Ethereum has a long and storied history, with many developments and incidents that had significant positive changes and setbacks. In mid-September 2022, a shift from the proof-of-work (PoW) to the proof-of-stake (PoS) model occurred, bringing promises to reduce its energy footprint, increase scalability, and decrease transaction times for the network.

The changes came under the moniker "Ethereum 2.0," an all-encompassing term that described Ethereum’s next evolution into a better-performing, more accessible network. The term is now defunct, as the blockchain community accepts the upgrade as the next step in its development, not necessarily something new.

What Is Ethereum 2.0?

Ethereum 2.0 was a broad term used to cover several improvements to the Ethereum blockchain, which tackled some of its most pressing technical hurdles. However, it was an informal name, and its community doesn't recognize it as a valid name for the blockchain and network—the Ethereum Foundation prefers to refer to the upgraded blockchain as Ethereum, with the consensus layer called ETH 2 and the execution layer called ETH 1.

Ethereum's developers have been shaping over several years with the intent of implementing it for several years, so the upgrade was not a one-off event. But it officially kicked off with the launch of the Beacon Chain in December 2020, which allowed ether, the native token of the Ethereum network, to be staked. The staking process entails locking tokens, keeping them from being used, in return for the privilege of participating in the network's consensus and validation measures. Those who stake their ether receive rewards through fees paid in ETH.

Why Move to Ethereum 2.0?

This Ethereum upgrade was complex, but the network needed it for several reasons. The Ethereum network was bogged down by technical limitations—namely network congestion, scalability, and accessibility.

Improvements in these areas were and remain critical if Ethereum is to reach a wider level of adoption. Ethereum is the blockchain many smart-contract-based decentralized applications (dApps) are housed on, and these have applications in finance, real estate, supply chains, and governance, among many others. But to have the intended scalability across all industries and uses, the blockchain needed to be able to handle network interactions on a much larger scale.

How Did Ethereum 2.0 Change Things?

The Ethereum network was experiencing bottlenecks simply because of the amount of activity on the blockchain. For instance, the gas fees paid to miners for their work sometimes reached extraordinarily high levels. The fees improved after the upgrade occurred, as validators began staking their ether.

Validators who want to run a solo validation node must lock in 32 ETH to activate it. However, anyone can stake any amount of ETH by joining a pool or placing it in an exchange that will do it for them.

Proof-of-stake is faster and more eco-friendly than proof-of-work, as it consumes far less power. This is because PoS isn't a competition to see which miner can reach the solution to the block hash first, which is what required so much energy. Instead, the network protocols randomly select which nodes get to validate transactions and open new blocks.

The network is handling about 29 transactions per second as of May 2023, but developers are still promising that it should be able to handle 100,000 transactions per second in the future.

That level of scalability required for the vast amount of applications developers project will be using the chain will be achieved through another update to the blockchain. It will use "Proto-Dnaksharding" and "Danksharding," which is going to replace rollups with "blobs" and distributed data sampling. Rollups take transactions off the chain and where they are checked, but it is costly in terms of processing by nodes because they are permanently recorded on the blockchain. This would bloat the blockchain, slowing the network or causing node operators to need much more powerful equipment. Blobs will not remain on the blockchain indefinitely, removing the bloat that could occur.

The Bottom Line

With proof of stake, Ethereum has completed the biggest evolution in its history. But it's important to note that the transition to PoS didn't bring an amazing opportunity for investing or a new value to the cryptocurrency—it merely transitioned the blockchain to a new way of doing things.

The Ethereum Foundation described the change like this: "Imagine Ethereum is a spaceship that isn't quite ready for an interstellar voyage. With the Beacon Chain, the community has built a new engine and a hardened hull. After significant testing, it's almost time to hot-swap the new engine for the old mid-flight." The change was implemented, and developers are still working toward the final version—if there will ever be a "final" one.

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