Ethereum's Crucial Proof-of-Stake Upgrade Explained

The Current State of Ethereum

While Ethereum is the second largest cryptocurrency by market capitalization, the Ethereum network leads the pack in terms of transaction volume — commonly exceeding one million transactions per day on its network. Since its release in 2015, Ethereum has become the most actively used blockchain network in the industry. As the first blockchain network to introduce smart contracts, Ethereum also boasts the highly coveted first-mover status in a burgeoning sector of the blockchain industry with almost limitless functions and use cases that include decentralized applications (dApps), stablecoins, decentralized finance (DeFi), non-fungible tokens (NFTs), and more.

With its smart contract capability and open-source nature, the Ethereum blockchain is inherently programmable and has become by far the most popular platform for developers to build dApps. It serves as the primary foundation of DeFi, and most crypto tokens are also created on Ethereum due to myriad tokenization standards that make the process of creating tokens a far simpler task for developers. Ethereum is home to the majority of DeFi projects, dApps, and tokens — in other words, when it comes to blockchain, there’s not a lot that Ethereum can’t do.

Undoubtedly, Ethereum’s first-mover status has been instrumental in its rapid growth and widespread adoption. But being the first of its kind has also presented challenges, namely, the scalability of Ethereum’s legacy Proof-of-Work (PoW) consensus mechanism, a technical infrastructure that becomes more outdated by the day as Proof of Stake (PoS) becomes the industry standard. This reliance on PoW has hindered the scalability of Ethereum as more and more platforms and users build on the network. In fact, the growth of the Ethereum platform has outpaced its ability to reasonably accommodate all of the development taking place. Network congestion, a legacy PoW consensus mechanism, and the explosion of Ethereum-based dApps have caused transaction fees (gas) paid in ether (ETH) to skyrocket.

As such, Ethereum is currently in the midst of an infrastructure overhaul — a project widely referred to as Ethereum 2.0. Ethereum is undergoing development to update its underlying protocol to become a truly modern blockchain designed to accommodate all of the transaction volume required for the network to achieve its vision of becoming the distributed global supercomputer. The core of this update is the long-awaited transition from PoW to PoS — which is a drastically more scalable and resource-efficient blockchain consensus mechanism.

Ethereum 2.0 Progress

It’s important to note that the Ethereum 2.0 update — formally known as Serenity — is being applied while the network remains fully operational; Ethereum will not be closed for business while the upgrades are implemented. With this in mind, the update has been strategically broken down into multiple phases which will take place over the course of several years — each bringing the overall progress of Serenity closer to completion.

The first phase, Phase 0, was initiated on December 1, 2020, although the entirety of its effects won’t be felt for years to come when the disparate phases are finally integrated into a functioning whole. The Phase 0 implementation was preceded by years of careful planning and a number of delays. Its primary purpose was to lay the groundwork for the Beacon Chain — Ethereum’s forthcoming PoS blockchain.

In order for the launch to take place on December 1, 2020, a deposit contract was established on the original Ethereum blockchain where several conditions had to be met by November 24, 2020. It required 16,384 individual users to deposit 32 ETH into the contract. Then an equal amount of ETH would be created on the Beacon Chain, which could then be used as collateral for staking. The deposited ETH is locked — incapable of being removed until the eventual merging of the legacy Ethereum and Ethereum 2.0 blockchains, at which time the duplicate ETH locked in the original blockchain will be destroyed.

Ultimately, more than 20,000 users made the required deposit to become validators before the deadline. With the deposit contract filled, Phase 0 of Serenity was slated to proceed on December 1, 2020.

Phase 0: Ethereum PoS

Phase 0 is arguably the largest overhaul of all Serenity updates. It provides crucial framework for the transition from PoW to PoS. This transition is enabled by three main technological implementations: the Beacon Chain, the PoS consensus mechanism (dubbed Casper), and validator nodes.

The Beacon Chain is an updated version of the Ethereum blockchain that will eventually replace the legacy Ethereum blockchain currently in use. For now, the Beacon Chain is in a trial stage and operating in parallel to the legacy Ethereum blockchain. It is currently not used for sending transactions, storing user data, or supporting smart contracts; its primary purpose is to coordinate validators and oversee their work. In the foreseeable future, however, the Beacon Chain will become the primary settlement layer for the Ethereum network and will be responsible for coordinating the forthcoming shard chains, which will debut in Serenity’s next phase of updates — Phase 1.

The Beacon Chain will also manage the new Ethereum PoS consensus mechanism, Casper. Casper will alter how new blocks of transactions are added to the Ethereum blockchain. Like other PoS blockchains, Ethereum will eventually process and verify new blocks via staking rather than mining. Meaning that in the Ethereum 2.0 protocol, validator nodes will take over the role that miners previously occupied — processing transactions and creating new blocks on the network in exchange for a proportionate cut of the network’s transaction fees.

Ethereum is also prioritizing security by enforcing a higher level of decentralization in Ethereum 2.0 by requiring a minimum of 16,384 active validator nodes — a number exceeding many other PoS ecosystems, and surpassing the roughly 9,800 nodes which secure the legacy Ethereum blockchain. In practice, however, many more validators are actively securing the Beacon Chain with over 79,000 validators staking a total of approximately 2,500,000 ETH as of February 2021.

Ethereum 2.0: A More Resource-Efficient Blockchain

Ethereum’s transition to PoS is intended to offer many benefits: more security, more democratic governance, and significantly more efficient usage of resources. On-chain, this will result in increased throughput, shorter transaction times, and lower transaction fees. Off-chain, the PoS consensus mechanism will be much less resource-intensive from an environmental standpoint — relying on staked collateral rather than computing power to secure the network and process new transactions.

However, the effects of these benefits will not be felt until the Serenity update nears completion and has successfully integrated the technological upgrades of each individual update phase. Such an ambitious overhaul of a massively popular blockchain network requires incredibly careful coordination and implementation. For a closer study of the timeline of execution for Ethereum’s Serenity upgrade towards Ethereum 2.0, our deep dive on the subject is a great place to start.