Ethereum 2.0 Merge — what it means for the DeFi space
“The Merge” is the process of moving to the second version of the Ethereum blockchain, which is in its final stages of testing before launch in August 2022. Ethereum was deployed in 2015, and became a huge success thanks to the ability to create decentralized applications using smart contracts. However, over time, as the number of users has increased significantly, there have been problems with speed and the high cost of transactions.
Now, Ethereum operates based on the Proof-of-Work (PoW) consensus mechanism. Ethereum 2.0 will use Proof-of-Stake (PoS), which will lower the entry barrier for small investors to those transacting with smaller funds and speed up the network. It will also increase its environmental friendliness, which is becoming more of an issue recently.
In this article, you will learn how Ethereum 2.0 will replace Ethereum. I’ll also describe in detail which Ethereum 2.0 features will appear after updates, which launch stages have already been completed, and the ones that are still to come. You will also learn about the shortcomings of the new network and the blockchains that remain alternatives to Ethereum.
What is Ethereum 2.0?
Ethereum 2.0 is an upgrade that aims for greater efficiency and network scalability. This means it would be able to process more transactions and offer greater security, while lowering transaction fees. In contrast to the 15 TPS (transactions per second) of the Ethereum we have now, Ethereum 2.0 transactions per second promises to be up to 100,000.
In simple terms, blockchain will not need the services of its current PoW miners and begin to validate the blockchain due to the shared of ownership of the token and not the power of the miners’ equipment.
While, the Ethereum 2.0 merge is expected to significantly reduce the network’s costs and energy consumption, at first launch, bugs are possible, and it could take time to fix them.
Ethereum 2.0 Upgrades. Stages and completion rate
According to the Ethereum 2.0 roadmap, Ethereum must do the following before the full transition is considered complete:
- Implementation of the Beacon Chain.
- The Merge.
- Implementation of sharding.
The Beacon Chain, which is already live, does not change anything about the Ethereum we use today. It will coordinate the work of the network, acting as a consensus layer. The Beacon Chain introduces proof of ownership in Ethereum to the ecosystem.
This is a new way to ensure the security of Ethereum, also making it mutually beneficial for all network participants; it allows participants to receive ETH through validating transactions and creating blocks for the common chain. This will change over time, but it is a fundamental component of a secure, sustainable, and scalable Ethereum.
As mentioned above, the Beacon Chain operates separately from the main network we use today. The main Ethereum network is currently still protected by proof of work, even as the Beacon Chain runs in parallel using proof of ownership.
The Merge unites the existing mainnet layer with its new Proof-of-Stake consensus layer, the Beacon Chain. This Ethereum 2.0 update eliminates the need for energy-intensive mining and instead secures the network with staked ETH.
The Merge upgrade is scheduled to launch in Q3/Q4 2022, but before this happens, all three testnet migrations must occur: The Ropsten testnet and Sepolia testnet migrations have been completed, with the final Goerli testnet stage going through the transition on August 11.
Sharding is a multi-phase upgrade aimed at improving the scalability and capacity of Ethereum. Shard chains provide additional cheap storage layers for applications and rollups for data storage. They enable Ethereum Layer 2 solutions to offer low transaction fees while using the security of Ethereum.
Sharding will reduce network congestion and increase the number of transactions per second by creating new chains. Shardchains are scheduled to launch in 2023, depending on how quickly work progresses after “The Merge”. Sharding will give Ethereum more ability to store and access data, but it won’t be used to execute code.
What does The Merge mean for the DeFi space?
The Ethereum community is waiting for the implementation of ETH 2.0. Expansion of financial opportunities in the DeFi sector, such as lending, farming, and staking, has led users to see all the imperfections of the Ethereum blockchain, such as low network throughput and high transaction costs.
Even the simplest interaction with DeFi projects on the Ethereum blockchain means high fees, as significant ETH gas fees are associated with every transaction. Large holders can pay these fees, but most investors looking to learn about the latest trends in crypto can only watch from the sidelines.
Since the advent of Bitcoin, cryptocurrency has been associated with decentralization, speed, and the low cost of transactions. However, when too many people start using the blockchain for swaps, staking, farming, bundling, lending, and management, it becomes a real problem. Communities still needs DeFi developers to choose one of the viable Layer 2 solutions due to the current situation.
While fast, smooth, and cheap operating is the promise of ETH 2.0, according to Ethereum Foundation researchers, there is a possibility that the final implementation could be significantly delayed.
A Brief Overview of Competitive Blockchains
Below is an overview of several promising blockchains with high transaction speed, low fees, and possible long-term prospects.
NEAR Protocol is a layer one blockchain that uses a unique sharding technology called Nightshade to achieve scalability. NEAR offers cross-chain interaction through the Rainbow Bridge and an EVM for deploying Ethereum-compatible smart contracts on the blockchain, called Aurora. Users can move ERC-20 tokens and assets from the Ethereum blockchain to the NEAR Protocol network, which offers higher throughput and lower fees.
$NEAR is the native NEAR Protocol token. It is used to pay fees for transactions and data storage. NEAR token holders can also earn rewards for staking coins (in stNEAR tokens) in their NEAR wallet and use them to vote on governance proposals.
With interesting projects like PembRock, the first leveraged yield farming app on the NEAR blockchain, created with the participation of INC4 developers, users can add liquidity, collect LP tokens, and then deposit them into separate farming pools.
The Avalanche smart contract execution platform has existed since 2018, and the launch of the blockchain took place on September 21, 2020. Using Avalanche’s functionality, developers can create a public or private blockchain and select the desired programming language and the Ethereum Virtual Machine (EVM) with which a particular blockchain will interact.
The speed of the Avalanche blockchain is ensured by the use of the Snow protocol — the period of transactions shouldn’t exceed two seconds. At the moment, Avalanche can process up to 4.5 thousand transactions per second, project representatives promise to bring this level to 20 thousand and above after applying second-level solutions.
Solana is a third-generation blockchain that powers many DeFi solutions, including developing decentralized applications (DApps) and smart contracts. Unlike other blockchains, Solana uses a hybrid consensus algorithm that combines Proof-of-History (PoH) with Proof-of-Stake (PoS), allowing the network to complete up to 50,000 transactions per second.
Ethereum 2.0 — A Promising New Stage for the Network
Ethereum 2.0 update aims to improve scalability and address other current blockchain issues such as low bandwidth, speed, and high transaction costs. Ethereum 2.0 is the most important update in the history of blockchain, which can fundamentally change the crypto market and, as some commentators say, bring about ETH’s dominance over Bitcoin. It’s an exciting time for the industry, and new innovative projects connected to Web3 are exploding.
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