Primer – Designed to ease bottlenecks and enhance efficiency, speed, and scalability, Ethereum 2.0 refers to the network’s transition to a Proof of Stake model from the current energy-intensive Proof of Work mechanism. This transition comprises several phases, with The Merge depicting the final move to a PoS blockchain enabling Ethereum to reduce its power consumption and gas fees significantly.
The Shift
Ethereum, the second largest blockchain network in the cryptosphere, runs on a Proof of Work model. Under this model, miners utilize powerful computers to solve complex mathematical transactions. The first miner to solve the problem appends the next block to the blockchain and claims newly minted ETH as a reward. However, the PoW mechanism devours an ever-increasing amount of electricity owing to the constant competition between the miners and the struggle associated with solving the problem. Though the process is highly secure and was introduced by Bitcoin, it expends enormous amounts of electricity and involves substantial hardware costs. According to estimates, Ethereum’s carbon footprint is equivalent to New Zealand’s, and its annualized energy consumption is comparable to that of Switzerland.
The shift to Ethereum 2.0 shall alter the entire validation structure and the energy and hardware requirement, thereby addressing each of the abovementioned aspects. In a PoS network, transaction verification is done by validators instead of miners. Consensus on PoS networks is achieved through coordination between validators (individuals/organizations) staking or pledging large quantities of ETH (32 Ether). An algorithm ascertains which validator gets selected to add the next block to the network. The higher the amount and the longer the duration of the stake, the greater the probability of being selected. Once a new block is added, and there are sufficient attestations from other contributors regarding the validity of the block, the validator can claim newly minted ETH as a reward. The network’s economic incentive to abide by the rules is considerably high as validators tend to face slashing (their staked share is burned/rendered useless) if they are found validating bad transactions or if they go offline.
The shift to PoS has several advantages, such as the utilization of only a fraction of the computing power that’ll make the network about 99% more energy-efficient.
Per reports, the locking up of ETH for the network to function could have a deflationary impact if it can maintain high demand in the future.
Different Phases
Ethereum, the second largest network by market capitalization, is the functional layer of the blockchain and smart contract world. The number of DeFi protocols that run on the network is testimony to its staggering growth. Although Ethereum’s growth has been phenomenal, it has adversely impacted its core architecture. The network’s congestion, low transaction speeds, and high gas costs reflect the impact. A series of updates formally referred to as Serenity is in the works to solve this problem. With Serenity, Ethereum aims to address the issue of scalability while maintaining network security and decentralization.
Listed below are the multiple phases that form part of the overall update.
Phase 0 – Beacon Chain
Phase 0 commenced with the launch of the Beacon Chain in December 2020. At the core of Ethereum 2.0 is the transition from the inefficient PoW to a more scalable and environmentally friendly PoS consensus mechanism. Phase 0 with the Beacon Chain, the PoS consensus mechanism (Casper), and validator nodes provide the necessary framework for the transition and future upgrades pertaining to network scaling and storage. The Beacon Chain introduced native staking to Ethereum and is tasked with managing and storing the registry of the network’s validators. The Beacon Chain has no implications on the mechanics of the existing PoW chain and runs parallel to the Ethereum Mainnet (existing PoW chain). In subsequent phases, the current PoW Chain shall merge with the Beacon Chain.
Phase 1 – The Merge
The next phase of the Serenity rollout is the Merge which shall mark the end of Proof of Work for Ethereum. Post the Merge, the PoW chain with all of its accounts, balances, smart contracts, and blockchain state, and the Beacon chain shall operate under one single network – the Ethereum PoS chain. After that, Eth1 and Eth2 will essentially signify two distinct layers, namely the execution layer and the consensus layer.
Eth1 execution layer – handles transactions and smart contract execution.
Eth2 consensus layer – handles proof-of-stake consensus and ensures validators act in accordance with the rules.
Thus, the Merge represents a permanent switch to a PoS model wherein validators will be assigned to secure the network, and mining will be abolished as the means for block production.
Merging Ethereum Mainnet with Beacon Chain
As part of the transition to the PoS system, testnets are essential to ascertain there aren’t any bugs or vulnerabilities. A testnet is a prerequisite for a smooth and error-free transition. It permits new tech/upgrades to be tested before they’re launched on the main blockchain network. The Merge shall be scheduled post successful testnet merges. As of today, the Merge has already been tested on Ropsten and Sepolia. The next and last test is on the Goerli testnet post which Ethereum network will officially migrate to a controlled and coordinated Proof-of-Stake system.
The Merge will pave the way for the implementation of shard chains. Initially, the plan was to work on sharding before the Merge but owing to the success of Layer 2 scaling solutions like Optimism and Arbitrum, the transition to PoS was prioritized. Layer 2 solutions offload the transactional burden from Ethereum and perform computations at much lower prices.
Phase 2 Sharding
Following the Merge, the focus will shift to sharding to enable the network to eliminate data congestion, enhance data storage, reduce gas fees and provide greater support to Layer 2 solutions. Sharding entails distributing the computational and processing load of the main chain horizontally to decongest the network. Sharding is essential for Ethereum to scale and provide additional faster and cheaper layers for decentralized applications and rollups to store data.
The upgrade will feature 64 shard chains. While the initial plan was centered around adding extra functionality such as the ability to store and execute code and handle transactions, the current plan focuses on danksharding. Danksharding is rollup-centric and uses shard blobs instead of shard chains. It utilizes data availability sampling, which enables the Ethereum network to verify vast amounts of data by sampling a few pieces of it. While this approach doesn’t equip shards to handle smart contracts, it contributes to higher transactions per second when combined with rollups. With rollups, the burdensome task of processing transactions is offloaded to L2, and then highly compressed data is rolled up into batches and sent to L1 for storage, all while retaining the security of L1.
Thus, sharding has important implications as it reduces the hardware requirement and eases the ability to run a node so network participation can be enhanced and higher levels of decentralization can be attained. The current plan entails shard usage for aggregation and movement of data. In addition, Ethereum aims to leverage L2 solutions (rollups) to maximize efficiency and scalability. With Eth 2.0 and rollups working in tandem, the transactional capacity of Ethereum is eventually expected to reach 100,000 transactions per second.
The journey to Serenity has seen multiple changes and continues to evolve as more efficient paths emerge. Each change is carefully considered and implemented to achieve a truly decentralized programmable blockchain.
Difficulty Bomb – Ethereum’s Gray Glacier Upgrade
Network upgrades refer to changes made to an underlying protocol. On the Ethereum network, these are done through Ethereum Improvement Proposals (EIPs). The upgrades alter existing rules in favor of new ones to bring about necessary improvements in the system. Unfortunately, the decentralized nature of blockchains makes the deployment of upgrades a cumbersome task requiring approval from the entire community as well as the developers.
A significant risk associated with upgrades comes in the form of community disagreement on proposed changes. With Ethereum transitioning to a PoS network, there is a great risk of miners continuing to mine the original PoW chain resulting in a hard fork. Something similar happened in July 2016, when an attempt to erase a hacker attack on a DAO caused an Ethereum hard fork and led to the emergence of Ethereum Classic. Ethereum (as we know it today) wanted to roll back the hack. Miners who agreed with the proposal stayed on, whereas those who disagreed became part of the Ethereum Classic. A hard fork represents a code change that renders the new version backward-incompatible with earlier blocks.
The Gray Glacier Upgrade
The rules laid out by the update instruct node operators and miners to manually upgrade to the latest client versions. Failure to comply with the rules would prove problematic as clients would be stuck on the pre-fork incompatible chain post upgrade.
Gray Glacier is a hard fork network upgrade that occurred at block 15,050,000 on 30 June and has delayed the difficulty bomb by 700,000 blocks, translating to an approximately 100-day delay. The difficulty bomb is critical for Ethereum’s transition to PoS.
Difficulty Bomb
The difficulty bomb is a code hardwired into the protocol from the very beginning. Its a mechanism designed to exponentially increase the mining difficulty of PoW mining algorithm resulting in longer block times, making mining eventually unprofitable for the miners. Ethereum developers, after extensive deliberations, decided to delay the detonation further to avoid what happened in 2016.
Closing Thoughts
The shift to Ethereum 2.0 is the most anticipated event in the cryptosphere and involves updates spread across multiple phases. Merge is almost 90% complete with Ethereum Foundation suggesting 19 September as the provisional launch date. The latest announcement from Vitalik at the annual Ethereum Community Conference (EthCC held in Paris) calls Merge to be the first phase of the long term development aimed at making Ethereum quantum resistant. Merge will make Ethereum 55% complete and will be followed by Surge (scalability improvement through sharding), Verge (storage optimized through Verkle trees and reduction of node size), Purge (excess historical data will be purged), and finally Splurge ( Increase efficiency and functionality).
While it might sound like the title of a “Rick and Morty” episode, the surge, verge, purge, and splurge are actually key parts of Ethereum’s scaling, cleanup, and evolution, Buterin said.