Ethereum1.0 (Eth1.0) has experienced meteoritic growth and is currently the number two cryptocurrency based on market capitalization.
Its blockchain has achieved overwhelming acceptance by DeFi developers as it can support smart contracts and NFTs. It is currently the world’s most actively used blockchain supporting more than 3,000 decentralized applications (dApps).
But this success has caused some issues for Eth1.0. Demand for this blockchain has created network congestion and higher, sometimes volatile transaction fees (gas fees).
Transactions and applications on the network continue to grow and therefore nodes that support the Ethereum network are becoming more computationally complex as they must increase processing power and storage space. Moreover, the exorbitant energy demands of the Proof of Work (PoW) consensus algorithm continues to attract public and legislative pushback.
Ethereum v2.0 (source: our.status.im)
To address these and related issues, the Ethereum Foundation has developed Ethereum2.0 (Eth2.0). Eth2.0 is a multi-phased upgrade to the Eth1.0 ecosystem that will not affect its native token ETH.
What Is Ethereum 2.0 (Eth2.0)?
Ethereum 2.0 – also known as Serenity – is a multi-phased upgrade program that will enhance the legacy Ethereum 1.0 (Eth1.0) ecosystem. This upgrade will enhance its scalability, increase its speed and security, and reduce its energy consumption.
Serenity was first initiated in 2020 and its three major phases will be implemented over the next several years.
Phase 0 will implement an enhanced Proof of Stake (PoS) blockchain called Beacon Chain. This chain will initially operate in parallel to the Eth1.0 legacy network, also referred to as the Ethereum Mainnet. Validator nodes will also be created during Phase 0.
The most profound changes to the Ethereum legacy network will occur during Phase 1. Phase 1 has been referred to by Ethereum.org as “The Merge.” The original legacy Eth1.0 Proof of Work (PoW) blockchain consensus will be merged with the Phase 0 Beacon Chain. During this merger, the legacy Eth1.0 blockchain will merge into Eth2.0 and become a “shard” of this network.
The last phase, Phase 2.0, concerns the inclusion of sharding chains. These sharding chains will enhance the network’s ability to process more transactions. At the same time, these sharding chains will increase scaling capacity since the anticipation is that the adoption of the Ethereum blockchain will continue to see continued demand.
Phase 0: The Beacon Chain
In December 2020, Phase 0 was initiated and can be divided into three network enhancements. Some of these enhancements are running in parallel to the legacy Ethereum1.0 network.
Casper – The Friendly GHOST of Ethereum (source: etherworld.com)
First, there is the creation of the Beacon Chain, Ethereum’s new Proof of Stake (PoS) blockchain. The Beacon Chain was initially referred to as Casper. The Beacon Chain is the underlying layer of the Ethereum network and it will eventually manage the new consensus mechanism for Eth2.0.
During Phase 0, the Beacon Chain will be used to manage the blockchain validators but will not be used to process any network transactions.
Ethereum’s Current Proof of Work
Eth1.0 uses a Proof-of-Work (PoW) consensus mechanism that continuously feeds global competition among its global collection of ETH miners. The winning miner receives the right to append their block to the public ledger.
The Eth1.0 network offers newly minted tokens and transaction fees to compensate ETH miners for the costs incurred for the processing hardware and their power requirements. PoW mining is extremely competitive where such rewards are given to the miner who finds a solution first.
Solving the PoW puzzle requires miners to exhaust all possible options until a random number is found that meets the network difficulty target. To arrive at potentially generating these random numbers, miners rely upon “mining rigs” to compute millions of potential solutions while expending huge amounts of energy.
The more mining capacity that a miner has, the more the minor must spend on electrical power and supporting infrastructure, but the greater the probability that this miner will be the first to successfully solve the puzzle. The large amounts of expended energy to support PoW has led a much negative publicity.
The Beacon Chain will solve the following problems created by the PoW consensus: energy efficiency, high costs of mining equipment, and reducing potential malicious network attacks.
Although the Beacon Chain will implement the new PoS network, the legacy Eth1.0 blockchain will still utilize PoW in parallel to the Beacon Chain PoS network.
The third and final step is the establishment of the validator network which will maintain and govern the Eth2.0 network. To initiate the launch of Phase 0, ETH2.0 required a minimum of 16,384 validators for the system to launch.
Beacon Chain’s Proof of Stake (PoS)
Proof of Stake (PoS) represents an alternative consensus algorithm to PoW. And it is this consensus algorithm that is gaining the most amount of attention blockchain network developers. For example, PoS has been adopted as the consensus algorithm of choice among some of the more notable blockchains including Cardano, Solana, and Algorand.
PoW networks require energy-intensive data mining to confirm blocks. In contrast, PoS offers certain advantages such as in speed and efficiency.
In addition, PoS requires validators to stake or provide as collateral an amount of ETH, the native cryptocurrency of the Ethereum blockchain. This staked ETH acts as a form of collateral or bond and is essentially locked up for a specified time period. This allows the validator to enhance network security while also earning financial rewards.
Validators have the power to organize transactions in blocks and write them into the ledger.
There are several perceived advantages of using a PoS consensus.
For example, staking makes it easier for individuals to become active in supporting the network. Staking also does not require large capital computer outlays or continued electrical power demands. Moreover, if an investor does not have enough of an initial investment to stake the required amount of ETH, this investor can join a staking pool.
As staking provides an easier entry point for individuals to become involved in the network, PoS networks become a more decentralized network than a PoW network.
Staking also allows for sharding or the creation of simultaneous multiple blocks rather than the creation of just a single transaction block.
Phase 1: The Merge
Phase 1 merges the Beacon Chain into Ethereum’s Mainnet. Once merged, the Ethereum network will no longer utilize PoW, resulting in a huge power consumption savings. For example, the Ethereum foundation estimates that the new PoS network will reduce total energy consumption by approximately 99.95%.
Eth2.0 Power Savings after Merge (source: blog.ethereum.org)
After “The Merge”, a PoS validator will no longer be required to invest in large amounts of computing hardware and electrical power to try to solve computational puzzles.
Lower computational requirements will make it less onerous for validators to participate in this network, providing potential validators easier access to become part of the network. As the number of validators grow, this will develop a more decentralized and therefore more secure network.
In addition, staking does not require high-tech mining rigs based on sophisticated ASIC hardware architectures. Rather, with Eth2.0v, staking can now be accomplished by validators working from normal desktop computers, laptops, or even handheld devices.
And for those that do not have the technical knowledge to become a validator or have enough ETH to afford an initial staking position, they can join a staking pool. Staking pools allow investors to combine their resources to meet certain minimum requirements for staking.
Phase 2: Sharding Chains
Implementation of Phase 2 is currently slotted to occur sometime during 2022. Vitalik Buterin, a co-founder to Ethereum, stated that Phase 2 was perhaps “even more important than Proof-of-Stake.”
During Phase 2, the legacy Eth1.0 blockchain will be split into multiple smaller blockchains called “shards.” Sharding entails breaking the state of the entire blockchain network into distinct datasets called “shards.” This is a more manageable task than having all the nodes maintain the entire network as is the case with PoW.
Splitting up the legacy Eth1.0 blockchain will create many ecosystem benefits.
First, shard chains will improve network speed. For example, when combined with a secondary scaling product known as “rollups,” it is estimated that sharding will allow Eth2.0 to process more than 100,000 transactions per second (TPS). This will be a huge improvement over Eth1.0 which currently can only process about 10-15 TPS.
Sharding will also enhance efficiency, as each validator committee will only be responsible for maintaining their own shard’s information.
In addition, the sharding process will randomly mix the validators between various sharding committees to practically eliminate the potential of validator bad actors. This will therefore heighten the overall security of the network.
The ETH2.0 Sharding Process is represented by the flow chart illustrated below.
ETH2.0 Sharding Process (source: deltecbank.com)
To begin, the sharding process requires a minimum of 16,384 stakers or validators to create the proper number of committees. As noted previously, the network established the required minimum of 16,384 validators during Phase 0.
Eth2.0 will comprise 32 separate blockchains or shards. A separate grouping of validators will be established for each of these 32 separate shards. Each grouping, called a committee, will include 128 validators.
Validators are randomly selected from the original group of 16,384 validators. According to Eth2.0, each of the 32 validator committees will be selected using a semi-random process called RANDAO.
It is these 32 committees that have the responsibility for the network infrastructure and maintenance. These committees hold the power to validate each transaction on the blockchain.
Specifically, each of the 128-validator committees is assigned to one of the 32 shard blocks. Each committee has a designated time for proposing a new block and validating the transactions within the assigned block. Each assigned block is referred to as a “slot.” And since there are 32 slots in each epoch, there must be 32 committees to complete each epoch validation.
After the committees are assigned to their separate blocks, one validator from each of the 32 committees is randomly chosen. They are given the right to propose a new block to the chain. The remaining 127 committee members of each of the 32 committees will vote on the proposal. In the words of the Eth2.0 protocol, they will “attest” to the transactions proposed by their selected committee member.
A majority of the committee must confirm the new block of transactions proposed by the selected committee member. If approved, the new block will be added to the blockchain and a “cross-link” is generated to confirm that the new block is properly added. The committee member chosen to add the new block is then entitled to receive its reward.
At the end of each epoch, all 32 committees are disbanded, and then using RANDAO for yet a second time, a new set of committees is established. By rearranging the committee structure for each epoch, the network removes control of the final outcome of proposed blocks from potential validator manipulation and fraud.
What will be the Impact of Eth2.0?
Implementation of Eth2.0 will reduce network congestion. Lower congestion will lead to lower, less volatile transactions fees, leading to Eth2.0 users paying lower gas fees.
After Phase 1’s “Merge,” current Eth1.0 miners will have to stake their ETH. Although miners’ rewards may be reduced, costs associated with mining will inevitably be much lower while the total number of transactions will increase, perhaps providing greater incentives for former ETH miners to stake their ETH.
Importantly, the issuance of ETH will decrease as well. ETH co-founder Vitalik Buterin has stated that under ETH 2.0, new token issuance should be between 100,000 and 2 million a year, down from its current 4.7million a year. This decrease in the total availability of ETH could potentially increase coin demand, leading to an increase in price.
Conclusion
Eth2.0’s purpose is threefold. First, it will enhance scalability and will support a higher number of transactions per second. Enhanced scalability is achieved without increasing the number of network nodes.
Eth2.0 will also heighten security against potential malicious attacks. PoS validators who maintain and manage the blockchain will be forced to stack a significant amount of ETH as collateral. This will create sufficient disincentives for malicious validator activity.
And then finally, the energy requirements for the Eth2.0 network will be drastically reduced by eliminating the energy-intensive PoW consensus from the network.
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