SCX Crypto Insights #6
Ethereum 2.0
Ethereum 2.0 is a term used to describe a series of potential updates to Ethereum to make it faster and better.
First of all, let’s have a look at the current problems of Ethereum 1.0 and why the updates proposed in Ethereum 2.0 are necessary. Some of the updates involve some code change that would need to be accepted by the community and in many cases exist as additional layers that sit on top of the existing network. And in the case of the update called Serenity, a wholly new blockchain that exists alongside the current one.
The problems include:
- Scalability. Scalability is big problem for Ethereum right now. Ethereum wants to be a world computer network that handles financial transactions and hosts smart contracts and DApps without being unusably slow.
- A solution for the difficulty bomb. Ethereum’s “Difficulty Bomb” refers to the increasing difficulty level of puzzles in the mining algorithm used to reward miners with ether on its blockchain. As the puzzles become more complex (and miners find it more difficult to earn ether) there will be a substantial lag between production of blocks on ethereum’s blockchain. This will slow it down in exponential terms and its economics will become less attractive to miners. The proposed solution to this problem is the change from proof-of-work to proof-of-stake.
- Security. Security isn’t the main problem with Ethereum, but there are aspects of security that will be improved with the updates and its one of the things being worked on.
Throughout 2020, major changes are coming to the Ethereum blockchain. As part of its Serenity upgrade, a new chain called Ethereum 2 will be launched. This will mark the start of Ethereum’s transition from a proof-of-work based consensus algorithm to proof-of-stake. With proof-of-stake there will be much lower computational resources needed for validating transactions, which means that energy consumption will not be an issue anymore in the future.
Procedure of the updates:
Firstly, a new blockchain will be launched called beacon chain. When the beacon chain is launched validators will be able to put up ETH2 as stake to sign off on transactions, secure the network and earn rewards. With the launch of the beacon chain ETH2 will be issued on a 1:1 basis for each ETH that has been sent to the deposit contract of the new beacon chain.
Secondly, so called shard chains will be established. Each shard can be viewed as a separate blockchain, and the beacon chain will act as a coordination layer between the shards. Through this process of these parallel running blockchains the capacity can be raised to around 1.3–2.7 MB/s. This increases the scalability by a lot and Ethereum is then able to support around 10’000 transactions per second initially. For comparison, a global payment system such as the payment network from VISA handles around 1’700 transactions per second on average.
And lastly, the full set of blockchain functionalities to Ethereum 2 will be introduced. It will be possible to execute smart contract code and transfer any tokens on the new blockchain. The old Ethereum chain (Ethereum 1.0) will be folded into an execution environment of Ethereum 2, meaning it will simply become a shard in the new chain, and all ETH remaining on the old chain will be transformed into ETH2.
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