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Sep 24, 2021

Defining Ethereum 2.0

By now, who hasn’t heard of Ethereum 2.0, the long-awaited upgrade to the second-largest crypto protocol by market cap? It’s what is behind those bumped up Ethereum staking rewards on Coinbase, by the way.

Ethereum 2.0, also charmingly known as Serenity, is a series of upgrades that will improve the original protocol’s scalability, security, and sustainability. While they are being worked on in tandem, they can be divided into three features: the Beacon Chain, merging with the Ethereum mainnet, and eventually Shard Chains. 

The need for these upgrades is largely a result of the ingenuity and popularity of the Ethereum protocol, which now hosts nearly 3000 dApps. As a pioneer in its field, the expansion of its ecosystem has actually outpaced its ability to support new platforms and users - in other words, Ethereum is having trouble scaling. 

With the growth and rise of DeFi, network congestion and exorbitant transaction fees have plagued the platform. This has also led to a migration of sorts to other more scalable alternatives, like BSC and Cardano, or layer-2 solutions like Polygon.  

While there has been some speculation over roadmap of these upgrades due to numerous delays, we should note that Ethereum 2.0 was always the end goal for the protocol. With this in mind, let’s look in detail at what Ethereum 2.0 seeks to achieve.

 

Ethereum 2.0 Roadmap

The maturation of the crypto industry has raised concerns about sustainability - namely networks’ ability to support a large number of users at reasonably low costs. We know by now that Proof-of-Work (PoW) systems like Bitcoin have worryingly high carbon footprints and higher barriers to entry in running a node due to the sheer amounts of computational power required. 

Most new blockchain projects are, therefore, moving away from the older PoW to Proof-of-Stake (PoS) and other alternative mechanisms. Similarly, Ethereum 2.0 involves transitioning to a PoS system via the Beacon Chain, which will eventually merge with the Ethereum mainnet. This first step is known as Phase 0. 

 

The Beacon Chain 

Live as of December 2020, Phase 0 launched the Beacon Chain, which functions as a bridge to Ethereum’s new Proof-of-Stake mechanism. The new PoS mechanism is also known as Casper. But how does PoS work? 

Unlike PoW, which requires mining via hardware setups, PoS does not require dedicated hardware. Instead, users must stake a minimum of 32 ETH in order to become block validators. As a result, PoS requires far less computational power. The more ETH you stake, the higher your chances at being picked as the next block validator to earn block rewards. 

PoS is also highly secure, as any attempt at attacking the network results in a significant portion of the attacker’s stake being “slashed.” This means their coins are automatically destroyed, making an attack a rather expensive endeavor. Ethereum’s Casper boosts this security as it will require a minimum of 16,384 active validator nodes (compared to the current approximately 9,800). At the time of writing, there are over 196,000 validators actively securing the Beacon Chain.

Merge With The Mainnet

While the Beacon Chain has launched, it is still operating parallel to the legacy blockchain in order to ensure operational continuity. As a result, it cannot support transactions or smart contracts, but is used to onboard validators who can now stake their ETH. 

The Beacon Chain is scheduled to merge with the Ethereum mainnet sometime in the next couple years. This is being referred to as the “docking.” Once the merge starts, stakers will be able to start validating and securing the mainnet. 

Shard Chains

Phase 1 will see the introduction of shard chains, which are a type of horizontal scaling solution. Sharding is the process of splitting a database or network into smaller parts in order to boost overall efficiency. In a blockchain, one of these small parts is called a shard chain. In Ethereum 2.0, each validator will then only be responsible for managing data from one shard (versus the entire blockchain). 

The Ethereum blockchain will be split into 64 separate shard chains, which operate in tandem and are managed by the Beacon Chain. They will all eventually have smart contract functionality and be able to support dApps. Sharding will also allow validators to run Ethereum on smaller devices like a smartphone or laptop, inviting more users and therefore increasing security.

Another option being considered is the introduction of roll-ups, a layer 2 scaling solution that will be combined with sharding. Roll-ups work by bundling transactions for off-chain execution before being settled on-chain. When combined with shards, this can allow for 100,000 transactions per second! 

Let’s briefly recap our new terms here:

  • Beacon Chain: a bridge to Ethereum’s new PoS mechanism
  • Casper: Ethereum’s new PoS mechanism
  • Shard Chains: a small portion (one 64th) of the Ethereum 2.0 network
  • Roll-ups: bundles of transactions executed off-chain and settled on-chain
  • Phase 0: the first migratory step to Ethereum 2.0, including the Beacon Chain launch
  • Phase 1: the second migratory step to Ethereum 2.0, including shard chains

 

This upgrade will not come without its challenges though. Infrastructure details will have to be ironed out, including how shard chains communicate with each other through the Beacon Chain. Currently, the plan is to use a system known as a “receipt paradigm.” This requires shard chains to produce transaction receipts, which are then stored and made available to (but not alterable by) all other shards. 

Another perhaps more obvious concern regarding shard chains is security, as it would require less effort for a malicious actor to attack a single shard. This risk will hopefully be minimized by Ethereum 2.0’s higher number of required validators, as well as increased validator responsibilities.

 

Where Is Ethereum At Now?

The launch of the Beacon Chain last December introduced the new PoS consensus layer - the crucial first phase in transitioning from a PoW system. However, the Ethereum mainnet also has its own role to play in Serenity and is simultaneously undergoing its own upgrades, namely the Berlin and London Hard Forks. A hard fork refers to a significant upgrade on a blockchain that is incompatible with the previous version, thereby splitting the network permanently. 

Berlin Hard Fork 

Named after the inaugural Ethereum DevCon in Berlin, this upgrade went live on April 15, 2021. It introduces four new Ethereum Improvement Proposals (EIPs): EIP-2565, EIP-2929, EIP-2718, and EIP-2930. These introduce new transaction types and modify the gas costs of specific transactions. This upgrade was actually postponed a number of times due to concerns about how centralized it was. 

London Hard Fork

The much-awaited London Hard Fork, set to launch August 4 after some delays, will bring in another five EIPs. The two most notable are EIP-1559 and EIP-3554. 

EIP-1559 will introduce a new fee structure that will make Ethereum deflationary. This has been quite controversial within the Ethereum community, as it could potentially decrease miner revenue by a lot. The network currently uses an auction mechanism, where transaction fees are set by users and accepted in turn by miners. Conversely, EIP-1559 will set a minimum fee known as the “base fee,” which readjusts dynamically based on network activity and is burnt by the network after a transaction. Users will still have the option to pay tips or “inclusion fees” to miners. 

EIP-3554, also known as the “difficulty bomb delay to December 2021,” refers specifically to when the difficulty of mining Ethereum will drastically increase. This process has been delayed till December, and is meant to discourage miners from staying on the PoW network and push them towards the new PoS chain. 

Coming up next (and supposedly last) is the Shanghai Hard Fork - it remains to be seen whether the Ethereum community will want to include more EIPs or to prioritize the merge. 

 

Takeaways

Serenity is an ambitious and much-needed set of upgrades to one of the world’s leading crypto protocols. These upgrades will not only address the more obvious scalability issues, but also those surrounding the sustainability and security of the platform. The transition to Ethereum 2.0 is also expected to have a bullish effect on the price of ether, as it will hopefully attract wider adoption and a renewed wave of dApp developers. 

While some remain rather skeptical about the impact Ethereum 2.0 could have on the crypto industry, it’s safe to say we have great expectations.

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