As early as the launch of Ethereum in 2015, the plan was that Ethereum would eventually move from the current proof-of-work consensus system to a proof-of-stake (PoS) system. After years of research and many delays, the launch of Ethereum 2.0 with PoS is now imminent.

The Ethereum network keeps hitting its limits set by the protocol in terms of transaction capacity. Also, like Bitcoin, Ethereum is currently based on the energy-hungry proof-of-work consensus process. The transformation to Ethereum 2.0 is intended to address these weaknesses.

Ethereum 2.0, or ETH2, is the working name. The project aims to fully realize the transition from mining to staking and ensure that there are no failures or losses. That is one of the reasons why the process consists of three phases.

Starting on December 1, 2020, the transition to Ethereum 2.0 involves three phases and will take several years to complete. Meanwhile, Ethereum 1.x will continue to run. It will only transition to the new system when all changes will be implemented.

Ethereum 2.0 will include several new features, including:

  • Proof-of-Stake consensus process
  • Validators instead of miners, which will receive newly created ETH
  • Validators depositing stakes of at least 32 ETH
  • a parallel blockchain called Beacon Chain
  • Shards, i.e. side chains, which supplement the blockchain
  • Nodes no longer need to store all data

Some details are currently undetermined, as they are still in the development phase.

What has happened so far

The launch of Ethereum 2.0 in late 2020 was preceded by years of research, which resulted in the now emerging sequence of phases. Before the actual project phases can start, the Ethereum team is currently simulating the conditions of phase 0 on several test networks such as Topaz or Görli.

Another test network, Schlesi, has been initiated at the end of April 2020 to ensure client compatibility and is therefore specifically targeted at them. PegaSys, Prysmatic Labs, Lighthouse, Cortex, Lodestar, Teku, Trinity and Nimbus are currently testing on it.

The three phases (see graphic above) consist of launching the Beacon Chain, adding the shards, and state execution.

The most is known about the Beacon Chain so far. Shards are side chains that are added in Phase1. Since they are closely coupled with the beacon chain, much is already known about them. The last phase is currently still covered with many question marks.

The individual phases explained

The Beacon Chain

The Beacon Chain is a blockchain that is added to the previous main chain, and runs in parallel. In its function as a proof-of-stake chain, it is the place where participants already implement the proof-of-stake mechanism. That is, it is already based on staking, but will not enable smart contracts or offer the option for tokens in Phase 0. With this reduced functionality, it virtually only fulfills the criteria a live test for the new consensus procedure.

In order to participate in the staking procedure, so-called validators must deposit 32 ETH on the beacon chain. The exchange takes place one-to-one, i.e. whoever deposits 32 ETH has deposited 32 ETH2 on the beacon chain. This process is irreversible, a retransfer to the Ethereum Chain is impossible.

The choice of which validators are used for voting on new blocks is made by a random generator. This means that the influence of individual players disappears and mergers can be avoided. If a validator acts against the interest of the community, a penalty payment (“slashing”) in the form of ETH2 is due. If the total stake falls below 16 ETH, the corresponding validator is ejected.

Validators are alternately allowed to submit proposals for new blocks and vote on their validity. For each block there is one proposer and several voting participants. The latter submit so-called attestations (testates), which are not themselves stored on the chain.

Instead, the system sends out the requests to validators via peer-2-peer protocol (“aggregate signatures”). This reduces the number of transactions and opens up more storage space overall. Costs in the form of gas are thus also eliminated. Once enough attestations are received, the mechanism appends the block to the blockchain.

The bottom line is that a block on the beacon chain contains the proposer’s signature, enough testates from validators, a bitfield, a pointer to the main chain, and a pointer to the beacon chain.

Sharding

The concept of sharding, which has been eagerly debated in the community for years, will now be manifested in the wake of Ethereum 2.0. Sharding stands for the option to establish side chains in addition to the main chain. This increases the speed of transactions, since not all processes take place on the main chain anymore.

So far, 64 shards are planned. They will only be set up and merged with the beacon chain if phase 0 proves successful. Ethereum 1.0 will run on one of the shards in the long run

In the last step, the Ethereum Virtual Machine will get a new coat of paint. From this point on, it will be possible to execute smart contracts on Ethereum 2.0 again. From this point on, the importance of Ethereum 1.0 will slowly decrease.

With Ethereum 2.0, the creators are taking some risks. Certainly, this is done consciously, also and especially to bring the community as a whole forward. Nevertheless, some considerations fall into the balance.

When ETH and ETH2 exist simultaneously, the money expansion increases as new ETH is created on both the old and new chains. The changes may also have an effect on the price, as ETH is tied up on the beacon chain through direct, irrevocable exchanges. And ultimately, it’s not clear – although it’s very far ahead – when exchanges will be able to add ETH2 to their portfolios.

Staking in ETH 2.0 explained in detail

Staking follows different laws than mining. Instead of miners, validators confirm the blocks on the chain. In order to be selected as a validator, interested parties deposit a sum of coins or tokens. This amount is “frozen” and cannot be used for any other purpose. If a loss of value occurs, it must first be triggered before a sale is even possible.

The guarantee is called a Stake because the validator uses it to symbolize the personal share in the project. Minimum stakes often represent large sums of money. This is to ensure that there is a personal relationship with the cryptocurrency or the blockchain, respectively.

The stake is subject to penalties or withheld completely if the validator has performed a malicious act. This approach, also known as a slashing program, encourages motivation to implement good intentions.

Validators must set up nodes and always be online. They are selected based on certain criteria, for example:

  • Stake as a percentage of total sales
  • Purely by chance

Often validators form staking pools. On the one hand, this contradicts the idea of decentralization, but on the other hand, it makes administration easier.

Staking offers many advantages over mining. Significantly lower energy consumption, access even for people without more powerful end devices, random selection of stakers and the personal share in the project clearly distinguish it from the now highly commercialized mining approaches.

But staking does not come without drawbacks. When coins are tied up, they cannot be deployed. This affects the ability to earn interest, which is potentially higher than the rewards. At the same time, fluctuations in value cannot be mitigated through mechanisms such as buying and selling or lending. Furthermore, many staking mechanisms are not yet mature. Especially for Ethereum, many details still need to be clarified.

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