In brief

  • Ethereum, the second-largest cryptocurrency by market cap, is planning a major update to its network.
  • The Ethereum 2.0 upgrade aims to address the network’s scalability and security.
  • The first phase of the upgrade, due in 2020, will see Ethereum switch to a proof of stake consensus mechanism.

It’s been a long time coming, but Ethereum 2.0 is finally on the horizon. The major update aims to address the network’s scalability and security through a number of changes to its infrastructure—most notably, the switch from a proof of work consensus mechanism to a proof of stake model.

What is Ethereum 2.0?

Ethereum 2.0, also known as Eth2 or “Serenity”, is an upgrade to the Ethereum blockchain. The upgrade aims to enhance the speed, efficiency, and scalability of the Ethereum network so that it can process more transactions and ease bottlenecks.

Ethereum 2.0 is launching in several phases, with the first upgrade expected to launch towards the end of 2020. 

How does Ethereum 2.0 differ from Ethereum?

While Ethereum 1.0 uses a consensus mechanism known as proof of work (PoW), Ethereum 2.0 will use a proof of stake (PoS) mechanism. 

How does proof of stake differ from proof of work?

With blockchains such as Ethereum, there is a need to validate transactions in a decentralized way. Ethereum, like other cryptocurrencies, currently uses a consensus mechanism known as proof of work (PoW).

In this system, miners use computer hardware processing power to solve complex mathematical puzzles and verify new transactions. The first miner to solve a puzzle adds a new transaction to the record of all transactions that make up the blockchain. They are then rewarded with cryptocoins. However, this process can be energy-intensive.

Proof of stake (PoS) differs in that instead of miners, transaction validators stake crypto for the right to verify a transaction. These validators are selected to propose a block based on how much crypto they hold, and how long they’ve held it for.

Other validators can then attest that they have seen a block. When there are enough attestations, a block can be added to the blockchain. Validators then are rewarded for the successful block proposition. This process is known as “forging” or “minting”.

The main advantage of PoS is that it is far more energy-efficient than PoW, as it decouples energy-intensive computer processing from the consensus algorithm. It also means that you don’t need a lot of computing power to secure the blockchain.

How will Ethereum 2.0 scale better than Ethereum 1.0?

One of the main reasons for the upgrade to Ethereum 2.0 is scalability. With Ethereum 1.0, the network can only support around 30 transactions per second; this causes delays and congestion. Ethereum 2.0 promises up to 100,000 transactions per second. This increase will be achieved through the implementation of shard chains.



How will Ethereum 2.0 be more secure?

Ethereum 2.0 has been devised with security in mind. Most proof of stake networks have a small set of validators, which makes for a more centralized system and decreased network security. Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized—and hence, secure.

However, according to Lior Yaffe, co-founder of Jelurida and lead core developer of the Ardor and Nxt blockchains, there is a potential vulnerability that focuses on the level of participation rates in the network.

Security audits of Ethereum 2.0 code are being carried out by organizations including blockchain security firm Least Authority

The Ethereum Foundation is setting up a dedicated security team for Ethereum 2.0 to research possible cybersecurity problems in the cryptocurrency. In a tweet, Ethereum 2.0 researcher Justin Drake stated that the research will include “fuzzing, bounty hunting, pager duty, cryptoeconomic modelling, applied cryptanalysis, formal verification”. 

How is the Ethereum 2.0 upgrade going to take place?

Following a series of testnet launches, Topaz, Medalla, Spadina and Zinken, the full roll-out of Ethereum 2.0 will take place in three phases: Phase 0, 1, and 2 (developers like to count from zero). Phase 0 is aiming for a 2020 launch date, with the other phases coming in the following years.

Phase 0 sees the implementation of the Beacon Chain; this stores and manages the registry of validators as well as deploying the proof of stake (PoS) consensus mechanism for Ethereum 2.0. The original Ethereum PoW chain will run alongside this so there is no break in data continuity.

Phase 1, due in 2021, will see the integration of proof of stake shard chains. The network is expected to launch with 64 shards (enabling 64 times more throughput than Ethereum 1.0) though at launch they won’t support accounts or smart contracts.

Phase 1.5, an interim update due in 2021, will see the Ethereum mainnet officially becoming a shard and transitioning to proof of stake.

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Phase 2, slotted to launch in 2021/22, will see shards becoming fully-functional and compatible with smart contracts. It also involves adding Ether accounts and enabling transfers and withdrawals, implementing cross-shard transfers, and contract calls. It will build execution environments for scalable apps that are built on top of Ethereum 2.0.

September 2020 brought news that the Spadina testnet had run into problems on its launch, forcing at least one more “dress rehearsal” before launch. Spadina is a short-term testnet designed to trial genesis, or the creation of the first block, on Ethereum 2.0. It is distinct from the larger Medalla testnet—a general sandbox that represents the up-and-running version of the network. Issues with the Spadina testnet included low participation, coupled with “confusion” and “invalid deposits.”

In October 2020, Ben Edgington, product owner for ETH 2.0 client Teku at ConsenSys (which funds an editorially independent Decrypt) noted that the Medalla testnet is “suffering from very low participation.” He added that “people are getting a bit bored of testnets” and “it’s time to move on.”

When Will Ethereum 2.0 Be Released?

Ethereum 2.0 is set to launch on December 1, according to a blog post from the Ethereum Foundation. The launch is conditional on certain criteria being met, though; there need to be 16,384 validators on the network by November 24, each staking 32 ETH, for a total of 524,288 ETH.

As part of the preparations for the launch, in November 2020, the Ethereum Foundation released the version 1.0 specifications for Ethereum 2.0, including a Launch Pad, where users can sign up to become an Ethereum 2.0 validator. It has also released the main ETH2 deposit contract—the last “missing link” that allows for sending ETH between both iterations of the blockchain.

By November 10, 50,000 ETH had already been staked; at time of writing, over 120,000 ETH had been staked in the ETH2 deposit contract—22.9% of that needed to launch Ethereum 2.0.

However, the pace of staking has been slower than expected; with the only option to stake initially being to run an Ethereum 2.0 node, a prospect that normal users find “intimidating,” according to Lito Coen, founder of CryptoTesters.

A Twitter poll conducted in early November found that half of those polled did not intend to make a 32 ETH deposit by the deadline of November 24, with just 21.3% stating that they either had staked, or intended to stake, 32 ETH.

In part, that’s because raising 32 ETH is an expensive prospect; at time of writing, with Ethereum’s price spiking on the release of the ETH 2.0 contract and hitting $500, it comes to over $16,400, with funds being locked up for two years. While that’s not an issue for Ethereum whales (Vitalik Buterin has committed 3,200 ETH, currently worth $1.6 million), smaller holders are effectively excluded from participating.

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To help alleviate the problem, DARMA Capital has allocated $50 million of its own ETH holdings so that institutions and individuals can contribute to Ethereum 2.0 while staying liquid, by entering into a swap agreement with DARMA and staking via LiquidStake.

The future for Ethereum 2.0

Ethereum co-founder Vitalik Buterin has laid out a roadmap of how the next five to ten years could pan out for Ethereum 2.0.

He says that over the last two years there has been a “solid shift from “blue sky” research, trying to understand what is possible, to concrete research and development, trying to optimize specific primitives that we know are implementable and implement them.”

He says that the bulk of the challenges is now “increasingly around development, and development’s share of the pie will only continue to grow over time”.

In June 2020, Buterin noted that Ethereum 2.0 will need to rely on current scaling methods such as ZK-rollups for at least two years before implementing shard chains.

How could Ethereum 2.0 affect Ethereum’s price?

For some, the launch of Ethereum 2.0 is exactly what the cryptocurrency needs.

“Once Ethereum has scalability via layer-2 tech or ETH 2.0 all questions are answered,” Jamie Anson, founder of Nifty Orchard and organizer of Ethereum London, told Decrypt. “The firing gun will go off.”

In other words, more scalability means more usage, which, in turn, means more demand. Which—at least in theory—should propel the price of Ethereum to new heights. “By the time ETH 2.0 and rollups work together there will be 100,000 transactions per second capacity. That’ll mean a completely seamless experience for the next billion people,” Anson added.

Matt Cutler, CEO of Blocknative, a company focusing on the complexity of the mempool, is equally optimistic, particularly as gas fees may decrease with the launch of Ethereum 2.0. “Our customer base seens reducing transaction fees and increasing network throughput as big opportunity areas moving forward,” he told Decrypt.

Moreover, the ecosystem taking notice of major milestones will reinforce Ethereum developer momentum. “This will have a long-term bullish impact on the price of ETH—notwithstanding the short-term volatility, which is part-and-parcel of crypto-asset valuations,” Cutler added.

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What is Ethereum 2.0 and Why Does It Matter?

by Joe T. Stanley
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