Everything You Want To Know About The Long Anticipated PoS Blockchain
It has been long-anticipated and we are still awaiting the launch of Ethereum 2.0 or ETH2. The long-planned upgrade to the Ethereum network, which is said to give it the scalability and security it needs to serve all of humanity. Yes, we know, a rather ambitious goal.
The first stage of ETH2, named only Phase 0, has been rescheduled but is currently planned to launch somewhere in 2020. That said, Ethereum 2.0 should be more energy-efficient and, therefore, a planet-friendly network that will allow more transactions and increase security. And we’re talking about it today because, technically speaking, Ethereum will become a proof-of-stake blockchain and introduce shard chains.
So, before we dive into all the details about ETH2, let’s take a quick look at what this “hype” is all about.
🚀 The Hype Around Ethereum
Ethereum is, at the time of writing, the world’s second most-capitalized cryptocurrency and set for some significant changes, as we discussed above. The network is known for its flexible, dynamic, and robust blockchain ecosystem. For those of you familiar with decentralized finance (DeFi), for example, you’re probably aware that Ethereum has the most DApps built on its ecosystem. The network was first launched in July 2015 and has gone through multiple selected feature updates in the past years. You’re probably wondering how this makes Ethereum different from any other blockchain network, as they all undergo updates regularly.
Ether (ETH) Ethereums native digital asset is the second-largest asset globally, but it is only capable of processing 15 transactions per second. In contrast, ICON’s native asset $ICX does around 9,000transactions per second. Ether has some catching up to do. But that’s not all gas use, and limits create a free market where people often compete for transactions and smart contracts to be processed quickly by paying higher prices.
In September 2019, the network did increase the gas use limit, but that came with a heavy toll as it further extended an already big blockchain. Ethereum archive nodes are on track to hit 5,000 GB by the end of 2020, according to decrypt.com. That makes the Ethereum chain, which is younger than Bitcoin, almost as resource-intensive in disk space as Bitcoin. The issues are only getting worse with the rapid expansion of the DeFi ecosystem. So, all these reasons suggest it is essential for Ethereum to upgrade to a more sustainable ecosystem model.
🕵️♂️ The Differences Between Ethereum 1.0 and 2.0
That said, let’s have a look at the main differences between Ethereum 1.0 and 2.0. At the core of the expected update are two mechanisms that the current network doesn’t have: Proof-of-Stake and Sharding (Shard Chains).
Currently, the Ethereum network is built on a Proof-of-Work (PoW) mechanism, a consensus algorithm that rewards miners who expend computational energy to solve mathematical problems to propose new blocks. With PoW, your chances to receive block rewards are a function of how much computational energy (power) you can produce.
PoW is a well-known and popular implementation across many networks such as Litecoin, Dogecoin, Bitcoin itself, of course, and many more. These networks' main reason for the mechanism is to prevent attacks and ensure that the power to decide is decentralized.
We already discussed the downside of this consensus mechanism, requiring too much energy. Additionally, it leaves the network open to a majority attack where 51% of Ethereum miners can collude the network’s decision and events, such as processing transactions amongst many others. This already happened on Ethereum Classic.
Furthermore, after the introduction of smart contracts, users of the Ethereum network found several issues. First, it has to do with the performance and scalability; at the moment, it works efficiently when handling transactions or activities such as block mining in small numbers, but when those numbers increase, the network is simply unable to process and handle the transactions.
However, there is no easy fix to this problem. The principles of the decentralized network in which Smart Contracts are governed to ensure that each transaction is verified by all the nodes existent in the network.
Now that’s where Ethereum 2.0 should come in with Proof-of-Stake (PoS), with validators selected to stake amounts of ETH on the network to function as a node to verify blocks. The factors that affect a validator selection will be randomized. As with all PoS networks, each validator will get rewarded with the transaction fees involved in the block they verify. The transition to ETH2.0 will require potential validators to stake a minimum of 32 ETH on the network to be eligible for selection.
That solves the issues of the 51% attack and energy wastage as a result of mining. More participants will access the Ethereum network and run nodes as the PoS mechanism makes it more convenient and cheaper because it doesn’t need any massive facilities. It is also unlikely that validators will create a 51% majority since they will need to have skin in the game in order to validate, and being ETH holders, won’t have an interest in seeing the network crash.
A second solution is sharding; Ethereum 2.0 will introduce Shard Chains that allow a single Ethereum blockchain to be split up in multiple chains for verification by various nodes at the same time.
⛓ The Beacon Chain
The essence of the new ETH2 will be the Beacon Chain; this new blockchain can initially coordinate up to 64 shard chains. The Beacon Chain manages the “Casper” Proof-of-Stake protocol of the new Ethereum. And it notes validators and their stakes, randomly select block validators, and assigns them to a random shard chain.
The validators of ETH2 vote by PoS with their cons and “certificates”. As soon as a block of the shard chain has collected enough certificates, it can receive a crosslink on the beacon chain. Then the block will be finalized, meaning it is no longer possible to undo it. It now offers the same security as a block on the Beacon-Chain, which is the main chain.
To incentivize those that already have ETH stake in the Ethereum Network, validators will be rewarded for performing their assigned duties. Every couple of minutes, a validator is given a responsibility and is rewarded when completed. The reward is a sliding scale based on the total network stake. So, if the total ETH staked is low, the return rate per validator increases, but as stake rises, total annual issuance increases to fund those validators. At the same time, they individually receive fewer rewards.
According to the Ethereum 2.0 Economics website, these are the factors that can decrease the total issuance amount:
- Validators going offline — combining the individuals and collective penalties, every one percent of validators offline will cut the total issuance with 3%. If more than 33% ever go offline at once, it will lead to finality leaking, which will incur extra penalties for offline validators.
- Slashed Validators — which might not happen that often in practice, will also affect the total issuance.
- Transaction fees being burned.
🧐 Final Thoughts
Ethereum 2.0 will not roll out all at once. Instead, it is expected to be rolled out in six phases. The image below illustrates the first two phases, as, after that, an actual roadmap isn’t created yet. At some point during these phases, ETH1 is expected to die. Whether this should happen as planned, or whether ETH2 should replace the old blockchain, because all the ethers and users have migrated step by step, is not yet known.
DISCLAIMER: This is not financial advice. Staking, delegation, and cryptocurrencies involve a high degree of risk, and there is always the possibility of loss, including the loss of all staked digital assets. Additionally, delegators are at risk of slashing in case of security or liveness faults on some protocols. We advise you to do your due diligence before choosing a validator.