In this article, I take a detailed look at the problems of Ethereum 1.0 and how Ethereum 2.0 will differ, the tech, and the pros and cons. With the value of Ethereum tripling this year and again set to double yet again what is this thing all about. But Ehtereum is much more than another Bitcoin or altcoin. Find out below.
Issues with Ethereum 1.0
Ethereum1.0 project started in 2014 and went live in 2015 and since then there have been various upgrades and forks of the network e.g 2016 was homestead and mauve paper followed. Today the project Ethereum 2.0 is gone-live at phase 1 (Deposits) and will progress later this year phase 2 (sharding, smart contracts)
There has always been the expectation of making blockchain consensus work in a way that is more efficient and more scalable than they are right now. It is what people expected at the beginning of Ethereum 1.0. So it was always part of the original Ethereum roadmap since its inception and has been researched since then and now has come to fruition.
This is very much needed as there is a lot happening on Ethereum 1.0 with USDT running on ERC20 and voluminous smart contacts like open certs and trad trusts using the network (ref lab 4 class). These may not be using many resources but when scaled across all nodes as is needed for proof of work validation to add blocks, they impact the performance be it transactions per second or gas fee.
Given gas fees use the average speed of the transaction and that the amount of gas used affects the speed it means the overall price of gas is rising. So the ultimate goal is to keep gas fees low and allow etherium to scale. (b.)
Given these factors, and the original roadmap and the current usage, and the need to keep etherium predominant so comes the deployment of Ethereum 2.0
What's the point of having Ethereum 2.0?
If crypto blockchain, in general, is to succeed as a whole it’s important that Ethereum is successful. If it fails it will be bad for everyone as blockchains need to be more scalable, interoperable, and faster.
The Ethereum 2.0 capabilities of proof of stake, to replace proof of work, and of a more decentralized Ethereum are key to this. Then having the whole community adopt it and get incentivized and penalized according to how it is used to maximum security, adoption. Smooth seamless transitions to Ethereum 2.0
are needed such that users of Ethereum do no need to go to the protocol level. This is done as follows. (a)
The heart of Ethereum 2.0
The basics are that of efficiency without proof of work needed at each node so that consensus is built quickly and to scale up the number of transactions with the aim to go from 12TPS to 10,000TPS++ Without being dependent on all nodes but a subset. This subset of validator nodes perform proof of stake and also allow the interoperability of Ethereum 1.0 with Ethereum 2.0 at the protocol level.
How does it work?
At the center of Ethereum 2.0 is what is called the ‘beacon chain’ and essentially acts to manage the consensus and stores information about the active proof of stake validator, what messages they have sent, and transport them to sub-chains or ‘shards’
The beacon chain has a connection to the existing Ethereum 1.0 network so whilst it deploys to new sharded chains this is not a separate ecosystem but an extension to the existing ecosystem. It acts as a bridge that basically allows you to take ETH and other assets you have in the Ethereum 1.0 network and move them to the Ethereum 2.0 network.
For example, if you have at least 32 ETH you can become a validator on the beacon chain and facilitate the move of existing tokens or contracts into the new sharded chains. By registering the 32 ETH into a new contract on the new network you are registering as one of the proofs of stake validators as one of the participants in the beacon chains consensus. (c.)
As a validator, the work is actually the run a Merkl proof to validate and create a new smart contract with a cryptographic key for the sharded chains and use the new encryption mechanism that Ethereum 2.0 network uses. Then combined with a pool of other validators consensus (Casper algorithm) is formed and the block is added. This the basis of the proof of stake consensus for Ethereum 2.0 (c.)
Ethereum 2.0 will gain adoption!
For the system to gain adoption it has to be seamless to the developer and this is built-in with the design of Ethereum 2.0. It has to be scalable and cost-effective and I believe that this is in place. The market demand for the functionality of Dapps is there and growing so I don’t question that. (c.)
The question is will the proof of work incentivize the validators sufficiently. One may ask why as a validator I have to stake a minimum 32 ETH and will this be the accessible entry point and worth their while. It also allows a series of incentives and disincentives to maintain and uphold consensus building. This is done via a smart contract. As a validator, you run software that says which block of the blockchain you think is correct and then sign with a cryptographic key.
And on adding a block there is an incentive of 2.2% to 6% deposit value per year. The amount varies depending on how much you are online vs offline. If you do something wrong you are penalized for example not meeting the required amount of validation need. There is a cost to running a node also but it’s determined by the software to be proportional to the amount of initial ether and is tied to the number of Kilobytes of data that you have to verify. So all in I feel the system is a compromise on work and reward.
Actually, the goal and methods are good in that it is truly decentralized with minimal risk of majority attack groups of miners colluding and gaining control. It encourages wide participation, simplicity, scalability, secure. So I believe it will work given the current adoption of blockchain and crypto.
However, its early days and there are obstacles to using Ethereum v2
There are many other systems that run ERC20 and other networks. There are also competing proofs out there. So it is competitive technology. Perhaps an unknown risk is the corporate versions of Ethereum and how these may be used over the main net for broader B2B blockchain.
The main obstacle I can see is moving from ETH1 to ETH 2 then the locking to the 32 ETH for 3 years given the volatility of the ETH int that it can go up or down but either way; your ETH is locked into the systems and there are other commitments of running a note e.g. time, hardware, maintenance, sysadmin, running cost. As mentioned there are incentives and disincentives to ensure the commitment of validator smart contract is made. (d.) So it is a wait and see as to the success of this project which has been years in the making and is too important to fail.
a. https://cryptocurrencyfacts.com/ethereum-2-0-explained/
b. https://cointelegraph.com/news/ethereum-gas-fees-reach-500k-as-eth-price-hits-a-2020-high- at-486
c. https://github.com/ethereum/eth2.0-specs
d. https://consensys.net/blog/blockchain-explained/my-journey-to-becoming-a-validator-on-ether eum-2-0/
e. https://www.kaleido.io/
