Ethereum 2.0: The Future of Unstoppable Programs
 July 26, 2020 by Haso

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Unstoppable programs birthing the age of Decentralised Finance (Defi) has brought Ethereum well and truly back into the spotlight. After the December 2017 hype bubble and hard crash seeing the Ethereum native token lose 85% of its value against Bitcoin over the next 2 and half years, mainstream media is once again beginning to reignite its potential in the eyes of the public. Even scam advertisements promising immediate ETH returns on deposits to specific addresses have weaved their way into genuine crypto content on YouTube.

Figure 1 Defi getting lots of attention

So is this the beginning of another hype cycle? How big will this bubble be? Or has there been a quiet grass roots movement during the bear market, building new onboarding ramps to bigger and better and potentially more universally accepted user experiences? Ethereum 2.0 is promising to take the excitement of the 7 billion-dollar Defi market today and scale it beyond your wildest dreams. Let’s take a look at what this actually means, in reality.

Ethereum Fundamentals
Smart Contracts is where it’s at for Ethereum – and that’s the difference compared to Bitcoin. Bitcoin has an extremely limited and stringent set of rules on which it is built, whereas the Ethereum “language” is verbose providing more flexibility and creative licence to developers. To balance the equation however, with more versatility comes more bugs and with more bugs more potential to be exploited – and this has happened to several applications throughout Ethereum’s history - the most sensational being the DAO. As time has passed however, the battles between developers and exploiters have borne and strengthened several solid models, most notably banking and financial services, escrow solutions and token offerings. All this has been built on the Ethereum 1.0 blockchain which maxes out at approximately 15 transactions per second.

Scaling to handle Peaks and Network Congestion
Although roughly twice as fast as the Bitcoin blockchain, this still places a significant limitation on the potential for mass adoption. The Initial Coin Offering boom of 2017/18 which coincided with the first novel decentralised application (dapp) that went viral – CryptoKitties a trading game where you can collect breed and trade virtual cats garnering at its peak nearly 15,000 daily users. Transactions on the Ethereum blockchain became congested seeing processing times jump from seconds to minutes as well as fees shoot up from cents to several dollars – not a good introduction to crypto for the new adopters. At the time of writing this article there were 2903 dapps and the most popular according to stateofthedapps were MakerDAO and Chainlink with a combined daily user total of around 7500 users. So, needless to say, there is a long way to go to effectively support mainstream adoption.

Figure 2 CryptoKitties - First Viral Dapp

Bitcoin too has battled with dramatic increases in transaction fees and processing bottlenecks due to user peaks. This has seen the release of the Segwit layer one upgrade which increased the efficiency of data storage within each block, as well as other solutions such as the Lightning Network facilitating micro payments and federated side chains such as Liquid, vastly increasing the speed in which large exchanges transact with each other. While these solutions have had a positive impact on scaling for Bitcoin, there is still a long way to go on the journey towards mass adoption. And the path isn’t necessarily a clear one, unlike Ethereum 2.0.

The Ethereum 2.0 Roadmap
Ethereum 2.0 has an unambiguous roadmap with the goal to reach tens of thousands of transactions per second. Whilst this end-state is still a number of years off, Ethereum upgrades over the last few years have paved the way for some interesting developments that are just around the corner.

Phase 0: Beacon Chain Public Testnet, August 4th 2020 Go-Live
With three months of successful testing accumulated predominately by Prysmatic Labs in public test environments using GoErli ETH (test/worthless ETH) the Beacon Chain public testnet is now being flagged to go live on August 4. This is the real deal with real ETH to be staked by validators. Beacon Chain? Staked? Validators? Let’s have a closer look.

Figure 3 The legacy and beacon chains

The Beacon Chain is a new Proof-of-Stake (PoS) blockchain and will run in parallel to Ethereum’s current Proof of Work (PoW) blockchain for approximately 2 to 4 years. This period will see no functionality beyond the registration of participants and staking of their ETH to ensure the ecosystem is completely stable before its expansion in Phase 1.

This transition to a new consensus mechanism offers significant efficiencies in energy savings and introduces new incentives to a wider population of participants in comparison to the several large miner operations that dominate PoW across the globe. For instance, PoW involves competing nodes expending energy proportional to the computing power on the network to produce new blocks – in Bitcoin the energy consumption is comparable to that of Kuwait’s. The Beacon Chain on the other hand, through Casper - a family of Proof of Stake consensus protocols developed by the Ethereum Foundation - will randomly select Validators to validate a block. A randomly selected committee of validators then votes on the proposed block which is then propagated across the whole network to achieve consensus.

The Beacon chain incentivise Validators to do the right thing and not produce fraudulent transactions through the following:

A Validator needs to stake (or lock up) at least 32 Eth

Projected earnings have been estimated between 2-18% of staked ETH per year for Validators

A Validator is rewarded with the block transaction fees

If a Validator is found to have produced a fraudulent transaction then they will be penalised through the confiscation of a proportion of their staked ETH and their capability to validate will be diminished

If a Validator is not online for an extended time they will be penalised a proportion of their staked ETH

PoS Benefits: Efficient, Secure and Fast
There are three key benefits setting the groundwork for future phases. They are:

Increase efficiency – significantly less processing power and hence electricity usage is required thanks to the Beacon Chain utilising small random groups of Validators. This beats PoW where once a block has been mined the network is flooded with the result, taking time for the other miners to receive and process the message which causes all miners to make necessary adjustments in the race to start mining the next block.

Increased security – the argument here is based on more participants taking part in the validation processes. The barrier to entry in becoming a Validator is not comparably high from a cost perspective in that a minimum of only 32 ETH is required to stake. There may be however technical barriers in acquiring the hardware and configuring the client, but they are dwarfed by the minimum expected hash rate vs electricity cost needed for Bitcoin’s PoW.

Network speed - for similar reasons outlined above in Increased efficiency, this is a clear and significant improvement achieved through the protocol’s management of Validators. There is no need for consensus to be achieved through flooding the network with messages until there is an agreed winner as per PoW. Instead, a random validator is selected to validate each block.

Phase 1: Shard Chains

Phase 1, flagged to launch approximately one year after Phase 0, will deliver Shard Chains - a scalability solution where the Ethereum blockchain is partitioned into 64 separate chains (shards) that run parallel to one another with seamless interoperation alongside the Beacon Chain.

This will allow the processing of multiple transactions simultaneously, up to 64 blocks at a time significantly reducing the data burden in comparison to traditional linear one-block-at-a-time models. During this phase, as per Phase 0, no real data and applications will be running to allow the system to stabilise.

Figure 4 The Beacon Chain, connecting the Ethereum

Phase 1.5: Migrating the PoW Chain
Phase 1.5 will see the decommissioning of the original PoW Ethereum blockchain as it is subsumed by the new chain becoming one of its 64 shards. The beacon chain will ensure integrity of the PoW chain’s history and its integration within its new environment signalling a complete transition to PoS. And for all ETH holders – there are no extra steps expected such as conversions required to use your ETH on 2.0.

Phase 2: A New Engine
To realise the quantum leap into a new world of features, the Ethereum Virtual Machine (EVM) – the engine enabling all we have seen so far such as, ERC20 tokens, dapps, smart contracts and supporting diagnostics in managing the blockchain, will be upgraded. Enter eWASM -the Ethereum Web Assembly Machine which is a subset of WASM - the open standard instruction for building web applications. By taking this strategy, this framework is expected to appeal to the wider traditional web developer audience as a means of jumpstarting the new ecosystem with real data and applications.

Potential Risks, the 51% attack and Competition
Just as for PoW, PoS is also potentially susceptible to a 51% attack. The principles are the same in that instead of accumulating 51% of the hash power, the attacker must control at least 51% of the Staked ETH to maliciously influence the network to, for example, reverse transactions or double spend. One may argue today ETH funds are more decentralised in comparison to the concentration of hashing power across the globe, so therefore the risk is further diminished for PoS.

AVAlabs provides another example of an open source developing Proof of Stake blockchain utilising their consensus protocol “Avalanche” which also offers the capability to build scalable dapps.

Founded by Emin Gun Sirer and Kevin Sekniqi and built on top of the AVA network the Ava blockchain is said to be able to provide extensive customisation over 3 tiers of user control; the network layer, the middle layer where blockchain resides and the application layer promising developers, users, and entrepreneurs alike the ability to configure the AVA blockchain to implement a potentially countless range of use-cases.

Avalabs has recently completed their initial token sale (Avax) in readiness for users to stake once Avalanche mainnet is launched, which is expected to be at the end of August. 2020 is certainly gearing up to be an exciting year for PoS.

Conclusion: Exciting Times Ahead
With the phases to fully implement Ethereum 2.0 many years away and a significant level of complexity to ensure the ecosystem functions stably one may become disheartened on whether this reality will ever be reached. In a world of instant satisfaction – the 15 second Tic Tok dopamine hit – it may all just seem too much, too opaque to hold on to. For those speculating – including those with their own Ether through staking, betting on Ethereum 2.0 certainly has its risks. That said, the vision of Ethereum 2.0 uncompromisingly holds true to its principles of decentralisation, security and scalability and is setting up methodically for the long haul. It is progressing slowly but that’s just the nature of open source, decentralised systems and Ethereum has a strong track record to date. And it’s that slowness that may creep up on the world and take us by surprise – slowly, but suddenly and we could have a primordial explosion of creative solutions to better serve humanity. Unstoppable programs scaling at an unstoppable rate – now here’s a promising future to be hopeful about.

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Comments (3)

By Douglas Jackson on 2020-07-26 04:49:15 ET
Superb article, Haso! Well done. I finally understand what the beacon chain is! Cannot wait to read your next articles.

By Gruic on 2020-07-26 05:04:58 ET
Loved it. A great work.

By CryptoGirl on 2020-07-26 05:13:40 ET
very cooooool!

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