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Launch of Ethereum 2.0: What are the implications and how is RioChain getting involved

The transition to Ethereum 2.0, one of the most anticipated events of the year, is starting today, on December 1st. Ethereum 2.0 includes several upgrades that aim to enhance the system’s privacy and make the blockchain more sustainable, scalable, and secure. Ethereum 2.0 is the result of four years of research and development that answer frustrations and bugs that clients, users, and Dapp developers have encountered over time. The transition is a massive project that will take time (a few years according to the company) to fully migrate. In this article we will summarise what upgrades the new Ethereum will provide, and how this could affect both the crypto market as well as the blockchain space, as well as the involvement of RioDeFi in this project.

CURRENT SITUATION

As of October 2020 and according to Consensys, 2,652 Dapps (1) have been built on Ethereum 1.0, making it the most popular blockchain for developers looking to host their projects on an existing infrastructure. However, there is no perfect blockchain and this is no exception for Ethereum. More precisely, the blockchain:

  • lacks interoperability, e.g. it cannot communicate with other blockchains such as Bitcoin;
  • has a limited number of transactions per second, currently at 15 TPS;
  • requires expensive transaction (gas) fees;
  • experiences congestion due to its traffic and the complexity and technical requirements of running nodes;
  • its PoW consensus consumes too much electricity.

Ethereum 2.0’s vision is to remain decentralised while increasing the number of transactions per second and number of nodes “without increasing the size of the nodes”. It will attempt to ‘’transition all users and assets to an entirely decentralised network without impacting nor losing data history and operations’’ (2).

To launch, Ethereum 2.0 needs the help of 16,384 validators. Everyone is eligible to become a node as long as he/she can stake at least 32 ETH, has computer sufficient hardware specs and a stable internet connection. Experience in the space is not required but we believe it would be hard for novices to validate blocks and take all the responsibilities it implies without being penalized (because validators can be put at disadvantage and see their deposits slashed if they don’t follow a set of rules to keep the chain operating and up to date). At the time we are writing this article, 872.289 ETH are already staked which represents 66% more than the minimum (e.g 524,288) required! (3)

WHAT CHANGES CAN WE EXPECT ON ETHEREUM 2.0?

Change on Ethereum 2.0 will occur slowly… but surely. Each upgrade is interconnected to another and shall follow a specific order, ‘Serenity’ being the roadmap that dictates them. Those upgrades can be divided into 4 different phases.

Phase 0: The launch of the Beacon Chain

It starts today. This is the backbone of Ethereum 2.0 that will support a new algorithm based on Proof of Stake (PoS) and the first component deployed. Under this consensus, new nodes (e.g the needed validators who deposited at least 32 ETH) will run the chain and support the Proof of Stake mechanism for a period of time. It will allow functions such as managing validators, providing randomness, proposing and adding blocks to the blockchain. Proof of Stake is a standard algorithm used in the DeFi space but not on Ethereum. Until now, Ethereum was using Proof of Work

Let’s briefly clarify the difference between PoW and PoS, and how Ethereum will transition from one to another. Initially, Ethereum utilized miners under the Proof of Work consensus. They were rewarded for mining Ethereum and providing other work similar to what is required to the validators under the Proof of Stake. Advanced hardware was required for miners to perform. That equipment is costly and consumes way too much electricity. Under Proof of Stake, the barrier of entry is changing. Nodes are now accepted based on their wealth, not on a certain amount of computational effort. As a result, Ethereum 2.0 is expected to be more sustainable and eco friendly, enabling more nodes to participate and maintain the network’s safety and operations at a lower energy cost. To motivate a maximum of users to stake their ETH, Ethereum 2.0 has developed a staking reward program, similar to what DeFi is providing at first glance but with more constraints. Firstly it takes the form of annualised interests and the lock up period is longer.Secondly, to get the rewards, validators need to have the appropriate software and hardware connecting to the beacon chain and understand how the technology works. Every 6 minutes (the time it takes to create a new block), validators will be rewarded on their accounts on ETH 2.0. At launch, validators could expect approximately 20% APR. However, as the number of validators grows, their incentives will decrease.

Phase 0.5: Deployment of the shard chain

Sharding chain is the following upgrade on Ethereum 2.0. Sharding is the process of breaking up data within the same blockchain. It’s a scalability and energy saving technique that allows parallel transactions to perform simultaneously by dividing the network, in the case of Ethereum 2.0, across 64 shards. Thanks to the shard chain, it will be easier for people to participate in the nodes process.

Phase 1: eWASM (New Ethereum Virtual Machine)

Ethereum-flavored Web Assembly (eWASM) is a virtual machine that will support a large number of coding languages. It will enable shard chains to execute smart contracts written in any language and participate to the scale of the Ethereum network. This will be mostly launched in 2022.

Phase 1.5: Docking the mainnet with Ethereum 2.0

Once the shard is upgraded, Ethereum will turn its mainnet to a shard, too. Meanwhile, the Ethereum we know will operate in parallel before merging with Ethereum 2.0. The mainnet could bring smart contracts into the Proof of Stake system as well as the full history of data recorded on Ethereum 1.0. When this is complete, Proof of Work will end. Then users and Dapp developers will be able to enjoy Ethereum 2.0 without having to do anything.

RISKS AND OPPORTUNITIES UNDER ETHEREUM 2.0

Ethereum 2.0’s success is not guaranteed. This process will take at least one to two years to complete. Due to the fast pace and volatile markets that crypto and DeFi are evolving in, we are not safe from a market crash or competitive blockchain development that could make Ethereum obsolete. Polkadot for example has emerged as the big winner of the year for providing scalable and interoperable solutions, and so far it is attracting the next generation of Dapp builders under its umbrella. New regulations could also ban cryptos or impose taxes on them, making this asset class less attractive for investors. For example, Coinbase decided to disable margin trading on Coinbase pro last week due to a complaint by the CFTC. The FCA has also banned digital assets derivatives for its retail investors. With an uncertain and risky future, the lockup period under Proof of Stake within Ethereum 2.0 may discourage community members from joining the reward program.

As Ethereum 2.0 will be constantly upgrading before completion, new disappointment will surge due to fees linked to cross-shard transactions. Those concerns are already known but will require more attention upon further integration. The migration of existing Dapps from Ethereum 1.0 to 2.0 will also take time. Meanwhile, new entrants might turn to other blockchains such as RioChain, which offers greater scalability, faster speeds, cross-chain compatibility, and is compatible with Ethereum.

PoS is still new and experimental. The challenge for Ethereum is to build the right incentive mechanisms to generate value and keep attracting validators to stake their ETH with it. Although the new PoS by Ethereum has been designed to maintain a low inflation that will range between 0.5% to 2% (4). At launch, the annual APR is expected to be at 22.95% and will decrease over time as more validators will join the network (5). This scheme may not remain competitive with programs from other DeFi platforms offering higher APRs to their users and more flexibility around the lockup period.

Ethereum staking calculator

Since 2 networks will be running in parallel under Ethereum, the issuance of rewards will increase as both PoW and PoS have dedicated programs for each consensus. This increase may devalue ETH as a cryptocurrency at the beginning; however, since its liquid supply will shrink due to staking, its price could be positively impacted after a few months. Furthermore, the lockup period could encourage validators to develop new investment products such as bond-like assets to generate further return on investment and create new opportunities for yield farmers.

HOW RIODEFI IS SUPPORTING ETHEREUM 2.0

RioDeFi is supporting Ethereum and will become a validator under Ethereum 2.0. This means the company has staked an amount of Ethereum to be eligible for it. As a validator, RioDeFi engages itself to be responsible for some of the data that will be stored, will validate transactions and add new blocks to the blockchain. It can do so because it was already running as a client on Ethereum 1.0 and is familiar with this blockchain. RioDeFi has been developed by crypto lovers. Although it decided to build on Substrate, RioDeFi believes in blockchain as a whole and wants to be among the supporters of big projects which shape the space. Ethereum is one of them.

“We think it’s only by helping and contributing to each other’s projects that the industry can grow and solve the societal problems that traditional finance and centralised authorities face.’’ said James Anderson, CEO at RioDeFi.

About RioDeFi

RioDeFi accelerates the mass adoption of digital assets by bridging traditional and decentralized finance. Our vision is a world in which everyone has access to decentralized financial (DeFi) services. We develop solutions that connect banking institutions with blockchain systems. Our applications enable lower transaction fees, faster confirmations, more efficiency, better returns for savings account holders, and global reach.

Should you have any questions, please join the conversation on our social media, Telegram and Twitter.

To learn more about the latest developments regarding RioChain, visit: Riodefi.com

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