Ethereum 2.0 – What’s the Hype?

After years in the making, finally, the much anticipated Ethereum 2.0 is here. On Dec 1, 2020, at noon UTC, its first phase, named the Beacon chain, was launched. The launch went through unhindered and swiftly reached the required staking rate to attest a block. Ethereum 2.0 was in the works since 2015, even before the existence of Ethereum 1.0. So what was the thought process behind it? Why was there so many years of delay? Now that it is released, what are its plans?

Ethereum Timeline and Brief History

Ethereum Blockchain was the brain-child of Vitalik Buterin, whose vision is to use the platform as a “world computer.” As of Dec 2020, 3017 decentralized apps or Dapps are running on the Ethereum network. Every month, more than 20 Dapps are consistently getting added to the network.

Source: State Of The Dapps

On average, over 1.15 million transactions happen on the Ethereum network daily. The transaction levels are up from 631,603 daily average a year ago, up by 82.21% from one year ago.

Source: ycharts.com

However, scalability has always been a concern for the network. In 2017, Cryptokittes, the popular game built on Ethereum, created such a craze among the crypto community that trading of these kitties severely flooded the network. Today, the burgeoning interest in the swiftly growing decentralized finance market is hobbling the platform. Today, over 80 percent of the DeFi platforms, around 200 of them, run on Ethereum. The increased use of the system warranted the need for a faster and scalable network.

Source: Coinmetrics and Coindesk Research

There are four main phases so far in the Ethereum life cycle – Frontier, Homestead, Metropolis, and Serenity. The Frontier stage saw the light of the day of July 30, 2015, marking the birth of Ethereum 1.0. The last phase, Serenity that ushered in the Ethereum 2.0, represents the shift of the network to PoS. The first three stages were upgrades on the existing network. However, Serenity has been launched as a different network with the imminent merge of the two networks.

Now, What Is Ethereum 2.0?

Since the inception of Ethereum 1.0, the core developers have been mulling over improving the scalability and usability of the network. They intended to upgrade to an energy efficient proof-of-stake (PoS) driven platform. Buterin himself has been keen on designing a Blockchain system that does not rely on resource intensive computations. He never considered the proof-of-work (PoW) driven mining systems as sustainable. As early as in 2014, he introduced an alternative PoS based approach called “Slasher.” 

However, these algorithms, though cost-effective, are more complex to design compared to PoW systems. The challenge is to determine the right amount of incentives, enough to keep the validators honest and motivated, yet ensure the tokens do not lose their value due to excessive supply.

The Ethereum developers took on the challenge head-on, and the result was Ethereum 2.0. The design, development, and testing of this new concept was not simple. After spending years in design and development, the developers started an extensive testing of the platform earlier this year.

Multiple testnets – Spadina, Zinken, Medella – were launched by the Ethereum Foundation members in partnership with several of their clients. After rigorous testing of the new ecosystem and fixing the encountered issues, Ethereum 2.0 was ready for the take-off. 

In Nov 2020, a deposit contract was deployed on the Ethereum 1.0 network for collecting the stakes of the potential validators. The users intending to earn rewards for securing the Ethereum 2.0 network and processing the transactions had to deposit 32 Ether (Eth) each in this contract. A total of 16,384 deposits of 32 Eth amounting to 524,288 Ether were required to be collected by one week before the planned Dec 1 launch. 

For the amount of Eth stored in this contract, an equal volume of Eth was created in the Ethereum 2.0 chain. The users who had locked their Eth in the deposit contract became the de facto validators in the 2.0 system. The duplicate Ether in the 2.0 chain served as their collateral. At present, the Ether from the 2.0 chain cannot be moved to the 1.0 network. It will continue until the chains merge in the future, and the duplicate Eth on the original platform (1.0) is destroyed.

With just a few hours to spare, on Nov 24, the deposit contract managed to acquire enough Ether needed for the lift-off. As a result, Ethereum 2.0 was born on Dec 1, 2020.

What Are the Various Phases of Serenity Deployment?

As launching an entirely new network with the ability to merge with the existing one can be quite complicated, the developers have decided to release the new platform in phases. Serenity has three main stages with an add-on phase that is still being worked out.

Source: Ethereum.Org

Phase 0 – Beacon Chain

The Rollout of the Casper PoS Consensus Algorithm

Beacon Chain is the first milestone in the Ethereum 2.0 roadmap. Here, a version of the PoS consensus algorithm called “Casper” was deployed. Buterin, along with a fellow-researcher, Vlad Zamfir, developed this algorithm. In this phase, users cannot deploy their smart contracts or transact their Ether. This phase is essentially a bootstrapping stage, where the validators get familiarized with the operations of the network. They will focus on coordinating with other validators and monitoring their work. They perform two functions – propose new blocks and attest them. For this effort, the validators earn rewards. Also, for the amount they have staked, they will gain an annual interest. However, for now, they cannot transfer their earned Ether to the original network. Similarly, no transactions of the 1.0 chain can move to this network.

Phase 1 – Shard Chains

The Deployment of 64 Shards of the Network

Phase 1 will introduce sharding. It is a vital step towards addressing scalability issues. Sharding potentially means, the single Ethereum 2.0 network will be divided into 64 micro-networks. Each micro-network is a shard. Each shard will have its own validators. Instead of the entire network processing all transactions, each of these smaller units will validate different transactions separately and add the blocks concurrently, thereby improving the network throughput. 

The validators for each shard are selected randomly to ensure no collusion between them is possible. Hence, by sharding, the transaction load will get shared among the 64 micro-networks. This mechanism reduces the load on the network and achieving scalability. The beacon chain will act like a bridge between these shards and will contain a unique summary of shard data in one place. In this phase, the networks will not have smart contracts and will only test data movement between shards and aggregation of shard data at the beacon chain. 

Phase 1.5 / 2 – The Docking

Merge the Two Networks and Enable All Developers to Deploy and Run Their Decentralized Apps on the 2.0 Network

In phase 1.5,  the two separate Ethereum environments will be merged into a single network. How will the transition be done? How will the duplicate Ether burned? – all these aspects are still being designed.

By the time we reach phase 2, the beacon chain and sharding feature would be thoroughly tested, and the two networks would have been merged. In this phase, users will be able to deploy their smart contracts on any of the 64 shards. Additionally, in addition to currently supported Solidity, Ethereum 2.0 would enable Dapps to be written in any programming language.

Phase 3 – Final Improvements and Updates

Implement Zk-STARK and Improve Scaling Mechanism

Phase 3 is still very nebulous at the moment. As per Buterin, this stage will focus on any improvements, such as adding more shards or implementing ZK-STARK. ZK-STARK is one of the upcoming zero knowledge cryptographic proof technology that enables users to share validated data with a third party without revealing it to them.

How Do Validators Make Money?

For the Ether deposited as a stake, the validators will earn rewards in the form of annualized interest. Additionally, for every block proposed and attested every six minutes, the validators will earn rewards. According to some estimates, the validators will initially get close to 20 percent interest on their staked Ether. The interest rate will decrease as the number of validators increases. Though validators will be earning less compared to the miners on the original chain, they will incur significantly less costs of hardware and resources compared to the mining.

What’s Next?

According to Buterin, implementing the entire Ethereum 2.0 roadmap would take five to ten years. He anticipates changes to the roadmap along the way. It is also unclear as to how long each stage will take to complete. A rough estimate is about six to eight months. 

Meanwhile, several crypto firms have found a new revenue stream in the form of staking services. Exchanges and wallets, including Kraken, OKEx, Coinbase, MyEtherWallet, are announcing services where their users can deposit their funds as stakes on the Ethereum 2.0 chain.

How Ethereum 2.0 will evolve in the future is to be seen. The start to it has been very well received so far.

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