Expert
Lesson 9
6 min

Ethereum 2.0 simply explained

Ethereum 2.0 refers to a set of updates that aims to tackle Ethereum’s current limitations. These challenges include limited scalability, issues with its consensus algorithm and excessive energy requirements. 

  • Ethereum 2.0 is an update to the Ethereum network that upgrades multiple aspects of the ecosystem and aims to solve a number of problems 

  • Scalability is one of the main features of Ethereum 2.0

  • With Ethereum 2.0, the network will transition to a proof of stake algorithm

In this lesson, you will learn about Ethereum 2.0.

As increasing numbers of users are engaging with the Ethereum network, it has started facing obstacles that need to be overcome to ensure a viable future. These challenges include limited scalability, the limitations and the consequences of the proof of work consensus algorithm, such as the network’s vast energy requirements. Ether is one of the most popular altcoins and ERC20 tokens are the most popular tokens on the Ethereum blockchain. Ethereum 2.0 is an update to the current Ethereum network that is set to address various issues for enhancing the ecosystem.

The three milestones to launching Ethereum 2.0 

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Ethereum 2.0 is not an update that will fully take effect at one set point. The update is rather a process that involves the gradual application of new features over two years to ensure a smooth transition from the existing ecosystem to the updated network. 

The three biggest milestones of this process include:

  • The implementation of the Beacon chain which will be a governing force of the ecosystem

  • The shard chains, which are set to increase data availability and to decrease transaction processing time;

  • The docking of the Ethereum mainnet. 

Their integration is scheduled to be completed in 2023. 

Phase Zero - the launch of the beacon chain

The Beacon chain has been live since the 1st of December, 2020. As the first element of Ethereum 2.0, its launch is sometimes referred to as Phase Zero. The Beacon chain is the coordinating mechanism behind the new Ethereum ecosystem and will take control once all of the updates of Ethereum 2.0 have been implemented.

The Beacon chain is essential in introducing proof of stake (in this case, ETH staking) to the Ethereum ecosystem. The beacon chain is also the coordinating entity of the 64 shards that are to be later introduced during the shard chains phase. 

The Beacon chain is essential in introducing proof of stake (in this case, ETH staking) to the Ethereum ecosystem.

It is important to note that the Beacon chain has not changed anything in the Ethereum Mainnet. They will run parallel to each other and everything will still function as before on Ethereum Mainnet.

Phase One - The shard chains

In what is referred to as Phase One, the ecosystem will gradually shift from running everything on a single main blockchain to distributing the load to 64 shards (blockchains). 

Like you learned in lesson 8 of the Expert section of the Bitpanda Academy, a shard is a separate blockchain in an ecosystem that is connected to the main blockchain and other shards within the same ecosystem. In Ethereum 2.0 specifically, the initial 64 shards will be interconnected and governed by the Beacon Chain once the last phase of the update is implemented.

These shards will be controlled and connected by the Beacon chain. It will enable shards to communicate and transfer data between one another while securing the ecosystem and the shards run according to the algorithm. This allows faster validation of transactions as validators only need to focus on a single, relatively-compact shard (blockchain), one of the 64, that was assigned to them, instead of dealing with one substantial blockchain.

Increasing transaction capacity

Thanks to this update, the Ethereum network is to become more scalable as more transactions can be processed. Additionally, hardware requirements are bound to drop significantly for validators as each validator only stores the data for its respective shard. In the future, these changes may enable running Ethereum even on a mobile phone or laptop.

Whether shards will be used to run DApps and transactions is still undecided. They will, however, provide easier storage and access to data. This phase of implementing shards is still ongoing and completion is expected at some point in 2023.

Phase Two - The docking of the Ethereum Mainnet

After this implementation, the present Ethereum Mainnet chain will “dock” (connect) to the new ecosystem of 64 shards, completing the Ethereum 2.0 update during Phase 1.5. 

With the update, the proof of work algorithm will be eliminated from the Ethereum ecosystem and proof of stake will take full effect throughout the entire network. The Mainnet, once docked, will enable running smart contracts in the renewed Ethereum ecosystem. 

Until the docking happens, the Ethereum mainnet will continue running without any of the changes of Ethereum 2.0 in parallel to the Beacon Chain and its shards. The docking is expected to be completed sometime in 2022 or 2023, according to ethereum.org.

What is Ethereum 2.0?

Ethereum 2.0 refers to a set of updates that aims to tackle the obstacles Ethereum faces. These include limited scalability, limitations of the current consensus algorithm, proof of work, and the negative effects the network’s significant energy consumption has on the environment. 

The core ideas around Ethereum 2.0 originate from Vitalik Buterin, founder of Ethereum and researcher Vlad Zamfir around the time of the Ethereum network’s creation and have been set to be implemented ever since.    

Main features of Ethereum 2.0

Increased scalability

So far, the Ethereum network only has one blockchain, Ethereum Mainnet. This meant that the number of transactions in the Mainnet was limited to between 15 and 45 per second. To solve this, the network is transiting from only one chain (Ethereum Mainnet) to an overall 64 chains (shards) in the scope of the implementation of Ethereum 2.0, decreasing the time needed for validation of transactions. 

Changing the consensus algorithm

Security in the network is currently based on the proof of work consensus algorithm. A remaining issue is the remote possibility of a 51% attack, which is an unlikely, but real risk. For instance, Ethereum Classic, a fork of Ethereum, has repeatedly fallen victim to 51% attacks

Furthermore, the proof of work algorithm requires ample computing power which consumes vast amounts of electricity. Therefore, the transition is also expected to address environmental aspects and security flaws of the existing network. With Ethereum 2.0, the ecosystem will transition to a proof of stake consensus algorithm

In order to become a validator of transactions in the network, those who verify the legitimacy of transactions in exchange for compensation in ETH (Ether), the would-be validator first needs to stake their ETH cryptocurrency. Staking in this case means that a validator provides a minimum of 32 ETH.

Staking on the updated network

The more ETH a validator stakes, the better their chances are of getting a validation task to receive rewards. By staking sufficient ETH, anyone can become a validator without needing  top-performance computing power (like in the proof of work system), therefore reducing the electricity consumption of the network and making it more environmentally friendly.

The proof of stake algorithm also protects the network from the possibility of coordinated attacks that could arise from one agent controlling 51% or more of the networks’ overall computing power. 

Advantages of staking

With the proof of stake algorithm, if a validator/validators were to act unlawfully and attempt to attack a shard, the algorithm could automatically destroy their stake. Therefore, this penalty system is intended to disincentivise any coordinated attack. Further, as the 64 shard ecosystem will be adopted, validators will be randomly assigned to and distributed among these shards to greatly reduce the chance of a planned and concentrated attack against a single shard.

FURTHER READING

ARTICLES:

  • Kovačević, A. - Ethereum 2.0 Includes Major Changes That Could End Bitcoin's Blockchain Dominance

  • Millman, R. - What is Ethereum 2.0 and Why Does It Matter?

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