Why ETH 2.0 is Such a Big Deal for Ethereum?

Why ETH 2.0 is Such a Big Deal for Ethereum?

By DrBreakThru | PayAttention | 26 Nov 2020


On November 23, 2020, the minimum staking requirement of 524,288 ETH for ETH 2.0 has been met!

This marks a significant milestone for Ethereum as it gives ETH 2.0 the green light to launch on December 1, 2020 – a moment Ethereans have been waiting for nearly 2k days since the genesis of Ethereum.

The ETH 2.0 deposit contract was released on November 4, 2020, and it now has a total of 691,552 ETH staked and 21,607 validators and counting. 

Soon, when ETH 2.0 launches in December, everyone who staked 32 ETH or more (the Validators) will get rewarded with newly minted ETH for proposing and attesting to blocks. 

Their rewards will be tied to the overall amount of ETH staked in the network and as it stands today with nearly 700,000 ETH staked, Validators will receive ~18.9% APR on their staked ETH.

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ETH 2.0 staking rewards based on the overall amount of ETH staked in the network (Source)

What's the Problem with Ethereum 1.0? 

The problem with Ethereum 1.0 is that it simply cannot scale to the point that’s needed for mass adoption. It suffers from major network congestion, it has exuberantly high gas fees, it has very low transaction processing, and it requires immense amounts of energy to maintain. 

Does this mean Ethereum 1.0 has failed?

No, not at all. 

Vitalik Buterin, the co-founder of Ethereum stated very early on that Ethereum 1.0 will suffer from fundamental scalability problems and will have to be upgraded through time. 

In fact, even before Ethereum went live on mainnet, Vitalik published a post in September 2014, outlining Ethereum 1.0’s scalability issues. 

In the post he said:

“Fundamentally, the problem of scaling up something like Bitcoin and Ethereum is an extremely hard one; the consensus architectures strongly rely on every node processing every transaction, and they do so in a very deep way.”

As mentioned in the quote above, Vitalik realized very early on that Ethereum 1.0’s consensus architecture – Proof-of-Work (PoW) mining of blocks – would be extremely difficult to scale. He knew that Ethereum would eventually have to transition to a Proof-of-Stake (PoS) network with the launch of Ethereum 2.0. 

That said, Ethereum 1.0’s PoW consensus architecture is at the root cause of Ethereum 1.0’s long list of scalability issues.

Ethereum 1.0 Scalability Issues

Network Congestion

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(Source)

Ethereum 1.0 has experienced multiple instances of severe network congestion causing transactions to either fail or take hours and even days to go through.

Since the network launched in 2015, there have been two notable events leading to severe network congestion:

  • The first was due to the CryptoKitties craze in 2017
  • The second was more recent with the DeFi yield farming boom in 2020

In both instances, the Ethereum blockchain came to a near standstill for regular users. There was so much activity on the network that only transactions with the most expensive fees would get processed and others would either fail or take hours and even days to process.

High Fees
Tying into the issue of network congestion, Ethereum fees can sometimes go incredibly high. During the DeFi craze in September 2020, ETH transaction fees were reaching 500 gwei or higher while the average transaction is normally well under 100 gwei.

Also, as reported by Glassnode on September 1, 2020, Ethereum miners earned over $500,000 in fees in just 1 hour:

Transaction Throughput
Ethereum 1.0 can only support about 25-30 transactions per second (TPS) without second layer scalability solutions. This is barely enough for a single DeFi application, let alone an entire blockchain network. Also, Ethereum’s low transaction throughput translates to slow transaction speeds due to network congestion.

Energy Inefficiency
Ethereum 1.0 uses a Proof-of-Work (PoW) mining consensus mechanism which requires a lot of energy to validate transactions and maintain the blockchain’s security. 

Computers (Ethereum miners) located all over the world contribute their computing power to solving complex mathematical equations in an effort to validate blocks on the Ethereum blockchain. When they validate a block, they get rewarded with newly minted ETH and the transaction fees from the transactions included in their mined block. 

Overall, this PoW mining process is rather energy inefficient and is also the main hindrance to Ethereum 1.0’s scalability as the blocks can only carry a finite amount of data and the next block in the sequence cannot be mined until the current block’s mining process is complete. 

How ETH 2.0 Solves This?  

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(Source)

ETH 2.0 solves all of the apparent issues in Ethereum 1.0 by undergoing a series of major upgrades that will be carried out through at least 4 phases over the next 2-3 years. 

It has long been debated that ETH 2.0 may never actually ship, but after years of waiting, we can now finally say it’s here – Ethereum 2.0 Phase 0 will commence on December 1, 2020. 

As for the vision of ETH 2.0 and beyond, Vitalik Buterin once shared a flow chart of how it might look like:

The above chart may be rather difficult to read for the regular crypto Joe, so let’s break things down by delving into each of ETH 2.0’s phases separately.

But before we dive in, remember, getting to the final state of ETH 2.0 will be a process, it cannot be rolled out with the simple flick of a switch. 

Now let’s find out how we get there:

What Phase 0 Will Bring?

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ETH 2.0 Launchpad for Phase 0 (Source)

The first phase of ETH 2.0, commencing on December 1, 2020,  addresses Ethereum 1.0’s biggest hindrance to scalability – it’s Proof-of-Work (PoW) consensus mechanism. 

Phase 0 will usher in the launch of a new Ethereum blockchain, given the name “Beacon Chain”. The Beacon Chain will serve as the control tower, or the main chain, of the Ethereum network. 

It will store and manage the registry of validators and will be the core blockchain in which sub-chains (shards) plug into. It will also implement the Proof-of-Stake (PoS) consensus mechanism for Ethereum 2.0 which enables anyone to stake 32 ETH to become a validator node that generates new blocks and receives rewards in ETH. 

In this phase, the new Beacon Chain will have zero functionality and will be inactive to Ethereum users. It will run in parallel to the Ethereum 1.0 chain with the sole function of enabling users to stake ETH to it. 

That said, users who stake ETH to this new chain in phase 0 will not have control of their staked ETH until Phase 1.5 launches, which is projected for 2021.

Moreover, the transition from a PoW to a PoS chain will vastly increase the capacity of processing transactions on the base layer from roughly 30 TPS in Ethereum 1.0 to 10,000 TPS in ETH 2.0. It will also increase Ethereum’s security and decentralization by lowering the barrier to entry for participation in the network.

Also, in later phases, Ethereum’s transaction throughput will be increased to 100,000 TPS + from the combination of layer 2 scaling solutions – sharding and zkRollups – on top of the Beacon Chain. 

What will Pase 1 Bring?
Phase 1 is expected to go live sometime in 2021 and will serve as the implementation process of shard chains – which are chains that run alongside the Beacon Chain like a multiple lane highway. 

ETH 2.0 will have 64 different shard chains that allow for transactions, storing, and processing of information to be done in parallel with one another. Instead of transactions being executed in a consecutive order, they'll be handled simultaneously and vastly increase Ethereum’s scalability.

Once these shards are fully functional, the Beacon Chain will only have to download the transaction history of a subset of shards to engage and execute transactions on the Ethereum network.

ETH 2.0s implementation of 64 shards is designed to be able to handle several hundred times more data than Ethereum 1.0 but will not be fully operational with smart contracts and accounts until ETH 2.0 Phase 2. 

What Phase 1.5 Will Bring?
Phase 1.5 is also projected to go live in 2021, where the current Ethereum 1.0 chain will transition into a shard, as to be 1 of ETH 2.0’s 64 shards. 

In doing this, Ethereum 1.0’s PoW consensus mechanism will be dropped and the ETH 2.0 PoS consensus mechanism of the Beacon Chain will support the Ethereum 1.0 shard.  Therefore, Phase 1.5 will see an end to Ethereum’s PoW mining, and only PoS validators will continue to secure and validate transactions on the network.

That said, the inefficiency of using immense computing power to mine will be a thing of the past, and PoS validators who are chosen based on the stake they hold will be in a position to receive ETH rewards by using their typical consumer PC. 

What Will Phase 2 Bring?
Phase 2 is the last planned stage of the ETH 2.0 upgrade and it’s projected to go live at the end of 2021 or sometime in 2022.

While this phase is less clearly defined than the previous 3 phases, we do know it will bring all of the pieces together to create a fully functioning blockchain ecosystem and network. 

It will usher in fully functioning shard chains that support Ether accounts, enable transfers and withdrawals, smart contracts, and seamless communication between all shard chains and the Beacon Chain at the same time.

At this stage, ETH 2.0 will be a decentralized, scalable, and secure PoS blockchain network suitable for hosting highly scalable dapps.

However, Ethereum won’t stop there. Many further improvements are planned for research and development after Phase 2 is complete, as outlined in Vitalik’s diagram above.

How Community & Investors Reacted? 

When it was announced that the threshold to launch the ETH 2.0 mainnet was reached, the Ethereum community and investors went ecstatic. 

Literally, everyone was celebrating on CT (Crypto Twitter) and the hype for Ethereum was perhaps at its peak. 

David Hoffman from the Bankless podcast labeled the launch of ETH 2.0 as the “Golden Age of Ethereum”:

Viktor Bunin, a protocol specialist at Bison Trails congratulated everyone who was apart of the long journey to get here:

Tom Shaughnessy, Co-Founder of Delphi Digital and host of the Delphi Podcast pointed out that ETH 2.0’s launch is getting more attention in a single hour than every other layer 1 did this year:

In addition to the Ethereans (Ethereum community members) being ecstatic about ETH 2.0, it appears the market has been pricing it in too.


DrBreakThru
DrBreakThru

I'm a simple guy, I see a crypto breakthrough, I talk about it


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