Blockchain technologies have revolutionized global markets, disrupting finance, trade, agriculture, and healthcare. Bitcoin was the first widespread application of blockchain technology, but from there have grown over 9,000 other altcoins. Ethereum has the second-largest market cap and is the largest general-purpose blockchain. Bitcoin’s emphasis is on becoming a store of value and an inflation hedge that is easy and secure to transfer. Ethereum on the other hand is intentionally designed for smart contracts and Dapps (decentralized apps). Ethereum is excellent; however, it is not perfect, but the Ethereum Foundation has the ability to improve aspects such as performance and security, which it is doing with Ethereum 2.0.
Ethereum 2.0 vs. Ethereum Classic?
Ethereum 2.0, aka Eth2 and Serenity, is the first upgrade to the existing Ethereum Classic blockchain, intended to increase the Ethereum network’s speed, efficiency, and scalability while boosting security and making the Network more sustainable. If you already hold ETH don’t worry; there is nothing you have to do; the ETH 2.0 upgrade is happening behind the scenes, and holders should never know there is a difference.
Users of Eth-1.0 have identified bottlenecks, and there remains a need to increase the number of possible transactions/second (currently 15 to 45). The two major structural changes in Eth2 are:
- Proof of stake–this is a consensus mechanism for facilitators of the ETH blockchain called Validators that look at ongoing transactions rather than this being a job of Ethereum Proof of Work miners. Validators have to put up a bond of 32ETH which is intended to prevent malpractice.
- Sharding-The splitting of a blockchain into shards (multiple blockchains.) Sharding improves efficiency, as the validators will maintain their own Shard’s info. Validators will also be shuffled between shards to avoid manipulation and strengthen security, with communication between shards using the Beacon Chain.
| Beacon Chain – system that coordinates ETH2.0’s expanded network of shards and stakers. The umbrella linking the shards. |
The Interworking of ETH2.0
On each Shard, 128 Validators (called a committee) have a responsibility for the Network’s infrastructure and maintenance. They hold signing and withdrawal keys confirming their position and the ability to verify each transaction’s validity; this validity verification process is called “attesting”. The Validator committee decides the validity and timing of the entire blockchain. Every new shard block is both proposed and validated by this committee within a 12-second time frame known as a “slot.”
The initial structure of Eth 2.0 will have 64 shards. Therefore, each slot is a chance for a shard Validator to add a block and receive a reward for this. There are 64 shard blocks (one per Shard) and one Beacon Chain block per Shard.
Image courtesy of London Blockchain Labs
Thirty-two slots make up an Epoch, which is approximately 6.4 minutes.
At the end of each epoch, the 128-validator committee is broken up and using a semi-random process called RANDAO a new set of validators is chosen. By changing the committee, it removes control of the final outcome of proposed blocks from malicious validators.
What’s the Difference Between Eth1 and Eth2?
The major difference is the “consensus mechanism” used (confirming a transaction). Ethereum uses proof of work (PoW) while Ethereum 2.0 will use proof of stake (PoS).
The Proof of Work PoW mechanism in its current form is a computationally and energy-intensive process, solving a complex mathematical puzzle currently used by Ethereum miners for validation of transactions. The fastest miner to solve the puzzle gets a reward. It is hoped that the PoW mechanism will foster innovation in the renewable energy sector.
In Proof of Stake, transactions are verified by the Validators instead of miners. PoS is more energy efficient than PoW because securing a blockchain by PoS uses much less computing power for block creation. The Ethereum Foundation estimates that ETH 2.0 Will Use 99.95% Less Energy than ETH 1.0.
Graph Courtesy of Decrypt.co
The Ethereum Mining business using PoW is a very competitive one requiring heavy investment in mining hardware and power consumption; this will change with the switch to Eth 2.0, allowing easier participation.
Ethereum 2.0’s Future
From the end of 2020 to 2022 Ethereum 2.0 is rolling out in 3(and a half) phases:
- Phase 0, which launched in December 2020, implemented the Beacon Chain, the registry of validators, and deployed the Proof of Work mechanism.
- Phase 1 has an anticipated launch in 2021, the first iteration of 64 shards will be launched.
- Phase 1.5 The merge is when the current Ethereum 1.0 chain becomes an Eth2 shard. At this point, validators can both enter and exit the scheme.
- Phase 2 Shard Chains is scheduled for the end of 2021 or 2022, and It will be an upgrade where the 64 shards will be fully functional with smart contract compatibility and other added features.
Graphic courtesy of SCN
ETH 2.0 Transactions Per Second Expectations
Even second-generation cryptocurrencies like Ethereum suffer from limitations in their throughput and scalability. The Bitcoin network can currently only process seven transactions per second and guarantees only 4.6, while ETH can handle between 15-45, this is a roadblock if the usage exceeds this which it occasionally does. The ETH 2.0 network will scale to a potential 100,000 transactions/sec; for comparison, VISA averages 1700 transactions/sec and claims it can do 24,000.
What Will Be ETH 2.0’s Impact?
The Ethereum network users will be happy because ETH will be changing its fee structure, and the users will be paying less for a transaction. This means that the current miners will be making less per transaction for the new inclusion fee rather than Ethereum’s auction-style fee market, but the expectation is that their cost per transaction will go down due to the energy efficiency increases of PoS and the number of transactions will be higher due to their lower cost benefitting both the user and Validator.
ETH 2.0’s lowered costs and higher speed will allow more types of Defi transactions to be possible and give opportunities to new and different kinds of Security Tokens, NFTs, and other Distributed Finance applications that did not make economic sense with ETH 1.0.
ETH 2.0 will also allow for more complex and cheaper smart contracts using zero knowledge rollups and optimistic rollups. With rollups, all transaction data gets bundled and made available on Ethereum in a cheaper way than it would be using regular blockchain-based transactions. The entailed computation load of rollups is done off-chain, further increasing throughput and transactional cost-efficiency.
Sharding will democratize the Network, eventually enabling ordinary users to operate Ethereum on a personal device. Increasing network participants will further decentralize the blockchain. The issuance of ETH will decrease as well; ETH co-founder Vitalik Buterin has said that under ETH 2.0 new token issuance should be between 100,000 and 2 million a year, down from its current 4.7million a year, potentially increasing coin demand.
Summary
The ETH 2.0 upgrade will allow this helpful global decentralized system of smart contracts to move forward with its vision of speed, security, and reliability, reducing its carbon footprint and leveling the playing field for investors to have a democratic say in ETH’s future by staking their ETH. Ethereum 2.0 is a needed upgrade to a blockchain network that is already the most widely used for smart contracts. As the acceptance of cryptocurrencies, smart contracts Dapps and NFTs continue to grow, the scalability of the Ethereum 2.0 network will undoubtedly attract more users making it the service of choice.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, deltecbankstag.wpengine.com.
The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business. Mr. Trehan is a Senior VP at Deltec International Group, deltecbankstag.wpengine.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
