If you know anything about cryptocurrencies, you’ve likely heard of what the Ethereum network is. But do you know how it works? Well, the Ethereum network is the second most popular cryptocurrency, and a true pioneer of blockchain use cases. However, did you know that Ethereum changed its whole consensus mechanism?

The move was dubbed “Ethereum 2.0” and involved Ethereum transitioning from the legacy Proof-of-Work (PoW) consensus mechanism to an alternative system, Proof-of-Stake (PoS) in 2022.

But to do so it needed the help of a separate chain already using PoS. So, the Beacon Chain was launched on December 1st, 2020 to facilitate that transition.

So, let’s take a look at what it was all about!

Defining the Ethereum Beacon Chain

The Beacon Chain was the backbone of Ethereum 2.0’s transition from PoW to PoS as it introduced PoS to the Ethereum ecosystem.

It was created to ensure the PoS consensus logic was sound and sustainable before it could be enabled on the Ethereum Mainnet. That’s why it ran as a parallel chain to the original PoW Ethereum.

What does it do?

A key piece of ETH 2.0, the Beacon Chain was responsible for establishing new parameters for governance, validator operations, staking rewards, and other changes related to the PoS system.

The Beacon Chain did not process any smart contract transactions; rather conducted the network of Ethereum stakers before they started validating real Ethereum transactions. Besides overseeing validators and managing ETH, along with the formation of validator committees and recording their votes, it also monitored the behavior of the validators. It rewarded validators for their good behavior while penalizing malicious activity by slashing rewards.

The Merge: From Beacon Chain To Main Consensus

To switch from PoW to PoS on Ethereum, the Beacon chain had to be instructed to accept blockchain transactions from the original Ethereum chain. These transactions were then bundled into blocks and organized into a blockchain using the PoS consensus mechanism.

At the same time, the original Ethereum clients turned off their mining, block propagation, and consensus logic, handing all of that over to the Beacon Chain. This event was known as The Merge.

In Sept. 2022, the Beacon Chain was merged with the original PoW chain to formalize PoS as Ethereum’s consensus mechanism. With The Merge upgrade, there were no longer two blockchains; just one PoS Ethereum chain.

The Impact of Beacon Chain

Now, let’s see how it impacted the wider Ethereum network.

Security: Staking on Ethereum

In introducing PoS to Ethereum, the Beacon Chain brought staking to the network. If you don’t already know, check out the Ledger Academy article on what crypto staking is. But for the Ethereum network, it involves locking ETH in a deposit contract.

According to data from Etherscan, the Ethereum Beacon Chain staking contract held more than 16 million ETH tokens at the time of the Merge, which is equivalent to over $22 billion, representing more than 13% of the coin’s market cap.

While staking has been live since Dec. 1, 2020, right from the Beacon Chain’s initiation, staked ETH can’t be withdrawn yet. This functionality is expected to be included in the next network upgrade, named Shanghai. The Shanghai upgrade will take place in April 2023, and it will finally allow participants to unlock their ETH.

Scalability: Sharding Ethereum Becomes Possible

With the Beacon Chain merged, the Ethereum community is now equipped to explore different ways of scaling the network.

Previously, scaling solutions involved rollups or sidechains.

Blockchain rollups rely on the Ethereum mainnet for security, but they are capable of executing transactions outside the main chain. A good example of an Ethereum project using this scaling solution is Immutable X.

Then, sidechains are independent blockchains that communicate with the main chain via a two-way bridge, such as how Polygon does with Ethereum.

However, moving to a proof of stake consensus also allows the implementation of another scaling solution: Sharding. Sharding involves splitting the main Ethereum network into multiple chains called “shards,” with each shard chain having its independent state. This would allow the Ethereum network to process more transactions than it currently handles and dramatically improves its scalability.

It is a multi-phase upgrade that provides secure distribution of data storage requirements, enabling low crypto gas fees while leveraging the security of Ethereum.

Final Thoughts

The future of Ethereum upgrades has already started, and it only gets better from hereon. The Beacon Chain has made it possible for Ethereum to become one of the most secure and reliable blockchain networks in existence today. Co-founder of Ethereum Vitalik Buterin suggested that the Merge and then the Shanghai upgrade are by no means the end of the story for the Ethereum network. In the future, we may see major upgrades to the network’s capabilities, from the Ethereum Virtual Machine to the network’s very consensus.