First, it’s worth framing the Eth2 upgrade with some context. Ethereum suffers from long-standing issues with scalability that was evident from the outset. Ethereum co-founder Joseph Lubin even went on the record to state that Ethereum’s lack of scalability was a problem known to the co-founding team.
Nevertheless, this hasn’t proven to be an adoption obstacle for the world’s first smart contract platform. According to dApp aggregator State of the dApps, over 3,500 applications are running on Ethereum, with a 24-hour volume of nearly US$300m. (As of May 05, 2021).
[Read now: What is the Ethereum Berlin upgrade?]
Inevitably, the influx of applications and users only makes Ethereum’s scalability problems worse, not better. The high traffic leads to inflated transaction fees, making for a poor user experience. Furthermore, the rapidly growing size of the blockchain means that miners need a vast amount of disk space to run an Ethereum client.
Finally, there’s a recognition that Ethereum’s Proof of Work consensus is highly energy-intensive. As a result, the Ethereum core development team devised a long-term plan to address the issue, which is the basis of Eth2.
At a high level, the Eth2 implementation involves two significant changes to the way Ethereum runs today. The first is a move from the Proof of Work consensus model to Proof of Stake. This move will address the challenge of energy consumption, as Proof of Stake is far more energy-efficient. However, it also lays the foundations for the second change, which is the implementation of sharding.
Whereas the current Ethereum blockchain is linear, with each block confirmed after its predecessor, sharding splits the network into subdivisions known as shards.
Each shard is connected to a central chain which ensures the integrity of the whole. Sharding will enable Ethereum to process many more transactions per second than it can in a linear model and reduce the amount of disk space needed by validators.
The roadmap got underway at the end of last year with the first of a three-phase rollout. Before diving in, it’s worth mentioning that the initial phases of the Eth2 rollout plan won’t impact the operations of the existing Ethereum platform or ecosystem until the final step is ready to implement.
The Beacon Chain is the central chain to which the shards will eventually connect. It runs on a Proof of Stake consensus, with validators rather than miners. Validators on the Beacon Chain must stake a minimum of 32 ETH to participate.
The Beacon Chain genesis occurred on December 1, 2020. More than 125,000 validators have staked over 4.1 million ETH on the Beacon Chain at the time of writing. Bearing in mind that there’s no opportunity to unstake ETH before the Eth2 implementation, this demonstrates a high level of faith from the Ethereum community that the upgrade will be a success and ETH will retain its long-term value.
The Ethereum development team is now working on the next phase, which will introduce shards to the Beacon Chain. There will be 64 shards in total which will significantly increase transactions per second. This phase of the roadmap is due to go live at some point in 2021.
The Ethereum team believes that sharding will make it more accessible for validators to join the network by reducing the amount of disk space needed and ultimately allowing anyone to become a validator without needing expensive computing equipment.
Unfortunately, any cost savings made on buying hardware will likely be dwarfed by the minimum 32 ETH stake (worth over $80,000 at today’s prices) needed to become a validator.
The final phase will involve connecting the current version of the Ethereum mainnet to the Beacon Chain as a shard. The docking will occur in 2021/2022 and will mark the first time the Ethereum community will realize the benefit of the Eth2 implementation. From this moment, Ethereum will no longer be a Proof of Work platform but move to a 100% Proof of Stake model.
Despite this plan appearing to be relatively straightforward on paper, there are still areas where it’s not entirely clear how things will work. For instance, there’s no concrete decision as yet regarding how the shards will operate. It is confirmed that the first version of the shards will increase the amount of data that the network can handle.
However, the initial implementation won’t allow shards to execute code. The Ethereum core development team is still discussing options, which may involve having some shards running code or waiting until private transactions are possible using technology like zk-snarks.
There are other questions around the ability of applications to interactr. DeFi is heavily dependent on Ethereum’s composability, or the ability for a user to daisy-chain funds through multiple applications in a single Ethereum transaction. It’s not clear whether this will continue uninterrupted if applications run on different shards.
It’s likely that answers to these questions will emerge over the coming months as the sharding phase moves closer to going live. However, none of them is a showstopper for the Eth2 roadmap, which has been a long time coming for the Ethereum community.
Hopefully, Eth2 will see an end to the scalability issues and high transaction fees once and for all.
Traditional markets have risen amid fears that inflation is back and interest rates will have to rise. Bitcoin (BTC) is also down. Is there a connection?