Ethereum or Ethereum 1.0 is arguably the world’s biggest and most influential decentralized blockchain network. Ethereum is powered by its native token the Ether (ETH) and benefits heavily from the smart contracts technology. Ethereum is currently hosting hundreds of thousands of different tokens and NFTs, Supports decentralized finance or DeFi, decentralized applications or DApps, decentralized exchanges or DEXs, metaverse ecosystems such as Axie Infinity, and many other decentralized projects. According to its creator Vitalik Buterin, Ethereum was conceived with the idea of eventually upgrading to a new version of itself that uses a more robust and cutting-edge consensus protocol. This vision is already happening through multiple phases and is promised to be finalized in 2023. Ethereum 2.0 will be the successor of the old Ethereum blockchain with new features and protocols to resolve many of the shortcomings of the current Ethereum.
The current version of Ethereum can only manage 15 transactions per second. Transactions are in constant competition with one another and are willing to pay higher and higher fees. In fact, transaction fees have even reached outrageous prices such as a few hundred dollars during peak traffic periods.
Scalability is one of the most anticipated targets that Ethereum is keen to achieve by adding shard chains to its network. Shard chains are, in layman’s terms, like adding more lanes to a crowded highway to reduce the traffic and the associated fees. Sharding is the process of reducing network congestion and increasing transactions per second by creating and adding new chains to the main blockchain, called “shards”. Ethereum 2.0 or “Serenity” has promised to scale the current 15 transactions per second up to 100,000 transactions per second by adding shard chains which would reduce the transaction fees significantly.
Enhancing the security of the Ethereum blockchain, especially against %51 attacks, is another goal promised to be delivered by Ethereum 2.0. Based on the type of consensus protocol used by a blockchain, the %51 attacks can vary in style. This is a nice segue into the difference between the current consensus protocol used by Ethereum and the one they are upgrading into.
Ethereum 1.0 is using the Proof of Work consensus protocol to create and verify new transactions, which is when the nodes on the blockchain reach a consensus that one node has put up the necessary processing effort to solve a difficult math problem (which is basically guessing a very large number by trial and error). This process which is the most popular consensus protocol and is used by giant cryptocurrencies such as Bitcoin and Ethereum consumes huge amounts of electricity and therefore is not very eco-friendly. The Proof of Work protocol or PoW can be the target of a %51 attack if an individual miner or a mining group acquires enough hardware to take control of %51 or more of a blockchain network. The June 2014 incident by the mining pool GHash.IO on the Bitcoin blockchain in which they reached a level of about 55% of Bitcoin’s hash rate over a 24-hour period, is considered to be one of the most alarming episodes for blockchains’ security, even though the incident wasn’t really a %51 attack, since the mining group didn’t try to withhold blocks and/or double-spend on the network. Since then, Bitcoin has become too enormous for such attacks to be plausible but small blockchains do face the risk of %51 attacks.
The most significant highlight of Ethereum 2.0 is the switch from Proof of Work to the Proof of Stake consensus protocol or PoS. We have dedicated two full articles to explain what Proof of Stake actually is and how it differs from Proof of Work. In a nutshell, Proof of Stake does not require users to dedicate advanced hardware to guess astronomically huge numbers. Instead, users that stake some of their cryptocurrency to be locked up temporarily, are randomly chosen to create and verify new blocks. If these validators create or confirm a fraudulent transaction, they are punished by losing some of their collateral, otherwise, they are rewarded for their part in the process.
Blockchains that use Proof of Stake are generally less susceptible to %51 attacks for two main reasons. First, to launch a %51 attack on a PoS blockchain, one must control over 51% of the network’s total circulating tokens. In the case of giant blockchains such as Bitcoin or Ethereum, this is close to impossible since it takes tens of billions of dollars to control %51 of the total circulating tokens in such networks. Second, recovering from such attacks is much easier. The slashing protocol allows Ethereum 2.0 to take away some or even all the coins of any validator who breaks the rules and might even eject them from the network completely.
The process of upgrading Ethereum happens in sequential phases. The first phase involves launching, testing and finally merging with the heart of Ethereum 2.0, the Beacon Chain. Launched on December 1, 2020, the Beacon Chain is a Proof of Stake blockchain that runs separately from the Ethereum Mainnet and has been the subject of testing and troubleshooting for a long time now. A few validators have volunteered to validate transactions on the Beacon Chain by each staking 32 ETHs which amounts to a total of $10 billion in collateral. The second phase is the merger between Ethereum Mainnet and the Beacon chain. The Mainnet will bring the ability to run smart contracts in the new Proof of Stake ecosystem, plus the full history and the current state of Ethereum. The final phase is integrating shard chains with the system, dividing the network into 64 chains with the old Ethereum blockchain operating as one of these 64 shards.
Exactly when the merge will happen is still the subject of speculations but it is anticipated to happen sometime in 2023. With a more scalable, more secure, and eco-friendlier experience, a long-term bullish impact on the price of ETH is expected by some experts such as Matt Cutler, the CEO of Blocknative. The Proof of Stake consensus protocol is already the backbone of a few major blockchains such as Cardano and Solana and is estimated to reduce Ethereum’s carbon footprint by up to 99.95%, along with all the other technical benefits that come with the switch.