for space in the subsequent block. Sharding is another planned development.
Before processing new transactions, every node in the Ethereum network is required to validate, download, and store every transaction that has ever taken place. This is a prerequisite for processing any new transactions. This Ethereum’s limit of 15 transactions per second (tps) is the bottleneck. To alleviate some of the strain caused by the volume of transactions, Eth2 will divide them among many shards, essentially semi-independent blockchains. PoS validators, also known as takers, are only required to store and process the transactions on the shard they are validating; they are not responsible for the entirety of the network.
Ethereum is looking to improve both its security and its decentralisation.
Although proponents of Proof-of-Work and Proof-of-Stake are far from agreeing with one another over whether a consensus mechanism provides greater levels of security and decentralisation, Ethereum’s vision has always been about Proof-of-Stake for several reasons, including the following:
There is less centralised control over the stakes. While in PoS, everyone has an equal chance of winning, PoW economies of scale make it impossible for small-scale miners to compete with larger mining farms. The cost of electricity, which is a big differentiator in PoW but becomes trivial in PoS, can be minimised because validator nodes can be run on typical hardware (for example, a laptop) from anywhere in the world.
PoS provides increased crypto-economic security compared to PoW. Validators are required to stake ETH, and the value of their collateral is at risk if validators engage in harmful behaviour. It will be necessary to issue fewer Ethers. Validators in proof-of-stake systems do not incur substantial energy costs, and fewer Ether tokens must be distributed.
The Ethereum project intends to scale.
PoS lays the groundwork for future scalability upgrades such as sharding. Sharding is partitioning a database horizontally so that the load can be distributed more evenly. This development implies that Ethereum will consist of many chains (also known as “shards”), which will lead to an increase in the number of transactions that can be processed in a second and a consequent decrease in network congestion.
Sharding requires PoS as a prerequisite because it permits a consistent split of network duties between existing block producers, which would not be possible with PoW. Sharding also requires PoS since it is a prerequisite for mining.
What is The Merge?
There are now two separate blockchains for Ethereum:
Ethereum Mainnet, the execution layer, is the Proof-of-Work chain currently handling smart contract interactions and processing transactions. This is what we make use of these days.
Beacon Chain is a Proof-of-Stake (PoS) chain that runs parallel to the Mainnet but doesn’t do much more but coordinates the network of stakers. This chain serves as the consensus layer. It is a brand-new consensus engine that will very soon take the place of PoW mining. Since the Ethereum Mainnet went live in December 2020, Beacon Chain has been operating in a manner that is entirely separate from that network. The PoS chain required this separation to be perfected without placing the main chain in danger.
The validation of transactions in Ethereum will be subject to upcoming changes. This is a lengthy process, and the organisation will shortly begin the phase referred to as “The Merge” (the second of three phases), which will come before the rollout of shard chains. Getting this property is a significant technological obstacle, but if it can be overcome, it has the potential to alter the blockchain environment fundamentally.
This new and improved version of Ethereum will operate based on the Proof of Stake Principle and provide numerous new and enhanced smart contract functionalities. The newly improved version will cause a frenzy in the cryptocurrency market. Following the release of the Version, it is anticipated that the market will increase, and concurrently, the number of use cases for cryptocurrencies will also grow. The additional fees that must be paid for each gas transaction across the Ethereum Blockchain will not diminish until Ethereum V 2.0 is released. Therefore, it was believed that gas prices may decrease after the improved version’s debut. The release of Ethereum Version 2.0 is expected to take place between August and November 2022.