It’s been a long time coming, but Ethereum 2.0 is finally up and running. The major update aims to address the network’s scalability and security through a number of changes to its infrastructure—most notably, the switch from a proof of work consensus mechanism to a proof of stake model.

What is Ethereum 2.0?

Ethereum 2.0, also known as Eth2 or “Serenity”, is an upgrade to the Ethereum blockchain. The upgrade aims to enhance the speed, efficiency, and scalability of the Ethereum network so that it can process more transactions and ease bottlenecks.

New Ethereum 2.0 calculator can show you 10 years of staking rewards

Ethereum 2.0 is launching in several phases, with the first upgrade expected to launch towards the end of 2020. 

How does Ethereum 2.0 differ from Ethereum?

While Ethereum 1.0 uses a consensus mechanism known as proof of work (PoW), Ethereum 2.0 will use a proof of stake (PoS) mechanism. 

How does proof of stake differ from proof of work?

With blockchains such as Ethereum, there is a need to validate transactions in a decentralized way. Ethereum, like other cryptocurrencies, currently uses a consensus mechanism known as proof of work (PoW).

In this system, miners use computer hardware processing power to solve complex mathematical puzzles and verify new transactions. The first miner to solve a puzzle adds a new transaction to the record of all transactions that make up the blockchain. They are then rewarded with cryptocoins. However, this process can be energy-intensive.

Proof of Work vs Proof of Stake, what is the difference?

Proof of stake (PoS) differs in that instead of miners, transaction validators stake crypto for the right to verify a transaction. These validators are selected to propose a block based on how much crypto they hold, and how long they’ve held it for.

Other validators can then attest that they have seen a block. When there are enough attestations, a block can be added to the blockchain. Validators then are rewarded for the successful block proposition. This process is known as “forging” or “minting”.

The main advantage of PoS is that it is far more energy-efficient than PoW, as it decouples energy-intensive computer processing from the consensus algorithm. It also means that you don’t need a lot of computing power to secure the blockchain.

How will Ethereum 2.0 scale better than Ethereum 1.0?

One of the main reasons for the upgrade to Ethereum 2.0 is scalability. With Ethereum 1.0, the network can only support around 30 transactions per second; this causes delays and congestion. Ethereum 2.0 promises up to 100,000 transactions per second. This increase will be achieved through the implementation of shard chains.

The current Ethereum set-up has a blockchain consisting of a single chain with consecutive blocks. This is secure, but very slow and not efficient. With the introduction of shard chains, this blockchain is split up, enabling transactions to be handled in parallel chains instead of consecutive ones. This speeds up the network, and can scale more easily.

How will Ethereum 2.0 be more secure?

Ethereum 2.0 has been devised with security in mind. Most proof of stake networks have a small set of validators, which makes for a more centralized system and decreased network security. Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized—and hence, secure.

Vitalik Buterin: Proof of stake will make Ethereum safer

However, according to Lior Yaffe, co-founder of Jelurida and lead core developer of the Ardor and Nxt blockchains, there is a potential vulnerability that focuses on the level of participation rates in the network.

Security audits of Ethereum 2.0 code are being carried out by organizations including blockchain security firm Least Authority. 

The Ethereum Foundation is setting up a dedicated security team for Ethereum 2.0 to research possible cybersecurity problems in the cryptocurrency. In a tweet, Ethereum 2.0 researcher Justin Drake stated that the research will include “fuzzing, bounty hunting, pager duty, cryptoeconomic modelling, applied cryptanalysis, formal verification”. 

How is the Ethereum 2.0 upgrade going to take place?

Following a series of testnet launches, Topaz, Medalla, Spadina and Zinken, the full roll-out of Ethereum 2.0 will take place in three phases: Phase 0, 1, and 2 (developers like to count from zero). Phase 0 launched on December 1, 2020, with the other phases set to arrive in the following years.

Phase 0 sees the implementation of the Beacon Chain; this stores and manages the registry of validators as well as deploying the proof of stake (PoS) consensus mechanism for Ethereum 2.0. The original Ethereum PoW chain will run alongside this so there is no break in data continuity.

Ethereum: the next five years

Phase 1, due in 2021, will see the integration of proof of stake shard chains. The network is expected to launch with 64 shards (enabling 64 times more throughput than Ethereum 1.0) though at launch they won’t support accounts or smart contracts.

Phase 1.5, an interim update due in 2021, will see the Ethereum mainnet officially becoming a shard and transitioning to proof of stake.

Ethereum 2.0 Goes Live With Launch of Beacon Chain

Phase 2, slotted to launch in 2021/22, will see shards becoming fully-functional and compatible with smart contracts. It also involves adding Ether accounts and enabling transfers and withdrawals, implementing cross-shard transfers, and contract calls. It will build execution environments for scalable apps that are built on top of Ethereum 2.0.

When was Ethereum 2.0 Released?

Ethereum 2.0’s Beacon Chain, the first stage in the release of Ethereum 2.0, went live at 12:00 pm UTC on December 1, 2020.

Speaking on the Ethereum 2.0 livestream, Danny Ryan, core researcher at the Ethereum Foundation, noted that, “Key to the health of this thing is we see participation over two thirds.”

With the launch of the beacon chain confirmed, there are more than 21,000 active validators on the network at time of writing, with each epoch seeing a success rate of over 80%.

The beacon chain will initially exist separate to the current Ethereum mainnet, before the mainnet is “docked” to the proof-of-stake system.

The first eligible block was slot 1, and its validator signed it with a cryptic message: “Mr F was here.”

The successful launch was celebrated by luminaries in the Ethereum community, including Vitalik Buterin and Joseph Lubin.

The launch follows a tense month of preparation, in which certain criteria had to be met; following the release of the deposit contract on November 4, there needed to be 16,384 validators on the network by November 24, each staking 32 ETH, for a total of 524,288 ETH.

Initially, the pace of staking was slower than expected, with a Twitter poll conducted in early November revealing that half of those polled did not intend to make a 32 ETH deposit by the deadline of November 24; just 21.3% stated that they either had staked, or intended to stake, 32 ETH.

Among the reasons given were the expense—32 ETH is over $19,000 at time of writing. The community rallied, with Vitalik Buterin committing 3,200 ETH, currently worth $1.9 million, and DARMA Capital allocating $50 million of its own ETH holdings so that institutions and individuals could contribute to Ethereum 2.0 while staying liquid.

With a potential delay to the launch looming, at the eleventh hour a late surge of validators committed to staking. Just 24 hours before the deadline, only around 50% of the target had been reached; fortunately for Ethereum 2.0, by November 24 enough validators had staked to commit to launching the beacon chain.

The future for Ethereum 2.0

Ethereum co-founder Vitalik Buterin has laid out a roadmap of how the next five to ten years could pan out for Ethereum 2.0.

He says that over the last two years there has been a “solid shift from “blue sky” research, trying to understand what is possible, to concrete research and development, trying to optimize specific primitives that we know are implementable and implement them.”

He says that the bulk of the challenges is now “increasingly around development, and development’s share of the pie will only continue to grow over time”.

In June 2020, Buterin noted that Ethereum 2.0 will need to rely on current scaling methods such as ZK-rollups for at least two years before implementing shard chains.

How could Ethereum 2.0 affect Ethereum’s price?

For some, the launch of Ethereum 2.0 is exactly what the cryptocurrency needs.

“Once Ethereum has scalability via layer-2 tech or ETH 2.0 all questions are answered,” Jamie Anson, founder of Nifty Orchard and organizer of Ethereum London, told Decrypt. “The firing gun will go off.”

In other words, more scalability means more usage, which, in turn, means more demand. Which—at least in theory—should propel the price of Ethereum to new heights. “By the time ETH 2.0 and rollups work together there will be 100,000 transactions per second capacity. That’ll mean a completely seamless experience for the next billion people,” Anson added.

Matt Cutler, CEO of Blocknative, a company focusing on the complexity of the mempool, is equally optimistic, particularly as gas fees may decrease with the launch of Ethereum 2.0. “Our customer base seens reducing transaction fees and increasing network throughput as big opportunity areas moving forward,” he told Decrypt.

Moreover, the ecosystem taking notice of major milestones will reinforce Ethereum developer momentum. “This will have a long-term bullish impact on the price of ETH—notwithstanding the short-term volatility, which is part-and-parcel of crypto-asset valuations,” Cutler added.