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Ask CryptoVantage: What is Ethereum 2.0?

Ethereum is the second biggest blockchain platform in the world, so why is a new version necessary? We’ll be looking at the issues faced by Ethereum’s original incarnation and examine how Ethereum 2.0 aims to fix them, and what it means for the future of the cryptocurrency in this week’s Ask CryptoVantage.

Ethereum 2.0 is on the horizon and it brings numerous upgrades to the network

The Issues Facing Ethereum 1.0

Ethereum has played second fiddle to Bitcoin since its inception, but both blockchain platforms are facing the same issues, and each needs to change its course if it wants to hold off competition from emerging blockchain companies. These new blockchain companies all aim to solve the issues that both Bitcoin and Ethereum now face, which are: scalability, proof of work consensus, and security.

Scalability

One of the ultimate goals of Ethereum is to become the “world’s computer”, but the problem with this goal is that currently, the Ethereum ledger is 90% full and can only process 15 transactions per second. That is not scalable to the needs that would exist if the platform was to reach that goal.

The congestion of the ledger combined with the slow transaction speed has made it extremely costly to use the blockchain, this is true now more than ever, and so big companies have shied away from using Ethereum as their platform or are looking for alternatives. If Ethereum wants to compete long-term, rather than be a steppingstone for other company’s progression in the blockchain industry, increasing scalability is a major necessity.

Proof of Work

The next issue facing Ethereum is its current proof of work consensus algorithm. There is nothing wrong with the way proof of work, well, works, but rather an issue in its long-term utility in relation to cost effectiveness. Ethereum 2.0 will utilize proof of stake, which is generally regarded as much more efficient.

Security

The third main issue facing Ethereum is security in relation to using a proof of stake system rather than their current proof of work one. Proof of work, partially due to the costs associated with programming an attack against the network, is extremely safe. Bad actors get cut out of the network thanks to technological and economic disincentives, and it would likely cost more resources than you could reap if you tried to attack the current proof of work system.

The issue for Ethereum then is not its current security, but its security once it switches to a proof of stake system with Ethereum 2.0. Proof of stake presents the issue of “nothing at stake”, an issue that will be discussed later in this article.

The Solutions Ethereum 2.0 Proposes

In order to solve the issues faced by Ethereum 1.0, the new version promises a proof of stake algorithm, while also solving scalability issues with Plasma and The Raiden Network, and Sharding. The first steps to 2.0 began on December 1 with the launch of the Beacon Chain.

Proof of Stake with Ethereum 2.0

The main issue with proof of stake is a problem called “nothing at stake”, which boils down to this, in a proof of work system, miners can only validate one block at a time. But in a proof of stake system they can be presented two blocks that they have to choose from, and in fact could choose both and double down their fees collected even though both will not be validated. Essentially it can lead to many security vulnerabilities. Ethereum 2.0 aims to solve this problem through a combination of the Casper protocol and the Beacon chain.

The Beacon chain is separate from the original proof of work chain but is connected and runs parallel. It is the system chain for Ethereum 2.0, and its main responsibilities are to store and maintain a registry of validators, process cross-links between itself and the main chain, and to process the final transaction. Launched on December 1, 2020, you can become a validator by staking 32 ETH, which will be held until the network is fully transitioned to 2.0, at which time you will receive your rewards. This switch to staking is a big step forward.

Plasma and The Raiden Network

Plasma is an extra layer that sits on top of the Ethereum, or any main chain, which allows users to run apps on a separate “child” chain without interacting with the main chain until final settlement is necessary. It also allows the separate child chain to run its own consensus algorithms and allows assets to be transferred from the main chain to the child chain and vice-versa.

This will substantially alleviate congestion on the main chain, increasing speed and reducing costs. The Raiden Network is separate from Plasma but works in a similar manner and aims to solve the same issue.

Sharding

Sharding is yet another way Ethereum 2.0 aims to solve its predecessor’s problems. In general, sharding is splitting a large database into more manageable parts. Currently, in all blockchain protocols each node stores the entire state and processes all transactions. While this provides a large amount of security, it limits scalability.

Essentially sharding aims to split the state and history of Ethereum into partitions, or “shards”, each with its own transaction history, much like the way a business might break up its customer database into groups based on geographic location and place each group on its own server. This will increase network speed.

How Close is Ethereum 2.0 and What Will It Bring?

Ethereum 2.0 was initially scheduled for release in Q1 of 2020, but it was not until December 1, 2020, when they launched the Beacon Chain that the transition to 2.0 got underway. Users can now stake 32 ETH to become a validator on Ethereum 2.0, but their stake is going to be held until the network is fully complete, at which time they will receive their rewards. That said, so far there has been 33,000 users who have staked 32 ETH to become validators on Ethereum 2.0, so community engagement is high. That is well over one billion dollars worth of ETH now tied up until 2.0 launches in full.

When it will be fully complete is unclear, some developers think it will take until at least 2022, for everything to be transitioned, while others think it may even be 2023. Either way, Ethereum needs to get it done sooner than later, as competitors, such as Cardano and Polkadot, are making strides of their own.

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Evan Jones

Evan Jones was introduced to cryptocurrency by fellow CryptoVantage contributor Keegan Francis in 2017 and was immediately intrigued by the use cases of many Ethereum-based cryptos. He bought his first hardware wallet shortly thereafter. He has a keen and vested interest in cryptos involving decentralized backend exchanges, payment processing, and power-sharing.