Ethereum 2.0

Ethereum, created by Vitaly Buterin, is a public blockchain 2.0 that allows the development of smart contracts and applications called Dapps. Tens of thousands of developers are creating Ethereum-based applications for finance, entertainment, cloud computing, and real estate. The Ethereum developer community is also one of the largest and most active in the world.

Ethereum has undergone four major upgrades since its public launch in July 2015. Homestead was introduced in March 2016, Metropolis Byzantium in October 2017, Metropolis Constantinople in February 2019, and Stambul in December 2019. Thanks to its constant efforts, the company now plans to move from its old version to the new one, which is Ethereum 2.0.

Anyone who has followed Ethereum over the years knows the entire history of the project's ups and downs, broken promises, missed deadlines, and vague messages about future plans. The cost of decentralization has always been high, and the level of the platform has never allowed big applications like YouTube or Twitter to run on its network. But with Ethereum 2.0., everything will change.

What is Ethereum 2.0?

At the beginning of December 2020, the Ethereum 2.0 upgrade began, designed to increase the scalability and security of the network. Notably, the network will switch from the Proof-of-Work (PoW) consensus algorithm for block validation and coin mining to the Proof-of-Stake (PoS) algorithm, since the PoW system has always been criticized for requiring huge computing power and huge energy consumption to “mine” new coins.

As described in a post on the Ethereum Foundation blog, the update includes the so-called PoW “Eth1” chain, applications and tools, and “Eth2” layers of software and protocols.

Eth1 is primarily about working and upgrading Ethereum's user layer: states, transactions, accounts, and everything that the end user takes into account when interacting with Ethereum. Eth2, on the other hand, is a series of upgrades designed to redefine Ethereum's core consensus: moving away from energy-intensive, inefficient proof-of-work to more sustainable, scalable proof-of-ownership.

The announcement also says:

“This relative problem isolation (user-level and core-level consensus) has allowed Ethereum (Eth1) to continue to work while supporting a radical revision of Ethereum's core consensus (Eth2) with relatively minimal risk.

In the future, this problem isolation may encourage greater specialization in the stack and software components. Eth1 developers and customers who support Ethereum today can still focus on optimization and stability at the user level, while Eth2 development teams can do what they know best - create a complex consensus based on proof-of-ownership.”

As part of the upgrade and transition to PoS, the Berlin hard fork (blockchain splitting) was activated on April 15, 2021, on block 12.244.000. The upgrade includes contract optimization to improve efficiency, which resulted in sharply lower transaction fees and updates on how the Ethereum Virtual Machine (EVM) reads the code and makes changes to prevent denial of service attacks (DDOS).

Ethereum miners (validators) and node operators must upgrade their Ethereum clients, as any nodes that have not been upgraded will be dropped, and they may be stuck in an incompatible chain, preventing them from working on the network or sending Ethereum.

After upgrading the network, Ethereum, in particular, is proving its use case, and given how developers are piling on improving the platform, it is not surprising that it is so popular with investors.

Eth2 is created by 9 different engineering teams. These teams are funded by the Ethereum Foundation and the Ethereum community and are responsible for creating various types of clients that connect to the Ethereum network. Different clients are designed for different use cases, for example, one client is optimized for smartphones, and another is created for large enterprises. It goes without saying that the Eth2 teams are the most experienced and talented protocol developers in the industry.

Ethereum 2.0 and its phases

The latest Ethereum upgrade aims to re-engineer the entire existing Ethereum platform to launch its new, more scalable version. The entire upgrade consists of several phases, the last of which is likely to be launched next year. Now let's discuss these three phases to understand Eth 2.0.

• PHASE 0

Phase 0 is called the “signal chain” and was launched in December 2020. It is intended to serve as a "command and control" center for the ETH2.0 network. The Beacon network went live in April 2020 on the Sapphire test network. The Onyx test network was released in June and had 20 000 validators by the end of the month.

Developers are currently using the Altona test network. The purpose of the beacon chain was to organize the validators and assign them to different chains of segments. Transactions have to be processed by a chain of segments for a certain period of time, and then randomly transferred to another segment. Consequently, it will implement the basics of PoS into the system. Ethereum's existing PoW blockchain will continue to exist. Since this is the initial stage, it will not be able to host dApps, perform smart contracts, or process transactions.

• PHASE 1

Phase 1, scheduled for 2021, concerns the deployment of segment chains that will make the Ethereum network more scalable. Developers will launch sharding chains. Shortly thereafter, the current core network will be converted to a shard, completing the transition to share confirmation.

It is important to note here that Ethereum's PoW can currently process one consecutive block at a time. But with the launch of Phase 1, representing chains of segments, Ethereum can process multiple transactions simultaneously. These parallel calculations will increase the transaction speed from tens to thousands, and maybe even to tens of thousands of transactions per second.

• PHASE 1.5

Phase 1.5 aims to merge Ethereum's original PoW with the new PoS chain, which means that users will be able to use their ETH in the latest version of Ethereum, that is 2.0, without any additional effort, or risk of their ETH becoming obsolete. At first, we will see ETH1 as a separate segment on the network, but it will eventually be converted into a runtime environment in Phase 2.

• PHASE 2.0

Ethereum 2.0 is due to be launched in 2022, although no date has been set because it is still in the research and development stage. To fully launch ETH2.0, there is still a lot of work to be done and it will take quite a while to implement it, but Phase 2 is expected to process transactions, execute smart contracts and host decentralized applications (dApps). This stage will function to create a runtime environment that can mimic the protocols of another blockchain, such as Bitcoin or Zcash. The plug-n-play algorithm system is expected to be the same as Hyperledger.

Summing up

At this point, Ethereum's momentum seems to be unstoppable as it moves from a “proof-of-work” to a “proof-of-ownership” blockchain. According to Etherscan, more than $18 billion has been invested in the Eth2 deposit contract since the launch of the Ethereum 2.0 Beacon Chain in December. Ethereum's next major upgrade, London, is scheduled for July 14.

The huge interest in the project is also driven by the fact that investors are considering some of the lofty promises of ETH2 as the network moves toward consensus changes, not to mention the continued strong growth of DeFi.

The Ethereum ecosystem has become the main blockchain that has attracted the eyes of the entire technological and financial world, and great hopes are pinned on it.

In conclusion, Ethereum 1.0 will continue to exist as it is now, and will undergo improvements that will eventually allow it to become a new generation blockchain. The introduction of Eth 2.0 will open doors of opportunity for the entire Ethereum community and developers as well as institutional investors.