A complete guide to Ethereum 2.0

Ethereum 2.0, also known as Serenity, is one of the most awaited updates in the Blockchain ecosystem. It’s a really big deal, especially given this network is home to the world's second-largest cryptocurrency by market cap. Through this article, let’s talk in-depth about Ethereum 2.0, its different phases, and what all can we expect from this upgrade! 

Introduction to Ethereum 2.0

In a nutshell, Ethereum 2.0 aims to shift Blockchain’s working from a PoW (proof of work) model (like that of Bitcoin) to a PoS (proof of stake) model. This transition is drastic since PoW is the protocol that’s tried, tested, and is used continuously for five years.  Don’t think of this as a creation of brand new cryptocurrency - the old ETH will remain as it is. Most of these upgrade changes will take place at the backend, and the consumer won’t even notice much of these changes.  ETH 2.0 has been in the works for the last 5 years, with one of the main goals to boost capacity by making the transactions execute faster. An overwhelming number of DApps, not to mention in the decentralized finance sector, have come up in this blockchain network. For instance, when CryptoKitties launched in 2017, Ether and Bitcoin were heading to all-time highs. Demand for these collectible cats reached such a peak that there were tens of transactions stuck and waiting to be processed.

How does 2.0 differ from 1.0?

Let’s use an analogy to understand the difference between Ethereum 1.0 and Ethereum 2.0. Think of 1.0 as a busy road with single lanes for each direction - so that all of the cars need to crawl through, slowly, in case of congestion.  Ethereum 2.0, on the other hand, is going to introduce Sharding (more about that later). Sharding will be able to turn that single-lane roadway into a motorway having dozens of lanes. That way, even in case of congestion, the number of transactions that can be handled concurrently will be greater.  The transition from PoW to PoS is going to be quite significant, especially in terms of energy wastage, efficiency, usage, and generation. PoW uses a lot of power - so much so that a single transaction on the Bitcoin blockchain has a carbon footprint that's equivalent to 667,551 VISA transactions. As a result of this, one singular payment in Eth 1.0 ends up using more power than a typical household uses in an entire day. Estimates from the Institute of Electrical and Electronics Engineers (that's IEEE for short) suggest that the much-awaited 2.0 upgrade is likely to cut the energy usage by 99%. This means, not only will this upgrade bring our world a step towards financial freedom, but it also won’t be calamitous, instead, will be beneficial, for the environment.  Check out: Stablecoin Development Company

What is meant by Sharding?

Sharding is at the root of Ethereum 2.0. It is a technology that’s behind all the scalability of this upgrade. Sharding involves splitting the Blockchain into loads of tiny chains (known as shards), that run alongside one another. As a result of these arrangements, transactions won’t run on one large blockchain, but concurrently on multiple tiny blockchains. — and this is clearly a much cleverer use of computing power. Each shard chain is similar to adding another lane, in order to upgrade Eth from single-laned to multiple-laned, and enhance its efficiency in handling multiple transactions. Greater the lanes, higher the parallel processing, and more will be the throughput. But - if it’s this useful and simply, why wasn’t it done from the very beginning? To be blunt, life isn’t that simple! There’s always a catch.   One such catch with sharding, especially if implemented poorly, is that of weakened security. In the sharding approach, fewer validators will be tasked with keeping the mini shards secure, so there’s a risk of them being overtaken by malicious intended personnels. It all harks back to that classic trilemma that has baffled cryptography enthusiasts for years: scalability, decentralization and security — you can pick two.

How does staking work?

A significant change in the Ethereum 2.0 blockchain will be the shift to staking. This will entail a complete rethink about how new blocks are confirmed. Casper, the PoS system, requires validators to put their money where the mouth is. In order to have the privilege of adding fresh blocks and receiving rewards, they need to use the 32 ETH that will be locked away. To make a comparison, you can understand it by comparing it to an insurance policy - just like you’re liable to losing your security deposit if you trashed a hotel room, validators risk losing their ETH if they fail to act in the interests of the blockchain network.  As you can understand from the discussion so far, this is greatly different from the way Ethereum currently works. In Ethereum 1.0, new blocks are mined by those who possess the greatest computing power, this makes it far from the reach of day-to-day consumers. With staking and PoS, blocks can be delegated in a more fair and proportional way, based on how much crypto someone has.  So, a person who has staked 5% of the total will end up validating 5% of the new blocks, and receiving the reward. Further, with Ethereum 2.0, validators are going to be chosen at random. Talking in terms of money and rewards - this will totally depend on the number of active validators - and it’s likely to diminish over time. According to Ethereum’s roadmap, the maximum gain would be 18.1% on top of the 32 ETH, or as low as 1.56%. Assuming, as an example, that 1 ETH was worth $500, this would require a total investment of $16,000 in order to become a validator. That’s a significant chunk of money. As a result of this, staking has emerged where different blockchain and crypto enthusiasts can bring their crypto together and split the proceeds.  Also Read: Financial Business Documents as Tokens on Decentralized Networks

What are some Pros and Cons of Ethereum 2.0 PoS?

As we’ve discussed so far, staking offers a lot more energy efficiency than ever - that’s one of the most prominent advantages associated with it. But that’s not all, here are some other benefits: 

• Lower barriers to entry. Becoming a validator on a blockchain that works on PoW is often expensive, as you’d require mining equipment, that are mostly high-tech, in order to perform the operations. With PoS on the other hand, it’d allow a simple laptop to process and validate shards. 
• A fairer playing field. The cost of equipment as discussed above, added to the electricity consumption required for such a mechanism makes this domain lopsided towards very few miners to have the financial resources to make such a thing happen. With PoS, this will be a thing of the past. 
• Reduced network attacks. Network attacks are quite expensive, and validators have a financial interest in ensuring that the blockchain is completely secure. For a malicious actor to succeed, they’ll have to stake a security deposit — money they would eventually lose.

As you’d expect, there are a few disadvantages to the PoS consensu, too. These include: 

• Some chances of power imbalance. Eliminating the mining process doesn’t completely eliminate power imbalance. A validator with deep pockets could end up staking a lot more ETH, thereby validating more blocks than everyone else. 
• Mostly untested at this stage. Since this transition is going to be big, to be totally sure of its success, we’ll have to wait for a bit. Right now, this is still mostly untested and that’s a concern, but that’ll change soon!

Also Read: Blockchain Adoption with Philathrophy

Main phases of ETH 2.0

The Ethereum Foundation is treading very lightly with the upcoming upgrade, and as a result of this, the process is similar to living in a house while it is being renovated!  The main phases that Ethereum 2.0 will go through are Phase 0, 1, and 2. The Ethereum 1.0 will be operational throughout all the stages. Here’s what the three steps mean: 

• Phase 0 - this heralded the Beacon Chain, which is responsible for managing all the validators. And delivering the consensus mechanism for PoS. It’ll also dish out rewards and penalties as required. 
• Phase 1 - includes the concept of sharding by dividing the Ethereum network into 64 independent chains. Though it’s logical to wonder if this would multiply the capacity by 64, it could actually mean that ETH 2.0 can handle hundreds of times more transactions per second than its predecessor. This part of the roadmap is  planned for 2021.
• Phase 2 - marks the arrival of ETH withdrawals and transfers, with smart contract functionality. This will eventually lead the Ethereum 1.0 being turned off once and for all. This is hoped to be achieved by 2022, let’s see! 

What will happen to the older ETH?

If you’re currently owning Etherium, you might be worried if it’ll be worthless as soon as 2.0 roars to life. The important thing to consider is that the cryptocurrency isn’t going to be different when 2.0 launches, only the Blockchain technology that underpins the crypto assets will chat. So, your tokens won’t be rendered useless, nor will you have to buy new tokens - you won’t have to make any transition of any sort. 

How does Ethereum 2.0 affect DeFi?

Ethereum 2.0 makes DeFi a lot more practical - in terms of transaction fees as well as speed of operation. Currently, the 1.0 version can only manage about 25 transactions per second. That’s just about enough for one DeFi protocol, not an entire blockchain network. Buterin suggested that 2.0’s capacity could quickly jump to more than 100,000 transactions per second once all the phases reach successful completion. However, the founder of Multicoin Capital, Kyle Samani, suggests that this may not be enough if DeFi becomes more popular.  Straight from his Twitter feed, he wrote: "Can you please explain to me how you can run the global financial system on 25 TPS? Or even 2,500 TPS? Or even 25,000? I'm fairly certain you need at least 1,000,000 TPS for crypto to function at global scale." One million transactions per second! This goes to suggest that even after Ethereum 2.0 launches, it’ll still take a lot of improvements, modifications, and additions so the platform can keep up with the demands of users.

Will Ethereum 2.0 affect the DApps? 

One lingering concern surrounding Ethereum 2.0 updates is its potential impact on the already existing DApps. Is it going to be an Apple-like scenario where newer iPhones stop supporting older applications?  There’s a definite risk that DApps might not be compatible with the upgraded blockchain. Another danger is that  bumps in the road as the network is rolled out could cause business disruption that slows activity down. If the rollout of all the phases is done right, it could also trigger a new wave of innovation on the blockchain as developers, previously fed up with high transaction fees and slow confirmation times, begin to return from smaller platforms. Dapp.com's market report suggests that there are currently 1,394 active decentralized apps. Out of those, roughly 41% run on Ethereum. Back in 2017, this blockchain was one of the few options for developers who wanted to build their own applications — but these days, they're spoiled for choice. In time, we could also begin to see Ethereum retake some of the important market share it had lost over the years. 

What are some known downsides of Ethereum 2.0?

Buterin admitted that one of the main disadvantages of switching to a PoS system is an increased complexity in terms of technicalities - because these systems require you to deal with validators.  This points to a wider issue - one that is extremely crucial in cracking mainstream adoption for the better. Cryptocurrencies and blockchains are complicated, and it goes a lot to ensure that all the technicalities have been understood properly. Making the platform more technical risks averting day-to-day customers who were otherwise looking to make their first steps in the crypto market.  DeFi - the domain that’s driving this demand for the blockchain network - often lacks simplicity and usability, especially for people newer to this domain.  In mid-August, even Buterin tweeted: "Reminder: you do NOT have to participate in 'the latest hot DeFi thing' to be in Ethereum. In fact, unless you *really* understand what's going on, it's likely best to sit out or participate only with very small amounts. There are many other kinds of ETH dapps, explore them!"

In conclusion

As discussed, one of the major downsides with Ethereum 2.0 is taking a leap into the unknown, as there are no major platforms that work on a PoS system on such a massive scale. Although as time passes, we’re sure that many of the seemingly big drawbacks will be easily taken care of, and we’ll move towards a more secure, and operational future for blockchain.  Let us know your thoughts about this article in the comments below. If you’d like to know more about our services, or talk about anything Blockchain-related, do reach out to us today!