Last month, the news that the Beacon Chain had finally arrived enjoyed detailed coverage from both industry media outlets and more mainstream publications. The majоrity of reports rightfully pointed out that the eagerly anticipated launch marked only the first step in realizing the ambitious Ethereum 2.0 vision for the world’s second-largest blockchain network. Nevertheless, it was a monumental event that concluded years of fascinating research and paved the way for a bold new chapter in Ethereum’s development.
Limechain’s own experts predicted that Ethereum 2.0 would be one of the defining blockchain trends of 2021. To understand why that’s likely to be the case, we need to understand what Ethereum 2.0 is meant to be and what it aims to achieve. But first, a quick refresher on how the original came to be.
Ethereum was designed to provide a solution to a particular problem. Stepping on the foundation laid by Bitcoin, Ethereum had an even more ambitious goal than its predecessor. That goal has been broadly described as decentralizing the Internet or building a decentralized world computer. Those who find such descriptions to be somewhat vague need to look no further than Ethereum’s creator Vitalik Buterin, who offers a more focused explanation of the protocol’s purpose and aim.
“The core idea behind Ethereum is [to have] a general-purpose blockchain. We can have a blockchain where instead of the blockchain working like a Swiss Army knife where you have five different tools for five different categories of applications, you have a blockchain that understands a general-purpose programing language,” Buterin said in an interview at TechCrunch’s Disrupt event in 2017. He likened the platform to a mobile phone operating system like Android or iOS, which is capable of running many different apps.
“This is the kind of general-purpose flexibility I was trying to bring to the blockchain world,” Buterin added.
Today, more than three years after that interview and over half a decade since Ethereum was created, it’s fair to question whether the protocol has lived up to the lofty ambition of its creator. The sheer number of dApps running on Ethereum points to an affirmative answer. However, a closer inspection might lead you to the conclusion that the more appropriate response might actually be “Well, perhaps not just yet”.
Solving the scalability trilemma
While Ethereum has certainly enabled plenty of innovation in the blockchain space, it has also had to deal with the limitations inherent to the design principles introduced by Bitcoin. Issues related to scalability, power consumption, and others have been limiting Ethereum’s versatility and utility for supporting decentralized apps.
More specifically, early iterations of blockchain technology have been long struggling to solve a fundamental problem known as the scalability trilemma. In general, every blockchain protocol aims to excel in three main areas – scalability, decentralization, and security. In an ideal scenario, a protocol would perform strongly in all three areas, but in practice, no blockchain has been able to achieve that. A number of existing solutions have been able to produce impressive results in a couple of these areas, but typically at the expense of the third one.
This is the problem Ethereum 2.0, often referred to as Eth2, aims to solve. It is not a single thing, but rather a series of interconnected updates all contributing to a singular vision of a more scalable, more secure, and more sustainable Ethereum platform. Multiple development teams across the Ethereum community are working to bring that vision to life. On the following pages, we’ll be taking a look at these efforts.
Proof of stake
Like most early iterations of blockchain technology, Ethereum relies on a proof-of-work consensus mechanism to validate transactions. What makes PoW algorithms useful for this purpose is that adding new blocks on the blockchain requires significant amounts of computational work, but verifying that the process has been followed correctly requires little effort. The people adding new blocks, colloquially known as miners, are rewarded for their efforts with crypto tokens native for the particular blockchain platform, for example, Ether, Bitcoin, etc. This mechanism discourages miners from trying to cheat the system as recording fraudulent data on the blockchain can be easily detected and leaves bad actors without token rewards to cover their hefty electricity bills.
But while proof of work was instrumental for establishing early blockchain technology, it also introduced a couple of major problems to the fledgling blockchain sector. For starters, the amount of computational work required for creating new blocks meant that miners with more computing power had a better chance of claiming rewards. This prompted the formation of large mining pools, which has, in turn, decreased the level of blockchain decentralization.
The second issue stems from the energy-intensive nature of PoW algorithms. The large amount of energy needed for PoW-based validation makes blockchain protocols less environmentally friendly.
Ethereum 2.0 aims to solve these problems by switching to a proof-of-stake consensus mechanism. Proof-of-stake requires users to stake ETH to become validators in the network. Validators are chosen at random to create new blocks and also have to validate the blocks they do not create. Both creating and validating blocks are rewarded with ETH.
Under proof-of-stake, creating new blocks does not require significant amounts of computational power, as selecting block producers is accomplished with a fairly complex random algorithm, unlike the mining in the PoW consensus algorithm. This will allow the protocol to become more environmentally friendly while remaining sufficiently decentralized.
Proof-of-stake is also set to improve Ethereum’s security by introducing powerful disincentives against attacks. Validators who engage in fraudulent activities, such as creating or validating malicious blocks, risk losing their ETH stakes, in contrast to PoW, where you do not get your farm burned down if you try to act maliciously.
With the launch of the Beacon Chain last month, the Eth2 project officially entered its ‘Phase 0’. While it does not have any effect on the current Ethereum protocol, the Beacon Chain is the foundational component of Eth2, the coordination mechanism responsible for bringing all elements of the new network together. A network of validators that makes proof-of-stake possible by ensuring that newly created blocks are valid and approving rewards. It also paves the way for the next big Ethereum 2.0 upgrade.
Sharding is Eth2’s solution to Ethereum’s scalability problems. Sharding is a common concept in computer science that involves splitting a large database into smaller chunks to spread the load.
The concept is not easily applicable to PoW blockchain protocols because smaller chains are inherently more vulnerable to 51% attack than larger ones. However, proof-of-stake and the Beacon Chain will ensure that security across the Ethereum 2.0 network is not compromised. In the future, the Beacon Chain will also be tasked with randomly assigning validators to different shard chains, thus minimizing the likelihood of bad actors successfully coordinating a 51% attack.
The Eth2 sharding upgrade will include introducing 64 new shard chains and is expected to ship later this year.
The conclusion of the Ethereum 2.0 project promises to be an event worthy of a Hans Zimmer score. Expected to come sometime next year, the so-called docking upgrade will merge the current Ethereum mainnet with Eth2’s Beacon Chain and schard chains. This will essentially complete Ethereum’s transition to proof-of-stake and usher in the new chapter for the second most popular blockchain protocol. A chapter, which will hopefully see Ethereum fully realizing its potential to power the first truly decentralized world computer.