Table of Contents
- How many names does Ethereum 2.0 have?
- Is it even necessary?
- Proof-of-Work v/s Proof-of-Stake Protocol
- Phase 0
- Phase 1
- Phase 2
- Phase 3 and beyond
As Ethereum strikes a 5 year anniversary, there’s a lot of positive noise around the next big update in the ecosystem – Ethereum 2.0. If you’re curious to know what Ethereum 2.0 is all about and why you should pay attention, go ahead and read this article.
We’ve tried breaking down the upcoming massive update into simple concepts to give you an insight into the future of Ethereum.
How Many Names Does Ethereum 2.0 Have?
Good question! There are many names to the Ethereum 2.0 update – thanks to the phased approach of the release. Ethereum 2.0, aka ETH2, aka Serenity, refer to the same long-awaited update to the Ethereum blockchain network that’ll be rolled out in several phases over the next few years. And if everything stays on track, the initial phase, called ‘Phase 0’ will begin sometime in late 2020.
So, why does Ethereum need a massive update in the first place? And how will this update change the existing Ethereum ecosystem? As the realisation of the Ethereum’s ability to revolutionise our society continues to unfold, the demand for Ethereum is increasing substantially. This is further reinforced by the fact that the Total Value Locked (TVL) in DeFi just crossed $3bn this week (21st July 2020), and here’s the time it’s taken to achieve major milestones for TVL in DeFi:
$100m: 160 days
$500m: 495 days
$1bn: 263 days
$2bn: 146 days
$3bn: 21 days
The overall goal of the ETH2 update is to increase the performance of the existing network and in doing so, preparing the Ethereum network for mainstream adoption.
Is It Even Necessary?
Ethereum 1.0 has already found its killer application in the DeFi ecosystem, however, with growing adoption – scalability and robustness of the infrastructure layer are becoming critical to the long term success of Ethereum. The Ethereum 2.0 upgrade will drastically help the applications built on Ethereum’s current foundation to not only survive long-term but also scale up their services to meet the demands of the ever-growing DeFi community. This upgrade will not only solve the problem of increasing transaction fees due to growing demand but will also solve the problem of speed as it’ll take Ethereum’s current capacity of processing 15 transactions per second to tens of thousands of transactions per second. This will take the Ethereum ecosystem one step closer to meet the needs of the global economy as the Ethereum foundation envisions its future to be.
Did You Know?
Back in December 2017, an experimental dapp built on the Ethereum network called ‘CryptoKitties’, that allowed its users to create and trade unique digital kittens, clogged the Ethereum network with a huge influx of transactions, as it unexpectedly became viral within the first week of its launch. In fact, transaction fees to send some CryptoKitties hit a whopping six figures in cost while this all lasted.
So, now that we know why this update is coming, let’s move on to what kind of changes are going to be implemented and how.
Proof-of-Work Protocol v/s Proof-of-Stake
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are what’s known as Consensus Mechanisms. A consensus mechanism is simply a way for all the computers within a network to come to an agreement on things like the validity of transaction data. Hence, consensus mechanisms are a key aspect of any blockchain’s foundation.
Proof-of-Work involves using computing power to perform guesswork to ultimately validate blocks of transaction data (commonly referred to as ‘mining’) and to publish that data to a network of computers around the world. At the time of writing this, PoW is helping both Bitcoin and Ethereum 1.0 to process transaction data. However, there are some problems with using PoW to process transactions on Ethereum:
- PoW consumes a lot of time and a lot of energy, due to the amount of electricity these computers use while constantly performing mathematical algorithms to compete with each other in order to validate transactions.
- It can potentially lead to more centralisation of the network. As big mining operations become the only miners that can complete and actually make a profit from performing computations.
- PoW takes a lot of time to confirm transactions. So, it does not allow for instantaneous transactions which hinder Ethereum’s potential use cases dramatically.
On the other hand, in PoS: –
- Instead of computers competing with each other to be the first to validate a block, PoS uses an algorithm that selects which computers will validate the next block. Computers that participate in the PoS consensus are known as validators. Also, as opposed to PoW, a new block that is added to the blockchain is “forged”, rather than “mined”.
- PoS requires validators to stake cryptocurrency on the network, basically as a form of collateral. Staking in regards to cryptocurrency simply means holding cryptocurrency in a wallet, or a smart contract, for an extended period of time in exchange for interest, rewards, or similar.
- PoS selects which validators will verify the next block, and can consider variables like the amount of cryptocurrency the validator has staked, the amount of time that cryptocurrency has been staked, and, it can randomly select validators to ensure the decentralisation of the validation process. If the block that has been verified by the validator is approved by the rest of the network and added to the blockchain, then the validator earns a reward for verifying the block.
- If the block proposed to the network has some inconsistencies or fraudulent transactions, the validator is penalised by removing some of their staked cryptocurrency and by having their rights to participate in the validation process limited or revoked completely. There’s also a penalty if a validator experiences any downtime to ensure that the Ethereum’s fleet of validators is stable and reliable.
So, you can see how PoS is much more energy-efficient and faster than PoW. Ethereum 2.0’s PoS protocol is called the “Casper Protocol”.
Ethereum 2.0 is being built on an entirely new blockchain network called the Beacon Chain. This new Beacon chain will be connected to the existing Ethereum 1.0 network and thereby will operate within the same Ethereum ecosystem. Hence It’ll be just sort of an extension of the original network and will run parallel to the existing network until the update is complete in a few years from now. So, you can think of the Beacon chain as a bridge that will allow transfers of ETH and other digital assets from the original Ethereum network, to the new ETH2 network.
On the Beacon Chain, a new way of validating blocks of data is going to be implemented. This new way of validating blocks of data is going to be one of the most instrumental updates for the new Ethereum 2.0 network. The main goal of Phase 0 is to test this new validation functionality, allow time for the system to stabilise, and to determine if any changes are needed before building ETH2 on this new foundation. This new validation technique will considerably improve the decentralisation, scalability, and usability of the Ethereum ecosystem and involves switching the Ethereum network from using a Proof-of-Work (PoW) protocol to process transactions, to a Proof-of-Stake (PoS) protocol.
In this initial phase, the Beacon Chain will not have much functionality apart from allowing validators to register and stake Ether.
In all blockchain systems, there’s a problem that people often refer to as the ‘trilemma’. And the trilemma is the problem of achieving these three aspects on the base layer of a blockchain system completely without any inhibiting trade-offs:
In phase 1 of the ETH2 update, the trilemma problem will attempt to be solved by implementing ‘Shard Chains’ which is also referred to as ‘Sharding’. Sharding is a Database Management technique that involves partitioning large databases into several smaller and faster databases. Currently, all the nodes maintaining blockchain networks store the entire blockchain database on them. While this makes the database and the network more secure, it comes with a trade-off of scalability. This is the same reason why the current Ethereum network is limited to about 15 transactions per second.
So, with sharding, instead of all the computers on the blockchain network validating and storing all the data being processed, it is split into partitions which are called ‘Shards’. And each shard will represent a fraction of the entire Ethereum 2.0 database. All of these separate shards will be connected to the Beacon chain, ensuring consensus between them all.
In Phase 1, a total of 64 shards will be deployed and connected to the Beacon chain. The goal of Phase 1 is to test this shard chain architecture and ensure that consensus between all the shards is being maintained successfully by the Beacon chain. However, it will be more of a simple trial run of the sharded structure to see if scalability can be achieved using random bits of data that have no meaning. Hence, no real data or applications will operate on the Beacon chain in Phase 1.
This is when real data and applications start to operate on the ETH2 network. Currently, the Ethereum network uses the EVM or Ethereum Virtual Machine as a network engine built on top of its blockchain foundation. It is responsible for executing ERC-20 token, deploying decentralised applications, running smart contracts, and a myriad of other integral tasks for the Ethereum ecosystem.
So, in Phase 2, the EVM will be replaced by a new virtual machine called EWASM, which is the Ethereum’s version of Web Assembly Code (WASM). Web Assembly Code is an open standard instruction for building applications on the internet. EWASM is a subset of WASM modified specifically to run the ETH2 ecosystem. It is designed to be fast, secure, efficient and portable. So, the EWASM framework will give the ETH2 massive performance enhancements and a ton of new features, all the while making it widely available and easy to use for web developers. It will also support a myriad of new programming languages, and, as WASM is used by a large number of projects outside of Ethereum, it will open up ETH2 to a larger, more active community of developers than EVM.
In this phase, the shards will begin to house and manage real data and smart contracts. And each shard will manage a virtual machine based on EWASM. Hence, in this phase, the full functionality of Ethereum 2.0 will finally be available.
Phase 3 and Beyond
This will simply involve updates to consensus, updates to scaling, and any further technical updates that need to be implemented to maintain the Ethereum 2.0 ecosystem.
Ethereum 2.0 phase 0 which is set to launch in late 2020, has been long-awaited and one of the most anticipated events in crypto-space in 2020. Proof-of-Stake and sharding will bring substantial improvements to the scalability, security, accessibility, and decentralisation of the Ethereum ecosystem and will make it even more awesome than it is now. The DeFi space is growing at a phenomenal rate thanks to Ethereum. And one can only imagine what crazy (amazing) innovations will come once this update is finally available to the Crypto community.