A Brief Guide to Ethereum 2.0 – The Highly-Anticipated Ethereum Upgrade

An Introduction to Ethereum

Launched in 2015, Ethereum is an open-source, blockchain-based, decentralized software platform. The blockchain supports ETH, the second-largest cryptocurrency in the world by market capitalization, second only to Bitcoin. Ethereum functions just like other cryptocurrencies, allowing people to send and receive value without third-party intervention.

The Ethereum blockchain also supports decentralized applications (dApps) and smart contracts. Developers can build and deploy dApps on the Ethereum blockchain. Ethereum ensures decentralization by replacing central servers with thousands of nodes spread around the world. The decentralization of the platform also ensures that it is always online. 

Smart contracts run Ethereum’s ecosystem, and they are lines of code stored on the blockchain; smart contracts are automatically executed when certain predefined conditions are met. The Ethereum blockchain acts as an unbiased party and enforces transactions on the blockchain.

Ethereum supports both decentralized applications and smart contracts, making the platform highly appealing to users and developers. Learn more about Ethereum here.

Ethereum logo in the sky
Photo by Zoltan Tasi on Unsplash

The Need for Ethereum 2.0

Ethereum is the second-largest cryptocurrency in the world by market capitalization, behind only bitcoin. It is one of the leading lights of the crypto space. However, Ethereum does have its fair share of problems that are plaguing it. Some of the issues facing Ethereum are

  • Low transactions speeds
  • Scalability issues
  • Few transactions per second

The most pressing issues that Ethereum faces are scalability and security. The Ethereum developer teams working on the platform looked at the problems that it was facing and decided to address them through a comprehensive upgrade that would overhaul the Ethereum Mainnet.

The upgrade was called Serenity, or simply Ethereum 2.0. Ethereum 2.0 promises to bring several new features to the platform while also upgrading existing ones. The upgrade has been a complex process, with multiple teams working on the upgrade.

History of Ethereum Forks

Ethereum handles over 80% of all crypto projects and decentralized applications. With the platform gaining popularity, there has been an influx of new users over the years. The technology behind the blockchain also needs continuous improvement, maintenance, and updates. These factors make forks necessary so that developers can carry out updates and modifications without a hitch.

  • Ice Age – This was the first fork on Ethereum. The fork was unplanned and allowed developers to stress-test the network.
  • Homestead – This was the first planned fork on the Ethereum blockchain. The fork allowed users to transact with Ether and enabled the creation and deployment of smart contracts.
  • The DAO – Also known as the Decentralized Autonomous Organization, The DAO funded decentralized applications on Ethereum until hackers found a loophole and stole more than $50 million. This led to an intense debate about what steps the community could take, with most community members suggesting a hard fork. The subsequent hard fork was the most divisive hard fork in the history of Ethereum and led to the founding of Ethereum Classic. 
  • Metropolis – Metropolis was a soft fork carried out over two phases. It fixed several bugs and introduced new security features to Ethereum.
  • St. Petersburg – This hard fork removed EIP-1283 as it had a vulnerability that could lead to it being hacked.
  • Istanbul – The Istanbul hard fork improved the processing speed, reduced processing fees, created better network interoperability, and increased activity volume.

Serenity is the current upgrade that is underway.

Photo by Jens Lelie on Unsplash

What Is Ethereum 2.0?

Ethereum 2.0, or Serenity, is the long-awaited upgrade to Ethereum. The upgrade significantly improves the efficiency, scalability, and speed of the Ethereum network and enables the platform to process more transactions, lower gas costs, and reduce congestion on the network. It will also improve the scalability and the programmability of the Ethereum blockchain itself without compromising on security. Transaction speeds on the platform are expected to increase from 30TPS to more than thousands of TPS.

Ethereum 2.0 will also see Ethereum shift from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) consensus mechanism, making mining more economical for miners involved in the process. PoW requires miners to work and provide security to the platform in exchange for a block reward and transaction speeds. There are no miners in the Proof-of-Stake consensus mechanism, and ETH is created by validators who have been chosen algorithmically. Validators secure the platform by locking up ETH; if a validator acts against the interest of the platform, the ETH in their possession is slashed, ensuring that validators stick to the rules of the protocol.

Key Features of Ethereum 2.0

  • Proof-of-Stake – Currently, Ethereum relies on the Proof-of-Work consensus mechanism to validate transactions on the network. Ethereum 2.0 will see that platform switch to a Proof-of-Stake consensus mechanism. How does PoS work? Validators propose, and attest blocks on the Ethereum blockchain. Validators then stake their cryptocurrency (ETH); once they have staked, they are randomly selected to propose a block. When a validator is set and proposes a block, the other validators attest that they have seen the block. Once enough validators have authenticated the block, it is added to the blockchain. Validators receive rewards for both proposing and attesting blocks.
  • Sharding – Sharding refers to splitting the Ethereum blockchain into multiple chains that operate independently from the main blockchain. Each shard functions independently and has its own set of smart contracts and account balances. Sharding enables Ethereum to improve its scalability, allowing them to process more data and transactions. As Ethereum gains mainstream recognition, sharding is an essential tool to ensure that the network does not face congestion due to increased users.

Ethereum 2.0 Phases

Ethereum 2.0 is spread over three different phrases, with the upgrade starting in 2020 and expected to run until 2021/2022 to finish all three phases.

  • Phase 0 (Beacon Chain) – Phase 0, also known as Beacon Chain, is the first phase of the Ethereum 2.0 upgrade. It brings Proof-of-Stake and staking to the Ethereum ecosystem and lays the groundwork for future upgrades. Beacon Chain went live on December 1st, 2020. Once complete, we will see the introduction of Proof-of-Stake to Ethereum. However, the Proof-of-Work blockchain will continue to exist as well after the implementation of Phase 0.
  • Phase 1 (Shard Chains) – Phase 1 of Ethereum is scheduled for 2021 and will see the implementation of shard chains on the Ethereum blockchain. Shard chains will give Ethereum the capacity to store and access more data. What exactly is sharding? It is the process of splitting a database horizontally. This “splitting” spreads the load horizontally. Sharding will help reduce the congestion on the Ethereum network and increase transaction speeds on the network.
  • Phase 1.5 (The Docking) – This phase will see the merging of the current Ethereum mainnet and the Beacon Chain system, implementing the Proof-of-Stake mechanism. This phase marks the end of the Proof-of-Work mechanism and completes the transition to Proof-of-Stake, and users will be able to use their ETH on the latest version of Ethereum. This upgrade will follow close on the heels of shard chains and be the update where Ethereum 2.0 is fully realized (speed, scalability, security, and sustainability).
  • Phase 2.0 (ETH 2.0) – This phase marks the completion of the upgrade, set to launch in 2021/2022. Phase 2 will enable Ethereum to mimic protocols of different blockchains such as bitcoin or Zcash. Phase 2 will significantly improve on ETH1 and redefine the blockchain entirely.

Why Does Ethereum 2.0 matter?

Ethereum 2.0 solves several issues plaguing Ethereum, such as scalability issues, low transaction speeds, network congestion, etc. Ethereum 2.0 will implement several enhancements leading to an improvement in the above factors without sacrificing the security and decentralization of the blockchain. ETH 2.0 will also see the introduction of Proof-of-Stake and sharding in the Ethereum ecosystem.

What Is Proof-of-Stake (PoS)?

Ethereum has used the Proof-of-Work consensus mechanism since its inception. Proof-of-Work relies on miners who own computers with massive computing power and compete with each other to solve complex mathematical questions and validate transactions. Once a miner validates a transaction, that miner is rewarded. Ethereum was looking to switch from PoW to PoS because the former had significant issues. The most pressing was the consumption of too much energy and security issues.

PoS requires that validators stake their cryptocurrency (ETH). Once they have staked their currency, they will be randomly selected to attest a block. The validator proposes a block and other validators on the blockchain need to attest that they have indeed seen the block. Once enough validators have attested that they have seen the block, it gets added to the blockchain, and the validator is rewarded. In PoS, validators are awarded for proposing and attesting the block.

Validators need to deposit 32 ETH, which is locked in as a security deposit. The deposit stands to be fully or partially forfeited in the case of any malpractice; this method effectively makes sure validators don’t act against the interest of the platform.

What is Sharding?

Sharding is the process through which the Ethereum blockchain is split into multiple chains. These chains operate independently of the primary blockchain; each shard functions independently and has its own set of smart contracts and account balances. Sharding improves the scalability of the blockchain, allowing the platform to process more data without congesting the network.

Sharding is an excellent way to scale while keeping things decentralized. The alternative to sharding is scaling by increasing the size of the database. Scaling by increasing the size of the database would make Ethereum less accessible to validators, as they would require expensive equipment. Shard chains allow validators to store data only for the data that they are currently validating. As Ethereum gains popularity, sharding is a crucial tool to handle the pressure of additional users.

The EIP 1559 Upgrade

Scheduled with the London hard fork, EIP 1559 is one of the most highly anticipated upgrades to Ethereum. EIP 1559 will change how a transaction works on the Ethereum blockchain, fixing significant issues in the process.

Standard transactions see gas fees sent from the user to the miner. After the upgrade, gas fees will be sent to the network instead of the miner. The user will have an option to tip the miner, and the burn fee is also set algorithmically, ensuring fairness.

EIP 1559 has divided the Ethereum community, with developers and users welcoming the upgrade while miners and mining pools are against it.

What Is the Difference Between Ethereum 1.0 and Ethereum 2.0?

The most significant difference between Ethereum and Ethereum 2.0 is the consensus mechanism used. Ethereum currently uses the Proof-of-Work consensus mechanism, while Ethereum 2.0 will introduce Proof-of-Work to the Ethereum ecosystem.

PoW is an exceptionally energy-intensive process in which miners compete with one another to solve complex mathematical problems with the use of powerful hardware. The miner verifies transactions by solving the problem and adds the transaction to the blockchain. PoS works slightly differently. Validators, instead of miners, verify transactions.

Validators stake ETH and are randomly selected to propose a block. Once they propose a block, other validators on the blockchain must attest that they have seen the block. Once enough validators have attested that they have seen the block, it is added to the blockchain. Validators that propose a block and those that attest to the block are both rewarded.

The Proof-of-Stake mechanism is more energy-efficient than the current mechanism as it uses less power to secure the blockchain.

How Does Ethereum 2.0 Impact Miners?

Ethereum 2.0 will see Ethereum move away from mining, switching to a PoS mechanism instead. The impact of this move will be significant since Ethereum is one of the most popular coins for mining. Once ETH 2.0 comes into the picture, miners will have few options. They can either sell their mining equipment, start staking and stay with Ethereum or start mining other altcoins.

Eventually, Ethereum will switch over entirely to the Proof-of-Stake mechanism, leaving miners with only two options. Miners can sell their mining rigs and use the funds to acquire ETH and begin staking. The second option is to switch to mining other Altcoins in place of Ethereum.

Cryptocurrency coins: Ethereum, Bitcoin, Zcash, Monero, Litecoin
Photo by Roger Brown from Pexels

How Does Ethereum 2.0 Impact Users?

Ethereum 2.0 will also have a significant impact on users. The upgrade will address several issues that have been plaguing the blockchain since its inception. The most notable of these issues is scalability. Ethereum 2.0 will improve the blockchain’s scalability, throughput, and security. It will also enhance the speed of transactions from the current 30TPS to thousands of TPS, significantly decluttering the network. Users who own ETH can also start staking and validating transactions, allowing them to participate in the network.

Conclusion

Ethereum 2.0 promises to be a disruptive force in the crypto space, which is the reason why its introduction is being carried out in a phased manner. With Beacon Chain already live and shard chains ready to be implemented in 2021, it won’t be long before Ethereum 2.0 is upon us.

Ethereum 2.0 promises to address the scalability issues of the platform. However, never before has the crypto space seen a task of such magnitude where all users and assets will be transitioning to an entirely new, decentralized network while keeping operations running. It will take some time before the entire update is complete; however, with more scalability, Ethereum is bound to draw more attention from users and investors and ensure its move to the mainstream.


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