Ethereum 2.0: A Guide to the Proof-of-Stake Transition

Live since 2015, Ethereum is a blockchain-enabled architecture for a distributed world computer that connects users to a vast ecosystem of smart contracts. The intended use case for Ethereum is entirely different from that of Bitcoin, which functions as a digital money network that is limited in its ability to accommodate multiple types of digital assets and applications. Ethereum, in comparison, can integrate digital assets and applications via immutable, blockchain-based smart contracts — which are composed of self-executing code — that carry out a set of instructions when specific conditions are met. Ether, or ETH, Ethereum’s native cryptocurrency, is used to pay for the cost of interacting with those smart contracts. This payment is referred to as gas.

At the time of this writing, there are nearly 2,000 decentralized applications (dApps) running on the Ethereum blockchain. The network has been strained by the weight of this heavy user volume, which has resulted in transaction delays and spiking gas fees. As a result, developers all over the world have sought to create a scalable solution so that the Ethereum network can operate at the level required to furnish a global transaction layer or world supercomputer. The open-source, distributed Ethereum developer community, guided by the Ethereum Foundation, ultimately decided that the best approach for resolving this scalability issue was to completely revamp Ethereum’s underlying network architecture. Enter Ethereum 2.0.

Ethereum’s Long-Awaited Upgrade

Ethereum 2.0 is a more scalable and robust version of the current Ethereum network that will be implemented via a multi-phase update package called Serenity. At its core, Serenity introduces two major changes to Ethereum: the transitioning of the blockchain from a Proof-of-Work (PoW) consensus algorithm to a Proof-of-Stake (PoS) model, and the introduction of Ethereum sharding, which will improve the network’s throughput by breaking down its data into more manageable sections. Because of this update’s structural complexity, Serenity will launch in four phases.

• Phase 0: Live as of December 1, 2020, this phase involves the launch of Eth2’s Beacon Chain, which is the coordination mechanism of the Eth2 network and uses a type of Proof of Stake called Casper. Casper introduces validators, which are responsible for processing transactions and creating new blocks on the network in exchange for a proportionate cut of the network’s transaction fees. The Beacon Chain will store and manage a registry of all the network’s validators. Upon completion, this protocol is expected to be thousands of times more resource-efficient than Ethereum’s current structure. However, in order to ensure operational continuity, the Beacon Chain blockchain will run alongside the existing PoW Ethereum 1.0 blockchain during this stage of the Serenity rollout.

• Phase 1: Phase 1 creates shard chains that connect the legacy Ethereum network to the Eth2 blockchain. Shard chains are created by sharding, or partitioning, the blockchain’s data processing responsibilities into smaller pieces. This decreases the workload of the network’s validators by enabling each validator to only store and manage one shard of the network instead of the whole blockchain. Through this process the Ethereum blockchain will be separated into 64 shards, of which Ethereum 1.0 will be one. During Phase 1, this sharding process will remain a trial run rather than a fully implemented network merge.

• Phases 1.5 and 2: This combined phase marks the full merging of Ethereum’s disparate network shards. Phase 1.5 will create a bridge between Ethereum 1.0 and Ethereum 2.0, allowing users to send ERC-20 tokens from one blockchain to the other. Phase 2 will enable native dApp deployment on Eth2 and the ability for smart contracts deployed on any of the shards to communicate with Ethereum smart contracts on any other shard. How exactly this cross-shard interoperability will actually be achieved remains uncertain.

• Phase 3 — Phase 3 is the least-defined phase of the Serenity upgrade, and generally refers to any other future features or upgrades developers will need to deploy in order to ensure a smooth and secure transition to Eth2. This phase may entail integrating new privacy technologies or adding more shards to the Beacon Chain as required.

Main Benefits Of Ethereum 2.0

The Serenity upgrade is an extensive undertaking. It is expected to result in a much faster, more efficient, and increasingly scalable Ethereum platform that’s capable of handling the ever-growing number of enterprise and individual users.

Interest in decentralized finance (DeFi) has surged in recent years. As of October 2020, 96% of all DeFi transactions occurred on the Ethereum network, which has led to network congestion and gas fee volatility. The planned move to Proof of Stake and shard chains will substantially increase the network’s throughput, or the number of transactions that take place every second. According to the developers working on Ethereum 2.0, while Ethereum 1.0 can handle only about 30 transactions per second (TPS), Eth2 is purportedly designed to handle up to 100,000 TPS.

Eth2 is also designed with security in mind. As of December 2020, Ethereum 1.0 was maintained by approximately 9,800 nodes. The Ethereum 2.0 network will enforce a higher level of decentralization by requiring a minimum of 16,384 validators within the network. The more decentralized a protocol, the more secure it is, since malicious actors would have to compromise or avoid the detection of more stakeholders.

Ethereum 2.0 Was Always the Goal

Even before Ethereum officially launched in July 2015, Vitalik Buterin, who drafted the original Ethereum whitepaper, hoped to design a flexible yet scalable blockchain that was less energy-intensive and costly than existing Proof-of-Work systems. In other words, Ethereum 2.0 is not only a highly anticipated upgrade — it also represents the actualization of an original goal envisioned by Ethereum’s initial architects.

Since Ethereum launched, its developers have executed smaller upgrades intended to improve the blockchain’s functionality while preparing it for the more ambitious Serenity upgrades. While Eth2 increases the network’s throughput and decreases the computational load of each individual validator node, to date the implementation process for these upgrades has been marked by some controversy. The Serenity upgrades have been delayed several times, which has raised concern about the practicality of the proposed improvements. However, several testnets for Ethereum 2.0 were deployed in 2020, and according to most Ethereum developers, Phase 1 is on track to launch in 2021.

The Serenity upgrade is an ambitious new chapter for a project that has continued to see immense growth over the years, both with respect to user volume and applicability. With these upgrades, Ethereum should be significantly better equipped to support its existing dApp ecosystem as well as an entire constellation of new products and services that have yet to be imagined.