A field guide to ETH2: The second coming of Ethereum

A field guide to ETH2: The second coming of Ethereum
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Feature Ethereum successfully launched its beacon chain at the end of 2020, the first step in the transition from its current iteration to the highly anticipated Ethereum 2.0 (ETH2).

Despite this initial progress, the remaining upgrades required to realise ETH2 are far more complex. What’s more, opinions are varied on whether the benefits outweigh the costs and many contest that other networks, such as Solana and Cardano, are already doing what ETH2 is promising.

What is ETH2?

Ethereum 2.0 consists of a set of three upgrades that aim to increase the speed, scalability, and efficiency of the Ethereum network.

The first of these – Phase 0 – saw the implementation of the beacon chain at the beginning of December, which introduced the beginnings of a proof of stake (PoS) consensus mechanism to Ethereum. For now, it runs alongside the original Ethereum blockchain, which still uses a proof of work (PoW) mechanism, to ensure data continuity throughout the chain.

Ethereum’s current mechanism for validating transactions, PoW, consists of ‘miners’ using computer processors to solve complex mathematical puzzles and verify new transactions.

The first miner to solve a given puzzle validates a new transaction to the blockchain and is rewarded with cryptocurrency. Whilst it is relatively simple, it requires a large amount of computational equipment and is extremely energy-intensive, limiting accessibility and efficiency.

On the other hand, PoS differs in that instead of miners, users can stake cryptocurrency for the right to verify a transaction.

Once enough other validators attest that the block has been verified, a block can be added to the blockchain. These validators are selected based on how much cryptocurrency they hold and for how long they have held it, and just like with PoW, they are rewarded with cryptocurrency for their works. This process is called ‘forging’ or ‘minting’.

Arguably the most important ETH2 upgrade is the introduction of sharding – Phase 1 – due in 2021.

Sharding is the process of splitting a database horizontally to spread the load. Phase 1 is set to launch with 64 shards, enabling 64 times the throughput of Ethereum 1.0, which currently can only process around 30 transactions per second (TPS). The Ethereum team has promised 100,000 transactions per second will eventually be possible with ETH2.

Expected in 2022, the final phase – Phase 2 – will see the Ethereum 1.0 mainnet ‘dock’ with the ETH2 beacon chain and sharding system, marking the merging of the blockchain and the end of PoW.

What to expect from ETH2?

These changes will have a positive effect on developers and businesses who participate in the Ethereum network, whilst causing minimal practical changes or difficulties in terms of individual users’ engagement. This is largely the result of ETH2 offering far greater “transactional throughput,” Christopher Brown, CEO of Zabo, tells The Block.

“By that I mean that the pipes that allow you to make transactions, such as to send and receive cryptocurrency or to use decentralized finance protocols, will be much larger. This, in turn, will allow for better applications that bring more accessibility to the network,” he says.

With ETH2 significantly expanding the capabilities of developers using its network, it is a positive sign that Chainstack’s “ETH2 Clients Development Report 2021” highlights the progress and client diversity of the ETH2 network – factors that are important to the success of any decentralised network.

The report found that the collective efforts of 10 independent ETH2 client teams thus far surmounted to more than 20 years of development, and that the Ethereum Foundation has granted more than £1.5m to the development of ETH2 projects.

The foundation hopes that the amount of development time being put in by teams such as Prysmatic Labs and Nimbus will help to make ETH2 an interoperable and multi-client network.

Experts expect the increased scalability and accessibility of ETH2 will lead to more usage and, in turn, demand. “Popularity and usage will increase by orders of magnitude. Furthermore, better accessibility will inevitably lead to more innovation which will multiplicatively attract more and more users,” says Brown.

Will ETH2 be too late to the party?

Ethereum 2.0 is not without its competitors – protocols such as Binance’s Smart Chain, Cardano, Polkadot, and Solana stand out as major rivals.

Take Cardano for example. The platform is being developed by one of the original co-founders of Ethereum, mathematician Charles Hoskinson, who left Ethereum in 2014 and subsequently founded IOHK, the company building Cardano.

Unlike Ethereum, Cardano is already fully operating through a proof of stake system. With its integration of smart contracts planned for mid-2021, it is highly plausible that younger, faster networks such as Cardano could soon overtake Ethereum as clear upgrades.

Solana may pose an even greater threat. The lesser-known blockchain can process up to 65,000 TPS, more than 2,000 times Ethereum’s current limit of 30TPS. Whilst sharding promises to lessen this gap, its implementation is still many months off even if delays are not a factor.

Despite these limitations, Ethereum does have a substantially larger market cap (£180 billion) than any of its competitors. With blockchain technology still in its (relative) infancy, this wider notoriety and accessibility positions Ethereum and ETH2 as the primary blockchain platform in the short-term.

Having said this, the clock is ticking on how long Ethereum can continue to underperform compared to its rivals and maintain dominance in such a highly competitive industry.

Ultimately, Ethereum 2.0’s self-described vision of “bring[ing] Ethereum into the mainstream to serve all of humanity” will not only depend on the successful implementation of its upgrades, but also how quickly it can reach each phase without facing development setbacks.

Interested in hearing more in person? Find out more at the Blockchain Expo World Series, Global, Europe and North America.   

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