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What is Beacon Chain and How it Transformed the Ethereum Network

Last updated 30th Nov 2022
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The Beacon Chain is one of the most important upgrades to the Ethereum network. The staker network operates on the chain, which is a consensus layer that merges with the mainnet to provide security and scalability. It also helps to maintain a low carbon footprint.

The Beacon Chain

The Ethereum mainnet manages transactions and smart contracts, while the Beacon Chain controls shard chains and stakers (who verify blocks). These two functions help coordinate the entire Ethereum network.

The initial proof-of-stake (PoS) blockchain, known as the Beacon Chain, was launched in 2020. Before implementing the proof-of-stake model on the main Ethereum network, the Beacon Chain was developed to ensure that the consensus mechanism was sustainable. In the beginning, the Beacon Chain functioned alongside the original Ethereum proof-of-work (PoW) model.

Before the Ethereum network could switch from proof-of-work to proof-of-stake, it had to instruct the Beacon Chain to accept transactions from Ethereum by ordering them into a blockchain using the proof-of-stake mechanism.

The original Ethereum clients shut down their mining, block propagation, and consensus logic at the same time and handed these functions over to the Beacon Chain. This event was referred to as "the merge." After the merge, there was only one Ethereum proof-of-stake chain.

Why Does the Merge Matter?

Switching to proof-of-stake has significant environmental benefits and lowers the barriers to entry for anyone who wants to participate.

Staking does not require expensive equipment, while crypto mining requires expensive hardware to participate. A user only needs to purchase a staking-friendly laptop to take part. The end result is that Ethereum has a large population of validators, which increases its decentralization.

In addition, proof-of-stake changes the security setting of Ethereum. This has both advantages and disadvantages. For example, one disadvantage is that tokens are easy to transfer. If tokens can be used to participate in consensus, it will be much easier to transfer tokens to bad actors than to deploy a large number of GPUs.

What is GPU Mining?

However, a solution to this problem is "slashing," the process by which a validator loses its staked tokens. The network can slash a group's tokens, rendering the entire process pointless if hackers possess the 51% of staked ETH required to begin manipulating the ledger, which would be extremely expensive. Since a user's GPU hardware cannot be "slashed" for crypto mining, proof-of-work systems lack this incentive mechanism.

Understanding PoS vs. PoW

Let's now get into more detail about what makes PoS the best option for a consensus process. In a nutshell, a consensus mechanism allows computers on a blockchain network to agree on the legitimacy of transactions.

Ethereum previously used the proof-of-work (PoW) mechanism. This involved participating "miners" competing to solve a challenging mathematical puzzle to validate new transactions, update the blockchain, and earn rewards. Although PoW has been tested and is secure, its energy-intensive approach has made it increasingly impractical.

In contrast, PoS solves this problem by selecting a small number of "validators" to verify the upcoming block's transactions before submitting it to the blockchain. In contrast to "mining" in PoW, this is known as "minting" blocks.

Since there is less competition, the computing power, and energy required to mine a new block are drastically reduced, making PoS a greener option.

Proof-of-WorkProof-of-Stake
Computational power affects mining capacity.The network stake affects the capacity to validate.
Block rewards are given to miners who crack a cryptographic challenge.Instead of receiving a block reward, validators are compensated with transaction fees.
To launch a malicious attack, hackers would require a machine that is more powerful than 51% of the computing network.It is virtually impossible for hackers to possess 51% of all cryptocurrency on the network.

How do you Become a Validator?

In order to become a validator, a node must contribute a minimum number of coins to the Ethereum network. Similar to a security deposit or collateral, this is referred to as "staking."

The probability of a validator being selected for coin staking is related to the size of the stake. For example, node X has a five times higher chance of being selected to mint the next block if it invests 160 ETH. So the selection process is not completely random.

A validator first determines whether or not all transactions in a block are genuine before deciding to validate the following block. Once everything is in order, the validator publishes the block on the blockchain to update its status.

Validation is the process by which a "committee" consisting of at least 128 other validators confirms this information. If the block meets certain criteria, the original validator receives a staking incentive made up of all fees for the validated transactions.

Staking Profitability

There are two types of validator commissions on the Ethereum network: Premium and Basic. A fixed block reward became obsolete after the switch to Proof-of-Stake (PoS). Today, the additional ETH emission is based on the income of validators and automatically fluctuates each epoch. The total amount of funds locked up in staking will be used to determine the size of the new coins' annual emission.

According to the staking rewards, Beacon Chain validators earned 4.5% annually until the end of August 2022.

Conclusion

The Ethereum network underwent the second of several major enhancements with the merge. It was no small feat to swap one consensus mechanism for another while continuing to run a blockchain.

The merge was proposed as a way to put new solutions into practice for better scalability. Now Ethereum is able to handle larger transaction loads without sacrificing security or decentralization.

Ethereum's massive overhaul, which transformed the digital machinery at the core of the largest cryptocurrency by market value to a much more energy-efficient system after years of development and delay, was one of the biggest moments in blockchain history.

FAQs

What is the purpose of Beacon Chain?

The coordination system of the Ethereum network is called the Beacon Chain. It is responsible for generating new blocks, ensuring their validity, and rewarding validators with ETH for maintaining the security of the network's security.

Can you still mine Ethereum?

Ethereum can no longer be mined, but staking can still be used to provide the same service and yield comparable rewards. Staking offers the most control and maximum returns while requiring the least amount of trust, but it also comes with the most responsibility.

What are the risks of staking on Ethereum 2.0?

Penalties leading to loss of funds and slashing, are the biggest concerns of staking on Ethereum 2.0.

Emma Dwyer

Emma Dwyer

Emma is a law graduate with seven years of experience working in financial services. She has been writing in the cryptocurrency and blockchain tech space for two years now. Recently she worked as a Managing Editor and Head of Content for different crypto publications.