Looking at the results of the first quarter of 2021, we can all agree — Ethereum had an amazing three months. The cryptocurrency has outperformed all cryptocurrencies (Bitcoin included), beating other macro assets by growth rate.
The end of 2020 was marked by the beginning of the most ambitious Ethereum upgrade yet — Ethereum 2.0.
The Ethereum 2.0 upgrade aims to address the network's scalability and security.
Compared to the prior system updates, Ethereum 2.0, also known as Serenity, is the largest one we’ve seen. In fact, calling it a new version of Ethereum is a misnomer — rather, 2.0 represents a fundamental shift of the system.In this article, we’ll examine the purpose of Ethereum 2, relying on official roadmaps, statements released by the original creator Vitalik Buterin and the official team, as well as the opinions of experts in the field.
What is Ethereum 2.0?
Ethereum 2.0 is a major upgrade to the Ethereum network, intending to improve the system’s speed, scalability, and efficiency. This will result in increased transaction volume, a decrease in gas costs, and less congestion. As Ethereum gains traction, the network struggles to process all requests 96% of transactions were reported to go through a “congested” Ethereum.
This update can increase the scalability of the network, allowing Ethereum to accept more transactions and host more Defi projects. For Ethereum enthusiasts and investors, it’s a big deal.
Before the upgrade and now still, Ethereum uses Proof-of-Work to secure its transactions and prevent double-spending. The PoW is based on a simple idea.
While miners need to solve a complicated problem by spending a lot of computing power, the system quickly confirms the solution using effectively none. So, miners’ computing power ensures the validity of a transaction. Each completed proof-of-work adds a block to the chain.
Of course, computing power is resource-heavy so miners get rewarded for each transaction. That’s where the concept of mining coins came from, and that’s how ETHs were generated up till now.
However, Ethereum 2.0 will retire PoW in favor of Proof of Stake — another approach to blockchain consensus. PoS confirms the transaction not by spending computing power, but by staking a certain deposit as proof of the user’s intention. Validators take turns voting on the block, and the vote’s weight depends on the amount of deposit (stake).
What are the benefits of PoS vs PoW?
- Less energy-consuming. Sustainability and negative environmental impact have long been a concern both for Ethereum and Bitcoin — these crypto networks are estimated to burn over $1 million worth of energy per day. Proof-of-Stake puts less strain on resources, using stakes to validate transactions.
- No need to issue new coins as frequently. To compensate miners for their highly expensive energy spendings, the network was forced to “pump out” rewards. However, PoS lowers miners’ expenses, making rewards less necessary.
- PoS gives the network more control over its rules — the system participants don’t have to worry about countries’ theoretical possibilities or corporations misusing large electrical reserves to “rig” the system. The practice of selfish mining is harder to execute in PoS-governed systems.
- A possibility to execute more transactions. Since the system doesn’t need to rely on billions-worth of energy, stakers will be able to approve operations faster. PoS makes deposits unlimited, faster to process, and accessible.
Who Are the Founders of Ethereum?
It took a large team to get the Ethereum foundation and technology off the ground. The original team had five founders with backgrounds in computer science, engineering, mathematics, finance, etc. Vitalik Buterin is the only founder who is still a part of the foundation, while others went on to work on their projects or keep contributing to Ethereum independently.
Vitalik Buterin is an Ethereum co-founder who came up with the idea of the network. His white paper analyzed the challenges of Bitcoin and offered a new approach to decentralization and transparency. He is the most known Ethereum founder, and the only one of the original team to stay on the project full-time.
Recently, Buterin introduced the Ethereum 2.0 update and is the main driving force behind the change. He released a talk where he discussed the technical changes in the soon-to-be-released network. Later, in the Coindesk interview, he gave a glimpse of the upcoming Ethereum 2.0 roadmap. Buterin’s ideas on Ethereum upgrades and discussions with the community come out on the official forum and Ethereum’s subreddit.
Side by side with Buterin, Mihai Alisie worked for the Bitcoin Magazine team. With a background in cyber economics, he was among the earliest Bitcoin adopters. Alisie extensively covered Ethereum and built decentralized projects.
Alisie’s role in the foundation was to build a Swiss base for Ethereum, incorporating the startup officially, opening a banking account, and laying the legal foundation behind the project. He’s the person behind the legal framework of Ethereum and one of the main drivers of a successful pre-sale campaign.
In 2015, he stepped down from his position as the Vice President of the Ethereum Foundation to focus on other Ethereum-based projects.
Anthony Di Iorio
An investor with a background in cryptocurrencies, he organized multiple Bitcoin meetups and startup events. He was one of the first co-founders of the company. Anthony Di Iorio managed the financial processes of the Foundation and helped set up the pre-sale campaign.
However, he soon resigned from the Foundation — supposedly due to disagreements regarding Ethereum’s status as a non-profit project.
Later, Di Iorio took the position of the Chief Digital Officer at the Toronto Stock Exchange. He was among the founders of Decentral — the company behind the Jaxx wallet. Eventually, he was recognized by Forbes as being one of the largest cryptocurrency holders (with an estimated net worth of around $750 million — $1 billion).
An Ethereum co-founder with a background in real estate and computer science. Before joining the Ethereum Foundation, he worked for Colored Coins, an Israeli-based company, specializing in the tokenization of real-life assets. Chetri joined the Foundation in 2013 and left it several years later.
One of the original Ethereum co-founders. Hoskinson contributed to the project with his strong background in mathematics and cryptocurrency. He took a leading role in managing the Swiss Foundation and creating its legal structure. With a few other co-founders, he advocated for a pro-profit status of Ethereum — the refusal to rally behind the non-profit stance eventually led to Hoskinson leaving the project.
Gavin Food wrote the Yellow paper of Ethereum, the technical bible of the ecosystem. A 39-page document describes the mechanism behind the Ethereum Virtual Machine and the architecture of the network. Wood’s legacy hugely manifests in building the backbone for a system behind smart contracts and decentralized ETH ledgers.
Jeffrey Wilcke is a co-founder of Ethereum with an ICO management background — he was a part of Mastercoin, a Netherlands-based startup. Jeffrey Wilcke created the version of Ethereum in Go (Google-backed software development language), along with backup versions for the network to improve its stability and security. However, eventually, a series of stressful events (most notably a 2016 hard fork) caused him to leave the Foundation.
After Ethereum, he launched a game development company called Grid Games.
Joseph Lubin contributed to the Foundation with his expertise in computer science, electrical engineering, and finance. He entered the crypto market by joining the Bitcoin Alliance of Canada. He monitored the company’s finances and identified growth opportunities.
After leaving Ethereum, he launched one of the most prominent blockchain development studios — Consensys. The company is one of the key players in expanding and maintaining the Ethereum infrastructure.
How does Ethereum 2.0 differ from Ethereum? (ETH vs ETH2)
Now, with official announcements, proposals, and roadmap in hand, let’s summarise the features of Ethereum 2. At this point, you already understand the motivation behind the upgrade — simply put, the current state of Ethereum doesn’t catch up to the system’s rapid growth.
The fundamentals of Ethereum remained unchanged: it’s still a cryptocurrency; the network is still powered by smart contracts. However, the use of smart contracts, a consensus algorithm, monetary policy, and the approach to transaction speed and security will be reviewed and improved.
Key Features of Ethereum 2.0
Let’s take a look at the fundamentals of ETH 2. These changes will contribute to positive shifts in Ethereum performance.
All blockchain systems operate within three values — Decentralization, Consistency, and Scalability. However, due to technical limitations, maintaining all three equally pronounced is impossible. There’s a tradeoff — if you choose two values, the third one has to go. In the case of Ethereum, Scalability was a major problem. To solve this “trilemma”, Ethereum includes sharding in its latest update.
Ethereum 1.0 was a single large chain that was governed by the entire network. Sure, we saw some occasional minor (and unwanted) forks in the past, but overall, the chain was designed to be a single entity. Sharding offers a different approach.
- Large chain is divided into smaller, faster ones. A chain is essentially a “monolith” database — to make a single change, you have to alter a large entity. Sharding breaks it into many smaller chains — and each can execute its transactions independently.
- Shard chains all adhere to the same rules and are controlled by the network. The split, however, from a technological point of view, allows faster data processing and updates.
- Ethereum 2.0 will connect shards with each other via cross-shard communication — hence, more security and consistency, without trading off scalability.
To provide network participants with more flexibility, a new update will also introduce various types of nodes (like a “Light Node”, or “Full Node”), with flexible data capacity and performance parameters.
Proof of Stake uses deposits to guarantee the honest participation of all network members. If you have a significant deposit staked in the system, you are interested in contributing positively to its growth.
Like Proof of Work, PoS solves the Byzantine fault by giving more incentives for collaboration than you could ever get if playing against the rules.
All network participants are invested in the system (since they deposited stakes) and, therefore, have a voting right.
The breakdown of Delegated Byzantine Fault Tolerance, Source
How does PoS work?
The Ethereum blockchain tracks validators who hold Ethereum by using a staking consensus mechanism. For Alice to send 1 ETH to Bob, the network validators should approve the transaction. Once validated, a transfer goes through successfully. Naturally, as an ETH user, you want your transaction to pass as fast as possible with the lowest fee possible.
PoS validators will approve the transactions by voting in favor or against them. The bigger the deposit is, the more weight a vote holds. In this particular update, the Ethereum team considers two PoS types.
- Chain-based Proof of Stake: the algorithm randomly chooses a validator in a given time slot (determined by the network’s rules). The user is granted a right to create a block and is rewarded for validation.
- BFT-style Proof of Stake: the validation of a block is conducted not by one but by many validators where all participants approve the transaction’s validity. The voting process on block approval involves many entities.
To become a validator of Ethereum, users should deposit 32 ETH. Mining will be discontinued — if you mined ETH before, you won’t be able after the update. Just like in mining, stakers will be rewarded with ETH 2.
Requirements for validators
- The deposit of at least 32 ETH
- A computer that matches set specs
- Internet connection
To stake ETH, the network uses beacon nodes — software that connects validators to the system and allows transparent communication. It tracks rewards and offers public APIs.
Return rates as specified in the Ethereum documentation
To stake Ethereum, you need to send the required amount of ETH to the official Ethereum 2.0 deposit smart contract on the Ethereum 1.0 blockchain.
Attention: in the Ethereum community, there have been attempts to trick miners into sending ETH to fake addresses. That’s why you should only use the address mentioned in the documentation.
ETH 2.0 transaction time
The current transaction validation system is relatively slow — Ethereum can execute up to 30 transactions per second. On the contrary, the ETH 2.0 version is promised to support 100 000 requests per second.
Increased capacity means lower transaction fees and more use cases for decentralization applications and ETH usage. As Ethereum will become faster, more efficient, and lower-cost, more companies and businesses will likely embrace decentralization, further strengthening the network.
The current state of Ethereum. 2.0: roadmap and updates
The implementation of the ETH 2.0 changes started in 2020. Let’s track the full timeline of the update and examine the project’s current position on the timeline.
To execute Ethereum 2.0, the team will roll out a virtual machine (eWASM) that powers the new consensus mechanism and sharding.
Ethereum 2.0 growth timeline, Source
Phase 0 — Beacon Chain
Since Proof of Stake validation is powered by beacons, the first step is to create the chain that will manage the process. This technology nominates block proposers, organizes validating committees, controls consensus compliance, and distributes rewards to validators. On top of that, beacons enable communication between validators and shards. It’s a key foundation of the entire Ethereum 2.0.
The breakdown of Phase 0
- The beacon chain connects shard blocks with attestations. Attestations are a collection of votes in a shard that communicates with the block. To assure the immutability of the record, phase 0 relies on The Friendly Finality Gadget, a hybrid proof-of-work/proof-of-stake consensus algorithm.
- Once the beacon chain is ready, it has to be supplied with Ether. Validators do this by staking their deposits to the address of the chain. Users approve the deposits — so, the PoS itself is approved by PoS. When the payment is registered, the system tracks a user as an active validator and grants the participant a voting right.
The results of Phase 0
After the Beacon Chain stage is concluded, the Ethereum chain will be broken into two. The current chain (pre-upgrade version) and the new one, ETH 2.0, will co-exist together, waiting for the upgrade’s complete execution.
By the end of the stage, the beacon nodes are live in mainnet and testnet. From that point on, validators rely on two main implementations — Prysm and Lighthouse beacon clients. With these systems, validators control their staking process.
Phase 1 — Shard Chains
So, Phase 0 lays the groundwork for the implementation of Ethereum 2.0 — however, it’s only a basic technical implementation. To improve the design and communication of shard chains, the update roadmap moves onto stage one, also known as Shard Chains. The documentation refers to this phase as a “trial run for shards”.
Setting up communication between shards
At the end of the Beacon phase, each shard is finalized and ready to run. It’s capable of processing its transactions and altering its data. However, to maintain the security of the system, it’s necessary to assure transparent communication between shards.
Shard communication is achieved with crosslinks — a set of signatures that will be exchanged between shards to notify them about database changes.
The role of a validator in cross-linking
Validators are necessary both for inter- and intra- shard changes. In other words, they will validate the structure of the shard itself and the cross-messages that the database sends to the rest of the network.
As soon as the transfer of a cross-link message reaches the consensus of the validator network, it is smoothly transmitted to the rest of the system.
The results of Phase 1
At the end of Phase 1, the shards are connected full-fledged and to validator networks. They can operate safely and quickly, keeping the entire system synchronized. The original pre-upgrade chain will still work simultaneously with ETH 2.0.
Phase 2 — State Execution
The second stage of the ETH 2.0 update is the final one. This is where the new Ethereum will transition into becoming the dominant chain; at this point, the original will be discontinued.
While, in previous stages, shards were mere data holders, by the end of phase 2, they will be able to execute smart contracts and host the rest of the Ethereum functionality. At this point. Ethereum 2.0 will offer the full range of Ethereum functionality, only with improved speed and scalability.
- Up to this point, the original Etherum will be kept to execute smart contracts and run dApps. After the last stage, this functionality will finally migrate to the 2.0 network.
- Shards will be able to handle large amounts of data and smoothly communicate with each other.
- All shards will be hosted on the new virtual machines, eWASMs.
The Progress of Ethereum 2.0 Upgrade
On the journey to ETH 2.0 upgrade, the team already executed the first steps of the roadmap.
In 2020, Ethereum released the deposit contract feature. It’s a huge shift — now validators can transfer their ETH to the official address to become holders. It’s the pivotal point of Phase 0, which means we might soon see the second stage of the roadmap.
The Future of Ethereum 2.0
If you hold Ethereum or have been mining it before, you likely have a lot of questions at this point. How will Ethereum migrate to its 2.0 version? What are the guarantees that Ethereum transactions, smart contracts, and decentralized apps will be working like before on the new algorithms?
To answer this question, let’s turn to the official Ethereum roadmap on Ether migration.
According to the current proposal, all Ether mined and received in Ether 1.0 will be locked in a smart contract. Users will receive the equivalent amount of ETH 2.0. They can stake this amount and earn rewards on the chain.
Now, the Ethereum team enabled the one-way bridge for depositing Ethereum. However, it’s not a perfect method.
Advantages and disadvantages of a one-way bridge
As you can see, the current depositing strategy is far from ideal. As an alternative, the community came up with a two-way bridge proposal — but it isn’t perfect either.
You can read the detailed proposals and the opinions of their advocates in the official documentation. Since Ethereum is a decentralized, proposal-driven project, it updates constantly, so it’s best to refer to the documentation as often as possible.
What Are the Risks Associated with Ethereum 2.0 Participation?
Early ETH staking has its drawbacks. While early adoption allows you to be the first in line for getting staking rewards and gives you the benefit of depositing relatively little (it’s likely the staking amount might change after the migration), there are still unknown variables in the equation. So, before committing to ETH 2.0 staking, make sure you understand its risks.
Risk 1 — Low liquidity. You won’t be able to use your 2.0 ETH for a while. A full-fledge release might take years.
Risk 2. Problems with Ethereum 2.0. Although there are no particular reasons to distrust the minds behind Ethereum, things can go wrong. The update is ambitious — the team itself admits that the full migration will take at least 1,5 years. During that time, the future of ETH will be uncertain.
Risk 3. Issues in the validating process. As an early validator, you might become a victim of staking bugs. Should that happen, you might get rewards sporadically or in the wrong amount.
Risk 4. Technical challenges. The process of setting up a validator node requires technical expertise, a stable Internet connection, and strict compliance with network rules. For violating requirements, you risk penalties and losing your stake.
That said, being an early staker of ETH has a lot of benefits. Etherum showed impressive growth this year and it’s not slowing down so far. The network’s APY (annual percentage yield) now is much larger than it's expected to be in the future. By being among the new staking programs’ first participants, you get a headstart for your staking process and jump on the bandwagon of future rewards.
Where Can You Buy Ethereum 2.0 (ETH2)?
ETH2 is already available on crypto exchanges. You can get ETH2 on Redot.com in exchange for ETH. Staking occurs automatically while you are holding ETH2 in your Redot account, with rewards distributed daily.
Must-know Ethereum 2.0 updates
Ethereum 2.0 update is an ongoing process started in November 2020. To know what’s happening to the network now, we encourage you to follow the Ethereum community and read newly released proposals. As for now, the Ethereum 2.0 team already hit several important milestones that indicate steady progress.
In November 2020, the Ethereum validators reached the threshold that was necessary for the next upgrade. Collectively, users deposited over 694 300 Ether, worth more than $422 million. Technically, this amount was necessary to kickstart the smart contract under Genesis 0 contract. The conditions were met, and the validating ecosystem got released publicly. Now users can track their ETH validation process on the Ethereum 2 Launchpad.
Aside from technical consequences, there’s another one, no less important. Such active participation in the early-staking program indicates the community’s full support of the proof-of-stake upgrade.
Once the threshold was reached, phase 0 entered a proactive phase. For Ethereum and its users, this is truly an important step.
Beacon Chain is Live
The Beacon Chain is fundamental for the execution of Phase 0 of the Ethereum 2.0 upgrade. It was recently released, enabling the team to set the transition to shards in motion. The Ethereum foundation researcher Danny Ryan mentioned to Coindesk that it’s a key step in making the network more scalable. This is a far-reaching leap towards the implementation of ETH 2.
The Beacon Chain allows executing fast transactions, similarly to PayPal and Visa. The network will increase scalability while maintaining crypto-standard of transparency and immutability.
How could Ethereum 2.0 affect Ethereum’s price?
Ethereum 2.0 is estimated to increase the Ethereum value. The increased transaction speed, lowered gas fees, and higher scalability of the system will open new use cases for Ethereum. Consequently, the ETH currency will gain higher adoption and increase its market cap.
How does Proof of Stake differ from Proof of Work?
The proof of stake doesn’t require an enormous amount of power. It's a safer, more scalable, and faster way to confirm blockchain transactions. The key difference lies in the verification process: to get a voting right, validators just need to deposit a set amount of ETH — there’s no need for millions of hashing operations and wasting colossal amounts of power.
How will Ethereum 2.0 scale better than Ethereum 1.0?
Shards will be able to process more transactions. Shards are small, fast databases that are easier to edit and manage. On top of that, proof of stake offers a more efficient approach to transaction validation. Compared to PoW, it’s cost-efficient, fast, and widely available.
How will Ethereum 2.0 be more secure?
With the PoS, the 51% attack is much more unlikely. If a user starts buying out a suspicious amount of token, such an increase in demand will cause ETH value to rise. So, each next purchase will become more expensive. This pattern can be easily detected — with PoS, carrying out a spontaneous attack is almost impossible. With PoW, things were different — a lot of server providers and governmental entities have access to tremendous amounts of computing power and can misuse them with little-to-no oversight.
How Many Ethereum 2.0 (ETH2) Coins Will Be In Circulation?
Redot has an ETH vs ETH2 pair available for trading. The exact amount of cryptocurrency expected to be in circulation is unknown but it is likely to be dynamic, like in Ethereum 1.0.
Is there a coin limit?
Ethereum has no limit on the number of issued coins. The coin cap is unlimited both in Ethereum 1.0 and Ethereum 2.0. At the same time, the original Ethereum creator Vitalik Buterin publicly stated that the formula of ETH2 emission will be somewhat similar to that of Bitcoin, with a diminishing supply of cryptocurrency over time.
The start of Ethereum 2.0 marks a paradigm-shifting change, not just for Ethereum, but for blockchain and cryptocurrencies in general. It’s a roadmap that leads the entire ecosystem to higher scalability — and, what’s more impressive, with few-to-no trade-offs. The goal is ambitious, and the community is facing a long journey. However, Ethereum’s financial success in 2020 and 2021 shows that the ecosystem is headed in the right direction.
What can Ethereum holders do to help propel the positive change? For one, contributing to the staking system is a good place to start. Multiple open-source projects work on building a Beacon Chain Client, sharding tools, and staking products. The changes are happening right now — so this year could be a unique chance to become an early adopter of the new Ethereum.
And that’s exciting.