Ethereum is the second-largest blockchain network, differentiating itself from other cryptocurrencies in its unique technology that enables decentralized applications (DApps) to run. Through the Ethereum network, users can implement smart contracts, buy NFTs, interact with thousands of DApps, as well as borrow and lend, all within the Ethereum ecosystem.
While ETH represents a massive opportunity for crypto to showcase its revolutionary real-world use cases, there have been several concerns, namely regarding energy consumption and high fees associated with higher network activity.
The solution to address some of Ethereum’s shortcomings has begun to roll out in what is known as ETH 2.0. In this article, we will highlight the features and roadmap of ETH 2.0, and why it matters for the future of crypto.
What is ETH 2.0?
ETH 2.0 is a new set of upgrades currently in development that will bring long-awaited improvements to the current Ethereum mainnet in the areas of security, scalability, and sustainability. Also called ETH 2 or “Serenity”, the new network aims to move from proof of work (PoW) system to proof of stake (PoS).
Under the current Ethereum network, the proof of work model serves to secure the network but as stands remains quite an energy-intensive process, where validators are required to literally prove the computational work done in validating the Ethereum blockchain.
The proof of stake system, already rolled out in the first phase of ETH 2, is a process in which a validator must stake (or deposit) 32 ETH on validator nodes in order to activate the validation software. This serves to validate transactions and secure the network in a more efficient manner, while still providing the incentives —in the form of staking rewards—for validators to perform 'honest' work.
3 Current challenges with Ethereum
1. Energy impact of Ethereum
While still requiring significantly lower energy levels than Bitcoin, Ethereum hasn’t escaped scrutiny of the high energy levels required under the current proof of work system. As the name implies, Ethereum blocks are validated through a process that secures the network by miners physically showing the computational work done to validate the chain. This process uses quite a bit of energy, which can lead to high costs for those who wish to serve as miners or validators.
The good news is that Ethereum 2 will aim to address the energy consumption of the current network. Carl Beekhuizen, a researcher at the Ethereum Foundation, says “Ethereum will see a greater than ~99.95% reduction in energy use post merge.”
2. Difficulty scaling
On the current Ethereum network, between 15 and 30 transactions can be processed per second. To give you an idea, the credit card provider Visa notoriously claims they can handle up to 24,000 transactions per second at max capacity.
As network activity increases on Ethereum, users have reported longer waiting transactions to be confirmed and paying higher fees while doing so. Additionally, under heavy usage users may lose out on their gas fees despite the transaction not succeeding.
The balance here lies in exponentially increasing the processing capacity of the network, while still incentivizing validators to keep on validating. With proof of stake, validators will continue to receive the block rewards and transaction fees under the current system, depending on the amount of ETH staked by the individual.
3. High gas fees
With an increase in adoption and transaction volume, unfortunately (but not surprisingly), this has also seen an increase in fees. Fees on the Ethereum network also know as gas, are paid using Ethereum’s native token, Ether. Like with a car, gas is the fuel that powers everything on the Ethereum blockchain, from validating transactions to activating smart contracts.
Since transaction completion time depends on network congestion levels, this presents an issue: as the number of ETH holders continues to grow, so to do gas fees. When miners pick up transactions to validate, they will naturally select the highest transaction fees to include in blocks.
This is because the rewards for Ethereum mining come in the form of transaction fees, so when there is more traffic, miners will select ones that pay higher in return for the same amount of work. In especially high-traffic situations, users looking to pay lower gas fees may be stuck waiting for their transactions to be validated.
The phases of Ethereum 2.0
In order to safely merge the current Ethereum blockchain network, the plans for Ethereum 2.0 have started to roll out in phases. Some of these phases have already been completed, while others are subject to change, with the ultimate goal of having the merge completed by 2022.
The Beacon Chain
The Beacon Chain has been first phase of rollout of Ethereum 2.0, and one that formally brings proof of stake to Ethereum. The Beacon Chain required an initial threshold of more than 16,000 validators to deposit the required 32 ETH to stake, which was reached on December 1, 2020. The Beacon Chain also boosts the security of the network by randomly assigning validators in order to prevent dishonest actors from attacking the system.
Broadly speaking, sharding is when an entire dataset is split into portions that represent the whole. With Ethereum 2.0, the current Ethereum chain becomes a shard of the whole, in a chain of 64 parallel shard chains. This serves to greatly improve the scalability of the network, since each shard chain will spread out the data storage functionality of the current Ethereum chain, simultaneously spreading out the data processing burden across the nodes. This phase is expected to be rolled out in 2022.
Docking is a critical part of the merging process, where the Ethereum mainnet will be integrated into ETH 2.0 shards. Before this phase is completed, Ethereum will continue to operate via proof of work, concurrently with the Beacon Chain’s proof of stake system. Once docking is successful, the merge will be complete and Ethereum 2.0 will be fully functional, and be able to handle all the functions that Ethereum brings, on a newly-upgraded scale. The merge is tentatively scheduled sometime between 2021 and 2022.
What ETH 2.0 hopes to solve
These phased steps, along with the principal change from a proof of work to a proof of stake model aims to address the three main shortcomings of the current Ethereum network: scalability, security and sustainability.
Security: ETH2 will bring added measures against malicious actors that try to attack the Ethereum network. Slashing is a new penalty system that will punish malicious validators and would-be attackers, by docking coins and inflicting punishments.
Slashing penalties can vary, though rule violators may be fined up to 18 staked ETH, and even face removal from the network. With proof of stake, validators are encouraged to perform honest validations, and through validator shuffling the chances of a successful attack are minimized.
Scalability: Through sharding and PoS, Ethereum 2.0 will be able to process anywhere from 20,000 to 100,000 transactions per second. Though this may take a few years to reach the maximum capacity, compared to the current rate of 10 to 20 transactions per second, this represents a speed increase of up to 999,900%. These exponential increases in speed will also serve to clear up network congestion, and keep gas fees low.
Sustainability: The transition away from proof of work will go a long way in massively cutting energy costs and environmental impact associated validation on the Ethereum network. As proof of stake is implemented, we will be able to determine if the changes in Ethereum 2.0 can be replicated to reduce the energy consumption within the broader cryptocurrency space.
ETH 2.0 and the future of crypto
When Tesla stopped accepting Bitcoin as a payment method for their cars due to its energy consumption levels, many saw this as a challenge to the entire crypto industry. Ethereum 2.0 represents a commitment to an energy-saving crypto future, which is crucial in order for cryptocurrency to continue to gain legitimacy in the eyes of governments and financial institutions.
JP Morgan is one such institution that has bought into the idea of ETH 2.0, saying, "Ethereum 2.0 shifts from an energy intensive Proof-of-Work validation mechanism to a much less intensive Proof-of-Stake validation mechanism. As a result, less computing power and energy consumption are needed to maintain the Ethereum network."
As Ethereum 2.0 is rolled out throughout 2021 and 2022, it remains to be seen the degree of success that Ethereum’s upgrades will have in solving the network’s underlying issues. While the process continues to unfold, there will continue to be many opportunities to participate in the DeFi revolution. If successful, Ethereum 2.0 will provide a critical blueprint for future blockchain networks to follow.