Understanding Ethereum 2.0

We are only weeks away from the official launch of Ethereum 2.0. It’s been a long journey. Ethereum 1.0 launched in 2015 and has had several upgrades since, but none of them come close to the changes Eth2 will introduce. 

It’s high time, too. Ethereum is by far the most popular blockchain platform to build on and, because it can only support 15 transactions per second (tps) on average, has seen serious network congestion as a result. Particularly because of the popularity of DeFi, Ethereum users have experienced high transaction fees and slow confirmation times, to the point where certain decentralized applications became virtually unusable.

graph of gas prices going up
Gas prices have surged in 2020

Eth2 promises to alleviate, if not entirely eliminate, these problems. This article will talk about the three biggest changes of Eth2, when they'll be rolled out, and why Eth1 will remain important for a long time still.

The Biggest Changes of Ethereum 2.0

From Proof of Work to Proof of Stake

Every blockchain needs a consensus mechanism. It’s how people come to an agreement on the validity of the information in blocks. The two most popular blockchains, Bitcoin and Ethereum, use a consensus mechanism called Proof of Work (PoW), where miners use computing power to find the key to a cryptographic puzzle.

PoW has been a good and safe consensus mechanism, but it has serious problems. One of them is the amount of electricity it consumes. Bitcoin and Ethereum have hundreds of thousands of miners all racing to find the key as fast they can, their devices drawing electricity from grids around the world. Bitcoin already consumes as much electricity as Switzerland, and that number is only ever going up.

Another problem is the fact that anyone with 51% of computing power could technically corrupt the chain. This is particularly possible if the price of Bitcoin drops and mining will stop being profitable for many miners. Only a few powerful mining groups will remain, leading to a more centralized blockchain and possibly a 51% attack.

That’s why most newer blockchains now run on Proof of Stake (PoS) or some version thereof. Eth2 will also move to PoS as its consensus mechanism. If you have 32 ETH (approx. $10,900 at the time of writing) you can become an Ethereum validator, validating information in Ethereum blocks. You need to stake that ETH (lock it up) and run a validator node, which can be any consumer-grade machine (instead of specialized hardware like you’d need for PoW).

32 ETH = 1 steak
I have steaked my ETH

The more ETH you stake, the more likely you’ll be chosen to propose a block. Once you’ve proposed a block, at least 128 other validators will need to attest that the information in your block is correct. Validating blocks will bring rewards ranging from 1.8% to 18% APR (proposed rates).

There’s a lot more to PoS on Ethereum, but that’s the gist of it. It will drastically reduce the energy consumption of Ethereum and will be one part of the puzzle to eventually help Ethereum scale to 100,000 transactions per second (according to Ethereum’s founder Vitalik Buterin). That’s a somewhat doubtful claim, considering even Visa can only theoretically process 24,000 tps, but moving to PoS should help speed up Ethereum from its snail-paced 15 tps.

Introducing Shard Chains

Another upgrade that will significantly improve Ethereum’s network capacity are shard chains. Eth1 is one long blockchain. Eth2 will be at least 64 parallel blockchains, called shards, that each take up a portion of the network’s processing work. No longer will miners/validators need to download, compute, store, and read all of Ethereum’s transactions. Instead, validators will only need to concern themselves with their particular shard.

All these separate shards are connected via the Beacon Chain. This is a chain that has links to all shards and that stores the addresses of all validators, the state of each validator, and block attestations. The Beacon Chain uses the Casper PoS protocol to finalize blocks and make them irreversible, and will also serve as a bridge between Eth1 and 2.

From EVM to eWASM

Creating a decentralized application on Eth1 requires you to learn Solidity, its programming language for writing smart contracts. What you write is Solidity is compiled into a low-level machine instruction called an opcode that the Ethereum Virtual Machine (EVM) uses to execute tasks.

But the EVM is slow and limited in its capabilities. That’s why Eth2 will introduce the Ethereum WebAssembly (eWASM). Developers will be able to program in many different languages and will be able to execute their code in modern browsers. This means that the barrier of entry for programming on Ethereum will lower significantly.

The Gradual Rollout of Eth2

All the above are exciting changes that will significantly improve the Ethereum blockchain and its corresponding ecosystem, but we’re nowhere near seeing these deployed yet. As it stands, we’re close to Phase 0 of Eth2. This means that you can soon deposit ETH from Eth1 to Eth2 and start staking. This phase is meant to accumulate the required 524,000 ETH (the minimum the chain needs to get going) and to stabilize the network.

Phase 1 will be implemented in 2021. This phase will introduce the shard chains we spoke about above. All that these shard chains will do at this point is verify data. There won’t be any actual transactions nor smart contracts yet.

Phase 2 has no defined timeline, but it will unlock the ability to build applications on Eth2. By this time, PoW should be entirely phased out and Ethereum will have moved to eWASM. This is Eth2 at its full functionality. There’s a Phase 3 as well, which will see further upgrades. Vitalik Buterin has a roadmap of the next five to ten years on Ethereum that might give you an idea of what’s down the line.

Closing Thoughts

Ethereum 2.0 is exciting, but it’s still a long way before it will become practically usable. I can’t help but feel worried for Ethereum about this, because other blockchains platforms such as Cosmos, Polkadot, and NEAR already have some version of all the above features, and they’re up and running already. At this point, Ethereum’s moat is its ecosystem, but how long will that last with today’s gas fees and transaction times?

We'll be stuck with Eth1 for a good while yet, which is why it's still important to pay attention to Eth1 upgrades, called Ethereum Improvement Upgrades (EIPs), as well as projects that aim to improve Eth1's scalability, such as Loopring and Matic Network).