What You Should Know About Ethereum 2.0

Ethereum 2.0, also called Eth2 or “Serenity”, is the next upgrade to the Ethereum blockchain. Ethereum 2.0 will be released in multiple “Phases” starting in 2020 with Phase 0. Each phase will improve the functionality and performance of Ethereum in different ways.

There are two primary improvements introduced by Ethereum 2.0 that do not exist in Ethereum 1.0: Proof of Stake and Shard Chains.

Proof of Stake: Currently, Ethereum 1.0 runs on a consensus mechanism known as Proof of Work (PoW).

PoW relies on physical computing power (miners) and electricity (work) to build blocks on the blockchain.

Proof of Stake (PoS) is an upgrade which enables improved security, scalability, and energy efficiency. Instead of relying on physical miners and electricity, PoS relies on validators (virtual miners) and deposits of ether.

Shard Chains: Shard chains are a scalability mechanism which drastically improves the throughput of the Ethereum blockchain. Currently, having a single chain made up of consecutive blocks is incredibly secure and makes information easy to verify.

However, requiring each full node to process and validate each transaction in consecutive blocks can affect the ability to process transactions quickly – especially in times of high mainnet activity.

Shard chains are a mechanism through which the Ethereum blockchain is “split” – thus dividing the data processing responsibility among many nodes.

This allows for transactions to be processed in parallel rather than consecutively. Each shard chain is like adding another lane to upgrade Ethereum from a single lane road to a multiple lane highway.

More lanes and parallel processing leads to much higher throughput. Shard chains are expected to be rolled out in Phase 1 of Ethereum 2.0.

Ethereum 2.0 is planned to be rolled out in at least three phases: Phase 0, 1, and 2. Phase 0 is planned to launch in 2020, with Phases 1 and 2 to be released in following years.

Phase 0: In the first phase of Ethereum 2.0, the “Beacon Chain” will be implemented. The Beacon Chain stores and manages the registry of validators, and will implement the Proof of Stake (PoS) consensus mechanism for Ethereum 2.0.

The original Ethereum PoW chain will continue to run alongside the new Ethereum PoS chain, ensuring there is no break in data continuity.

Phase 1: The second phase of Ethereum 2.0 will likely roll out in 2021. The primary improvement of Phase 1 is the integration of shard chains. Shard chains are a scalability mechanism in which the Ethereum blockchain is “split” into 64 different chains, which allows for parallel transaction, storing, processing of information.

At its most conservative estimate it will enable 64 times more throughput than Ethereum 1.0, but it is designed to be able to handle several hundred times more data than Ethereum 1.0.

Phase 2: The third phase of Ethereum 2.0 will likely be launched in 2021 or 2022. This phase is currently less clearly defined than the above two phases, but will involve adding ether accounts and enabling transfers and withdrawals, implementing cross-shard transfers and contract calls, building execution environments so that scalable applications can be built on top of Ethereum 2.0, and bringing the Ethereum 1.0 chain into Ethereum 2.0 so that Proof of Work can finally be turned off.

Many further improvements are planned for research and development after Phase 2 is complete.

Ethereum 2.0 will primarily benefit the scalability, throughput, and security of the Ethereum public mainnet.

Ethereum 2.0 will not eliminate any of the data history, transaction records, or asset ownership of the Ethereum 1.0 chain. The Beacon Chain – which will be the backbone of Ethereum 2.0 – will be fully functional with the existing 1.0 chain, ensuring continuity.

The current plan is for the Ethereum 1.0 chain to effectively become the first shard on Ethereum 2.0 when Phase 1 launches. Until then, the Ethereum 1.0 chain will continue as it is now and will undergo improvements to enable it to eventually be an Ethereum 2.0 shard.

Phase 0 of Ethereum 2.0 will launch in 2020. Phase 1 is anticipated in 2021. Phase 2 and beyond are anticipated for 2021 or later.

Proof of Stake (PoS) is an upgrade from Ethereum 1.0’s current Proof of Work consensus model and allows for improved security and scalability.

PoS is a consensus mechanism that relies on validators and staked ETH for the continuation of blocks on the blockchain, and is necessary for sharding.

Validators are people who elect to continue the blockchain by depositing (or “staking”) 32 ETH into the deposit contract. On a continuous basis, validators are randomly selected from the pool of all validators to be given the opportunity to create the next block.

Should a validator successfully validate a block, they will receive an ETH reward. If a validator attempts to compromise the truthful continuation of the blockchain, their deposit will be ‘slashed’ – meaning they will lose some or all of their 32 staked ETH.

A Proof of Stake mechanism offers more crypto-economic security compared to the more abstract disincentive of losing the cost associated with electricity.

Rather than investing in an enormous mining facility to defray the cost of electricity to mine blocks in PoW, staking on Ethereum 2.0 will only require a consumer laptop (some software clients aim to be lightweight enough to run on a cell phone, thus reducing the barrier to entry to participating in the consensus process, consequently increasing the decentralization of the network). Proof of Stake will go live in Phase 0 of Ethereum 2.0.

There is no way to buy Ethereum 2.0 ether, since there will not be a new type of ETH token. Instead, users will deposit ETH in the Ethereum 2.0 deposit contract. Right now, this is planned to be a one-way, non-reversible transaction.

There are two ways ETH holders can participate and earn rewards for staking on Ethereum 2.0.

First, an ETH holder may run their own validator(s) by staking ETH in increments of 32 on the network. Running your own validator node means you have the responsibility to validate and organize blocks – not doing so could result in a penalty of ETH.

Another option for ETH holders is to stake their rewards through a staking provider or join a staking pool with smaller amounts of ETH, through which anyone can stake whatever small amount of ETH they are able to and still receive rewards proportional to their contribution.

Phase 0 is the first step toward changing the consensus mechanism of Ethereum from proof-of-work to a proof-of-stake. With proof-of-stake, validators commit a stake and run software to secure the Ethereum 2.0 chain. Phase 0 of Ethereum 2.0 will launch the beacon chain, which will establish and maintain the proof- of- stake consensus mechanism.

In order to become a validator on Ethereum 2.0, validators will deposit 32 ether into the official Ethereum 2.0 deposit contract, which has been developed and released by the Ethereum Foundation.

More technical users can run their own validator node and stake their own ETH. Codefi Activate worked with the Ethereum Foundation to build the Launchpad app, to provide technical onboarding to the requirements, responsibilities, and risks in becoming an Eth2 validator.

Another option is to stake your ETH using a staking provider, a number of which will likely come to market in the weeks and months before the launch. There will be both custodial and non-custodial staking services offered.

As a validator on Ethereum 2.0, you get rewarded for proposing and attesting the next block in the chain. You will receive rewards in ETH for making valid proposals and attestations.

Rewards are dynamically calculated based on the state of the network upon epoch completion. Network level reward issuance rates are a function of the total amount of ETH staked and average % online of validator(s). Individual validator reward rates depend on the number of validators run and % uptime of the validator.

Rewards minus penalties are transferred to validators every epoch (384 seconds ~6.5 minutes). As a result, the reward you expect to receive when being randomly selected to be a validator may be different than what a validator actually receives.

An upside to participating as a validator is that you can earn rewards of ETH. There is, however, a risk of losing funds through the ‘slashing’ of the ETH you staked on the network.

With a small amount of care, this risk is negligible. The first way a validator might lose funds is by being offline and not performing its duties correctly.

This incurs a relatively mild penalty: roughly the same as the reward you could have made. As long as you are currently participating for at least 50% of the time, you will not lose your stake. The other way a validator can lose funds is to publish contradictory information about the chain.

In this case, the validator is slashed and ejected from the system. The amount slashed is between 1 ETH and the entire stake amount, depending on other factors. Being slashed is easy to protect against and ought never to happen unless a validator is deliberately acting maliciously.

After you have registered your 32 ETH stake in the deposit contract and your validator has become active, it will be assigned duties from time to time by the Beacon Chain.

Validators will be called on to attest to blocks on the Beacon Chain once every 6.4 minutes (once per epoch), and randomly selected from the whole validator set to propose blocks periodically.

If there are 100,000 validators in total, your validator will be asked to propose a block about once every two weeks on average. This is all completely automatic and entirely handled by the validator software.

In order for the Beacon Chain to launch, at least 16,384 validators will be needed, which equates to 524,288 ETH staked. Staking rewards are not distributed until the Beacon Chain reaches the genesis threshold.

There is no need to do anything special with the ETH you currently own. It continues to be fully usable on the Ethereum 1.0 chain. At some point, the Ethereum 1.0 chain will become part of Ethereum 2.0, and your ETH will continue to function just as it does now, with no action required on your part.

For those who want to participate in staking, you can choose to become a validator on the Ethereum 2.0 beacon chain by depositing your ETH into the validator deposit contract on the Ethereum 1.0 chain.

It then becomes a validator balance on the Ethereum 2.0 beacon chain. This process is non-reversible. Transfers are disabled during Phase 0 so validators will have to wait until Phase 2 until withdraws to a specific shard are possible, at which point your ETH stake and the rewards accrued will be fully usable within Ethereum 2.0.

The development of Ethereum 2.0 is largely led and coordinated by the Ethereum Foundation research team, but many other research and implementation teams are making substantial contributions.

The main work is to collaborate on defining the specification for Ethereum 2.0, which is maintained on the Ethereum Foundation GitHub pages. Seven independent teams are building Ethereum 2.0 clients in a variety of different programming languages for different use cases and are constantly feeding back into the design and specifications.