What is Ethereum 2.0?

Ethereum 2.0

What is known as the Ethereum blockchain today is undergoing several changes to upgrade the protocol to Ethereum 2.0. Ethereum 2.0 represents a complete overhaul of the original protocol. The upgrade is supposed to bring more scalability to meet Ethereum’s increased network demands. Moreover, the change aims to improve the protocol in terms of its security and decentralization.

One key aspect of the upgrade will be the transition of the Ethereum protocol from Proof-of-Work (PoW) to Proof-of-Stake (PoS). According to the Ethereum roadmap, the current PoW chain, Eth1, would eventually be terminated through the difficulty bomb. The result is that users are automatically migrated to the new PoS chain, generally known as Ethereum 2.0. Proof-of-Stake is the consensus mechanism where ether are staked to find consensus. This stands in contrast to Proof-of-Work, where energy is expended to mine and achieve block finality.

Another important goal of the Ethereum 2.0 upgrade is to counter the “crypto energy debate” by adopting a less energy-intensive PoS mechanism. By switching to Proof-of-Stake, mining will be eliminated and Ethereum’s energy consumption is said to decrease by 99.95%.

Interestingly, beyond protocol development, a significant development in Ethereum has been the shift away from the Eth1 and Eth2 terminology. Core developers have since dropped the terminology and adopted the ‘execution layer’ (formerly Eth1) and ‘consensus layer’ (formerly Eth2) respectively. This was due to several factors including users’ perception, inclusivity, and scaling clarity.

The initial timeline for the launch of Ethereum 2.0 was set for Q2 2022. However, this was pushed to the end of 2022 or the beginning of 2023. Such a move was partly influenced by the ‘early merge proposal,’ which seeks to get rid of the PoW chain and transition everything to the Beacon Chain. This step was successfully implemented on the Kiln testnet on March 15, 2022.

The Ethereum upgrade is being spearheaded by a core team of Ethereum clients including Lighthouse, Nimbus, Prysm, Teku, and Lodestar. Ethereum clients provide the software needed to allow Ethereum nodes to read transactions on the Ethereum blockchain.

What does the update look like?

From a high-level perspective, the Ethereum upgrade is being implemented in three main phases. The first phase was the rollout of the Beacon Chain. It was activated on December 1, 2020, and has introduced Proof-of-Stake consensus to Ethereum.

This enabled Ethereum users to secure the network by staking ETH and earn more ETH in the process. The Beacon Chain is also responsible for managing the PoS mechanism. Moreover, if Ethereum developers will truly follow the sharding approach, the Beacon Chain will process crosslinks, which are essential to determine and secure the state of shard chains. Finally, the Beacon Chain will provide block finality via PoS.

The next phase will be the “Merge,” where the current Ethereum mainnet will merge with the Beacon Chain to mark the end of PoW Ethereum and complete the transition to PoS. Through merging the execution layer and the consensus layer, the Beacon Chain will receive smart contract capability, as well as the complete history and the entire present state of Ethereum. This is essential to guarantee a smooth transition for Ethereum users.

Once the merge is finalized, stakers — also known as validators — will be assigned to validate the Ethereum network. Henceforth, mining will no longer be supported, and miners can stake their earnings in the new protocol. Certain features such as withdrawing staked ETH will not be supported after the upgrade but will be introduced in subsequent network upgrades. The merge is expected to occur in Q3/Q4 2022.

The last phase is the setting up of shard chains. Sharding is the proposed splitting of Ethereum’s architecture into smaller pieces to scale the network. These are chains that run parallel to each other and are connected to the mainchain, which is the Beacon Chain in Ethereum. As such, sharding is also described as a horizontal scaling approach. It is a multi-phase upgrade to address Ethereum’s capacity and scalability. Shard chains will enable validators to store and run data for the shard they are validating, and not the entire network. This speeds up the network and has fewer hardware requirements.

Sharding will allow users to run clients on their own without the need for intermediary services due to lower hardware requirements. Also, shard chains will offer great improvements to Ethereum’s overall transaction speed when compared to Layer 2 solutions like rollups. There are plans for shards to have extra functionalities such as storing and executing code, as well as handling transactions. Each shard will have smart contract capability and allow for cross-shard interoperability.

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What benefits will the update bring?

From a big-picture view, Ethereum’s upgrade can be viewed through the lens of trying to solve the scalability trilemma of security, scalability, and decentralization. This is especially difficult since the three properties work in cross-purposes to each other. A public blockchain can ever only provide two out of the three features at the same time: security, decentralization, and scalability.

For instance, if you centralize Ethereum to achieve scale then you compromise on security, data privacy, and censorship resistance. With the updates though, Ethereum strives to scale in the most decentralized way possible, finally achieving all three features simultaneously as outlined in its vision.

Scalability

To achieve scalability the protocol needs to process thousands of transactions per second without bloating Ethereum, otherwise network nodes cannot trustlessly run it anymore. Thus, to scale efficiently, the network needs to process more transactions while at the same time increase the number of nodes for decentralization and security.

The deployment of shard chains will spread the load of the network to 64 chains, improving speeds and reducing network congestion.

Security

The transition of Ethereum to Proof-of-Stake greatly reduces the incentive for attacks like a 51-percent attack. This is because in a PoS system, the validators stake large amounts of ETH in the network, and an attack on the network can result in the protocol destroying their holdings.

Sustainability

The ongoing controversy about PoW cryptocurrencies being energy-intensive is a hot topic. Hence, Ethereum’s move towards being secured by ETH via staking. This is far less energy-intensive than the computing power needed for PoW cryptocurrencies like Bitcoin. Consequently, Ethereum will position itself as a sustainable blockchain.

What happens to Ethereum mining after the update?

The merge will signal the end of Proof-of-Work Ethereum and begin the era of a more sustainable, eco-friendly Ethereum.

At this point Ethereum will be one step closer to achieving its vision of scalability, security, and sustainability. Miners will no longer be able to mine ETH and will have to move to another crypto network. GPU miners will most likely look to mine Ether on Ethereum Classic (ETC) or Ravencoin (RVN). However, due to the unique hardware requirements of these networks, ASIC miners may not have a place to go. Once Ethereum has implemented the merge, staking will become the standard for Ethereum. This will offer a profitable and sustainable approach to securing the network.

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