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.
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 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, and so big companies have shied away from using Ethereum as their platform.
Meanwhile, budding blockchain projects frequently have transaction speeds in the hundreds, if not thousands, per second. 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.
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. Bitcoin also uses proof of work, and currently a one Bitcoin transaction costs a miner enough electricity to power an American household for 1.57 days. Apart from this resulting in an expensive transaction fee, it is also wasteful and unsustainable for mass adoption. Ethereum 2.0 aims to switch Ethereum to a hybrid proof of work/proof-of-stake algorithm.
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 the article.
The Ethereum 2.0 Solutions
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 something called Sharding. While the changes are not limited to this group, they are some of the major ones.
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 possible blocks as the next block in the chain. The miners would then have to choose from two blocks, 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.
In short, the Casper protocol is designed to eliminate the “nothing at stake” issue by introducing a mechanism that will instantly confiscate the entire stake of any validator who tries to support an invalid chain by validating more than one block at a time. This will provide an incentive to only validate blocks one block at a time, essentially giving them a stake in properly validating. The Casper protocol is a proof of stake mechanism that will be delivered by the Beacon chain.
The Beacon chain is separate from the original proof of work chain but is connected and runs parallel. It will be the system chain for Ethereum 2.0 and its main responsibilities will be to store and maintain a registry of validators, process cross-links between itself and the main chain, and to process the finality gadget (meaning the block is finalized after validator consensus). Validators will be allowed to stake on the Beacon chain via a smart contract on the current Ethereum blockchain.
Plasma and The Raiden Network
Mentioned earlier was the issue of transaction speed being extremely slow on the current Ethereum blockchain at 15 transactions per second, and the effect this has on scalability. This is where Plasma and Raiden come into play. Both are similar to Bitcoin’s Lightning Network in terms of their purpose and functionality.
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. It is almost indistinguishable from the Lightning Network in terms of function. It will only require developers to interact with an Application Processing Interface to build scalable applications on top of it, and will provide near-instant payments, increased transaction privacy, micropayments, low fees, and atomic token swaps. As with Plasma and the Lightning Network, Raiden’s payment channels exist off-chain and are only ever on the main chain for final settlement, reducing network congestion.
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. By breaking down the blockchain into more manageable segments it should lead to increased transaction throughput and address scalability because each node will not have to process everything that takes place on the blockchain but solely a portion of it.
How Close is Ethereum 2.0?
Ethereum 2.0 was initially scheduled for release in Q1 of 2020, but it is now looking like it will not be released until at least Q2, possibly on Ethereum’s fifth anniversary on July 30, 2020. Formal verification and audit of the bytecode has been completed and a testnet of Ethereum 2.0 was able to run 100k nodes without issue.
If Ethereum 2.0 is launched, and launched successfully, then it will represent a major step forward for the blockchain platform. By solving scalability and security issues that Ethereum 1.0 has run into it could allow the platform to rise above Bitcoin and take over the number one spot in cryptocurrency, or at least stave off its smart contract competitors who are simultaneously looking to solve the same issues with their own projects. Only time will tell, and the next year will be critical for Ethereum.
Disclaimer: This article is in no way meant to be taken as advice to buy, sell, or invest in Ethereum.