The Next Leap In Blockchain Tech Explained
In 2020, all eyes are on Ethereum as the second-largest cryptocurrency undergoes a significant upgrade.
Ethereum has long played second-fiddle to Bitcoin in terms of market capitalization, adoption, and practicality. However, by the end of 2020, that may no longer be the case.
Currently, Ethereum uses a proof of work consensus algorithm just like Bitcoin does. While PoW enables transactions at the current scale, if cryptocurrency platforms are to ever find adoption by billions worldwide, they’ll need better performance under the hood.
Drastically increased scalability is just one of the reasons Ethereum is upgrading its consensus mechanism to proof of stake in Ethereum 2.0. To really grasp the relevance of a switch to PoS, let’s unravel what it is, and what else Ethereum 2.0 is bringing to the table.
Ethereum 2.0 Rollout In Three Phases
A few basic facts about Ethereum in its current state is that it is slow, relatively expensive to use, and can’t scale to save its life. What’s more, Ethereum’s proof of work network is so inefficient that each network transaction requires the same amount of energy it takes to power an American home for a day.
The good news is that ETH 2.0 is rescuing the network from all of these pitfalls. The upgrade rolls out in three parts: phase 0, phase 1, and phase 2. When all is said and done, Ethereum will be powerful, inexpensive to use, highly scalable, and energy-efficient via a PoS algorithm.
Before jumping into the three phases, how about a quick primer on proof of stake?
Proof of Stake In a Nutshell
In proof of work, miners utilize extreme amounts of computational force powered by incomprehensible amounts of electricity to earn block rewards. This whole process keeps the network honest, secure, and stable, but comes at a big cost to performance and the environment.
Proof of stake, on the other hand, disperses the responsibility of network validation to stakers rather than miners. Stakers put down a certain amount of the network’s native token, then start validating the network. If they’re ever proven to be dishonest, their stake is slashed.
To become a PoS staker requires far less hardware and electricity compared to PoW, making it also better suited to maximum decentralization.
The Beacon Chain
First and foremost amongst Ethereum’s crucial upgrades is its phase 0 Beacon Chain upgrade. Phase 0 sets the stage for the rest of the show and contains the most hotly anticipated aspect of the ETH 2.0 rollout — PoS staking.
A switch to PoS is to ETH what the halving is to BTC — which is to say it’s a change of unparalleled importance which will give tangible value to the network’s underlying asset. Apart from what it could mean from a financial standpoint, PoS will take pressure off the environment and give people a real reason to HODL their ETH.
A switch to proof of stake isn’t all phase 0 is about, however. It also contains the preliminary groundwork for supporting sharding, the all-important scaling solution that should ultimately see Ethereum live up to its promise.
Interoperability is also a big focus of the Beacon Chain — it’ll be constructed to integrate easily with friendly chains. To paraphrase the gravity of this first Ethereum upgrade, Consensys’ Ben Edgington wrote: “The Beacon Chain is a brand-new, Proof-of-Stake blockchain. It is the spine that supports the whole of the new Ethereum 2.0 system.”
Ethereum Starts Sharding
From a performance perspective, phase 1 is immensely important. This is where sharding comes in to play. In effect, sharding allows for parallel processing of transactions so that a blockchain can handle way more transactions, rather than the few Ethereum is capable of now.
The Beacon Chain of phase 0 is the foundation upon which all else is built. Because of that, the development of phase 1 is pretty straightforward.
Developers are using phase 1 as an opportunity to add 1024 blockchains to the Beacon Chain. With the huge influx of subchains which will be used in the sharding process, Ethereum can finally move out of Bitcoin’s lowly transaction per second realm and into Visa’s neighborhood.
Ethereum the World Computer
Right now, the computation side of Ethereum is handled in the EVM (Ethereum Virtual Machine). Smart contracts are all executed by the EVM, as are financial rules like how transactions are charged in ether. While it works well, the EVM as operated by ETH 1.0 is pretty rigid.
Phase 2 will bring about dynamic computations that allow for various execution environments to set rules about how they operate on a case by case basis. Some EEs can run code unsupported by other EEs, while yet others allow for transacting in a specific ERC20 token and not ETH itself.
By abstracting the EVM’s rules for computations, an entire universe of possibilities is opened up to the Ethereum 2.0 blockchain, giving it hugely increased diversity, and making it suitable for many more purposes than it currently is.
When Ethereum 2.0?
So, when exactly is all of this supposed to happen? The answer is nobody knows, unfortunately.
Earlier this month, developers launched a testnet Ethereum 2.0 environment, an important step in ultimately rolling out the main event later this year.
However, after several delays since 2018, it might be best not to put too much stock in a hard and fast deadline. Expect to see Ethereum 2.0 rolling out sometime between the end of Q3 to Q4 2020.