Ethereum 2.0

Ethereum 2.0 is an upgrade to the Ethereum Network which improves the speed, efficiency, and scalability of the network whilst preserving security and decentralisation. The upgrade is very significant to Ethereum and will consist of multiple phases, with the three major stages being:

• Phase 0 — Deployment and Staking on the Beacon Chain.
• Phase 1 — Merge between Beacon Chain and the Mainnet.
• Phase 2 — Sharding Framework.

The key changes to the network that ETH 2.0 brings are:

• Sharding — Ethereum will be broken into 64 “Shards” that operate at the same time. This will drastically improve efficiency.
• Staking — Overhaul of the consensus protocol from proof-of-work to proof-of-stake.

Current limitations of Ethereum

Ethereum currently works with a Proof-of-Work (“PoW”) consensus. The motivation for Ethereum 2.0 is seeded in the current limitations of the network.

High start-up costs

The economic issue of proof of work is that barrier to entry is high. Realistically unless users join mining pools the electrical costs, initial costs of hardware required to profitably mine Ethereum is high.

Power Consumption

It’s estimated that Ethereum uses 57.01 TWh per year (at the time of writing) which is equivalent to the power consumption of Uzbekistan making it not sustainable environmentally.

Centralisation Risk

Higher start-up costs also lead to miners joining a mining pool or economics of scale where big miners dominate. This leads to centralisation of miners which offsets some of the security offered by PoW systems.

Scaling Limitations

Furthermore PoW is harder to scale since the processing power is limited by the fact that each block is mined sequentially, and there is a finite limit to the block size. If the number of pending transactions exceeds the block size limit any remaining transactions wait in line for the next block. The Ethereum network currently can only handle roughly 15 transactions per second, which is far too few considering the increasing demand of the network.

Costs for Users

The implications of the network congestion caused by scalability issues is that the costs of operating on the network are increased and passed onto users.

Proof of Stake process on Ethereum 2.0

Proof of Stake replaces the miners and electricity with validators and staking. Validators replace miners as the individuals who maintain the state of the network. On Ethereum 2.0, validators are required to commit 32 ETH as the legitimacy of their intention into the official deposit contract.

How PoS works on Ethereum

1. Blocks can be created in every slot, which lasts 12 seconds.
2. The network randomly selects one validator to be the proposer for each slot.
3. If the assigned validator misses the opportunity to propose a block, the network will have no block for that slot and progresses to the next slot.
4. During each slot, validators will take turns submitting attestations (voting for the main chain).
5. The votes determine the blocks for every epoch (one epoch is 6.4 minutes, consisting of 32 slots).
6. Each validator submits their attestations once every epoch.
7. Finality requires at least 2 epochs (≈ 12.8 minutes).
8. Validators will also be monitoring each other for malicious behaviors.
9. If they observe another validator propose two blocks in the same slot or submit attestation votes that contradict themselves, they can alert the network.
10. The network will reward the whistleblower and will slash the violator.
11. Rewards, penalties, and slashing are processed every epoch. Inflationary rewards are when validators are issued ETH for conducting the work. Properly submitting attestations and including other validator attestations when proposing blocks yields a validator anywhere from 2% to 22% in staking rewards, dependent on how much of the entire network is staked.
12. If a validator fails to stay online and execute their share of computational responsibilities, their block reward will moderately decrease (lose 67K Gwei for each epoch they are offline for) in order to incentivize validators to stay online as consistently as possible. The penalty amounts have been intentionally set low so that honest validators with low connectivity can still be netting positive staking rewards.

Advantages over PoW

More economically viable

Instead of all the investment in expensive graphics cards and mining equipment required in PoW, in which miners expend physical energy (called hash power) by burning electricity to confirm blocks, hardware for staking is less expensive and validators seeking to redeem investment can withdraw their staked ETH which is more liquid and selling mining equipment.

Network Security

The economic incentives against malicious actors are stronger on a PoS network. In PoW, the economic risk of a failed attack is equal to the cost of electricity and borrowed computing power whereas in PoS the cost to launch an attack is equal to the amount of staked ETH. If a validator attempts to launch an attack to compromise the network their 32 staked ETH will be slashed (removed and burnt).

Slashable offenses include proposing two blocks in the same slot or submitting contradicting attestation votes. In the case of a successful attack where a large sum of ETH is stolen, the network is compromised and the value of ETH may drop rendering the attack less financially successful. Once a validator is slashed, the validator will have their ETH balance decreased every single epoch until they are out of the active set. The slashed validator will see their ETH balance decrease anywhere from 3% to 10% at a time, depending on the staking ratio and how many validators get slashed around a similar time frame.

Security is also improved through a higher level of decentralization by requiring a minimum of 16,384 active validator nodes (roughly 8,000 nodes existed before the launch of Beacon Chain).

Low barrier to entry

Companies also offer staking services for clients who choose not to run their own validator nodes. Like mining pools, individuals wishing to stake less than 32ETH can join a staking pool, where their funds are pooled with others to reach the required 32 ETH. Their rewards are proportional to the total contribution.

Lower Energy Consumption

Less cryptographically complex equations are required in Proof of Stake because it does not depend on the cost of electricity and computational equipment to thwart potential attacks Instead it depends on direct economic incentives. Thus the energy consumption per transaction is significantly lower in the Proof of Stake network. According to the ETH R&D research, almost 99.9% lower

Credit: https://blog.ethereum.org/2021/05/18/country-power-no-more/

Sharding

The increased scalability comes from a lateral processing technique called sharding. Sharding is the process of splitting a database horizontally to spread the load and an attempt to solve the trilemma faced by blockchain systems:

Credit: https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/sharding/

In the current blockchain, the entirety of the network has to undergo verification by all participating nodes after every transaction hence the processing speed is limited by the speed of its slowest participant. This creates a bottleneck that increases transaction costs and requires more computational power and storage.

With sharding, the network will break verification of the state and history into smaller parts (shards) and nodes focus on validating the subset of the data received (the shard) instead of the entire blockchain saving the need to store the entire Ethereum blockchain. This process of parallel processing optimises the overall processing and storage capacity of the network increasing it greatly. Anyone is able to run a node capable of sharding and the hardware requirements are lower than the requirement to run a full node increasing network participation. Sharding will continue to keep the network decentralised.

Like with the current system, there will still be a separation between the level of rigour for validators.

Phases

Eth2 is set to roll out in phases, with Phase 0 already rolled out on December 1, 2020.

Phase 0

• Phase 0 is the launch of the Beacon Chain which will implement the Proof of Stake consensus mechanism, Casper.
• The Beacon Chain coordinates the registry of validators.
• With the launch of Phase 0 comes a new token, ETH2.
• Users of Ethereum will be able to convert to ETH2 at a 1:1 ratio via a registration contract burning the ETH in the current wallet.
• Users are given a withdrawal key and a validator key.
• 32 ETH2 is required to be staked to be a validator on the Beacon Chain.
• There is a period for ETH 2.0, users won’t be able to withdraw it until Phase 1.
• The Beacon Chain currently doesn’t handle accounts, transactions, storage, or smart contracts.
• Currently, a separate network that runs parallel to the current Ethereum system ensuring there is no break in data continuity.
• Accounts or smart contracts will not be supported until Phase 1.

Eventually, the Beacon Chain will merge with the legacy Ethereum chain to become the primary settlement layer for the Ethereum network and also coordinate the shard chains.

Phase 1

• A bridge between the two environments of Beacon Chain and legacy Ethereum is created.
• The Ethereum 1.0 mainnet shard will provide the history and the current state of Ethereum to the Beacon Chain.
• During this period dApps will want to begin construction on Beacon Chain.

Eventually, the side chains will function with full capability.

Phase 2

• Phase 2will implement shard chains, which are controlled by the Beacon Chain.
• It is expected that Phase 2 will be running with 64 shards.
• The Ethereum 1.0 blockchain will become one of the 64 shard chains, all of which will operate using the new Ethereum PoS protocol.
• eWASM will increase the number of potential programmers for the ecosystem by allowing programmers to choose from several languages to write code to the blockchain, with no need to learn a native Ethereum-only language.