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Ethereum 2.0 explained by ZILD

By Zild | Zild Finance | 12 Nov 2020

Ethereum 2.0 is an upgrade to the Ethereum network that is expected to take place during 2020.

Once launched, Ethereum 2.0 will be primarily a testnet for testing the Proof-of-Stake consensus algorithm system. Most of the economic activity and smart contracts will continue to function on the original Ethereum network, which will continue to be a parallel system to Ethereum 2.0. The developers implement the possibility of transition of Eth1 to Eth2, but the opposite will be impossible.

What are the phases of Ethereum 2.0 deployment?

Phase 0: Beacon Chain

It only includes testing the new Proof-of-Stake mechanism, so the network will be predominantly test-driven, although it will use real Ethereum tokens. Within this phase, the following aspects of PoS should become functional:

  • Management of the set of stakers;
  • Stakeholder funds management;
  • A random number generator that helps you select block producers and staking curators;
  • Stakeholders vote for block size proposals;
  • Distribution of awards and fines for stakers.

Phase 1: Sharding

An experimental network with 64 shards will initially be deployed. While phase 0 aims to test the basic PoS infrastructure, in the absence of significant economic activity, then phase 1 aims to test the basic sharding model. During this phase, 65 blockchains will operate in parallel — the Beacon Chain, which existed at stage 0, and 64 new shards. There will also be a two-way communication and link mechanism between the Beacon Chain and all 64 shards.

Phase 2: Implementation of the new operating mode

It is assumed that at this stage smart contracts will start working on the network and economic activity will begin. Shards will no longer be stores of raw data, but will begin to resemble virtual machines and Ethereum 1.0 smart contracts. Specifications for Phase 2 are under development.

Unilateral fixation

After the launch of Ethereum 2.0, two networks will operate in parallel — Eth1 and Eth2. It will initially be possible to convert Eth1 coins to Eth2 coins, but not vice versa, so in theory Eth2 coins should trade at a price less than or equal to the value of Eth1 coins. However, in the early stages of the transition, Eth2 coins are unlikely to be priced or supported by exchanges at all, as their only use would be staking. Even basic transactions will not be possible.

To transfer Eth1 to Eth2, you will need to use the Eth1 escrow agreement. This agreement destroys coins on Eth1, and then the destruction can be used as confirmation to issue new Eth2 coins. Coins are burned permanently, although coin recovery can be realized thanks to a protocol change as a result of a hard fork.

Coins transferred to Eth2 automatically go to the validator pool.

Proof-of-Stake, finally

According to the proof of stake concept, the “weight” of the vote and the amount of the validator’s reward are determined by the value of the coins in the stake. Eth2 specifications stipulate that each validator must have 32 ETH. If more than 32 ETH is received in the contract, then the staker does not receive a reward from these additional coins. If there are less than 32 ETH coins, the staker will not be activated. Therefore, you will need to transfer ETH to Eth2 in portions of 32 coins. Each portion of 32 ETH can be a separate staker.

How will the issue of coins look like?

Ethereum will continue to operate on a Proof-of-Work basis, while Eth2 will operate on a Proof-of-Stake basis.

During this period, both groups of validators, miners, and stakers will receive rewards, so the Ethereum inflation rate will rise — at least until the two systems merge.

The emission level of Eth2 will depend on the number of tokens involved in the staking process. The annual emission level will be based on an algorithm in which Eth2 is the number of Ethereum tokens involved in the Proof-of-Stake validation pool (the source of these figures is a post by Vitalik Buterin published in April 2019):

Inflation rate in Ethereum 2.0

The rate of issue determines the amount of remuneration. The award aims to motivate users to move coins to Eth2 and to steak. The reward will decrease in proportion to the number of coins being moved, as Eth2’s success will reduce the need for them. Such a model can ensure that the number of coins moved is sufficient to significantly increase the size of the network; at the same time, the emission will not become too high if Eth2

How will the blockchain merger take place?

In the future, Eth1 and Eth2 may merge back into one system in a few years. In fact, Eth1 will become a shard inside Eth2, which will allow Ethereum to move between shards in both directions, and the two coins will merge into one. Presumably, most of the economic activity currently taking place on Eth1 will continue to take place inside the Eth2 shard.

The next step could be the merging of consensus systems. The Eth1 shard can gradually move to Proof-of-Stake.

Proof-of-Work can continue working, but after a given number of blocks — for example, after every 100 blocks — the block’s consensus will determine the Proof-of-Stake. In the end, it will be possible to completely abandon Proof-of-Work: the rewards for the Proof-of-Work block will become unnecessary. This will give Ethereum users and investors more certainty regarding the inflation timeline.

What are the prospects for Ethereum 2.0?

Ethereum holders tend to experiment with sophisticated new systems — DAO, Maker, DeFi.

Some members of the Ethereum community are concerned that Ethereum technology has been around for five years, but still lags behind, so they think new technologies are needed.

Ethereum 2.0 satisfies the community’s demand for new ideas, and it is possible to look forward to a significant influx of funds and staking rewards (possibly billions of dollars in ETH).

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