Beyond the Jargon: What You Need to Know About Ethereum 2.0

Ethereum 2.0 Explained

The core development team of Ethereum, is currently working on a significant upgrade—Ethereum 2.0. There are currently many technical jargons that have confused people as regards this subject, especially persons who are not tech-savvy. This has made it quite difficult for many people to really understand what the new development is about. This article would be focused on breaking down Ethereum 2.0 into simple and basic pieces that every person would be able to understand.

What is Ethereum 2.0?

Ethereum 2.0, also called Eth2 or Serenity, is a long-anticipated upgrade to the Ethereum public mainnet. It is expected to launch in 2020. It involves re-constructing the entire Ethereum platform in order to have a new and more scalable version. The implementation of Ethereum 2.0 is expected to start in the summer of 2020, and it would most likely run for another year or two until all three phases are completed. The special and significant thing about this upgrade is the moving of Ethereum from Proof of Work (PoW) to Proof of Stake (PoS) consensus.

Proof of Work (PoW) Explained

Right from the time of creation, Ethereum and many other cryptocurrencies— such as Bitcoin and Litecoin— have used the Proof of Work (PoW) consensus. The architecture of Proof of Work is such that miners run nodes and expend computational energy to solve complex mathematical problems in a competition to mine the next block. In this competition, whoever solves the complex mathematical problem first, receives the block reward. The time and money that miners need to run hardware and expend electricity on PoW chains, are compensated by block rewards. 

These block rewards are distributed to miners who successfully mine a block into existence. Although PoW chains are generally secure, they often face scalability and accessibility issues. This scalability issue is set to be fixed by the implementation of Proof of Stake (PoS) network via shadding.  Currently, Ethereum can only process a limited amount of information in a given period. This is because, each block is mined sequentially, and there is a finite amount of data that can be recorded in each block. This is known as the block size. 

On the issue of accessibility, becoming a miner requires a lot of things. it will cost an individual a fortune to purchase and set up all the necessary devices needed. To be a successful miner and earn good reward, one needs to reside in an area where cost of electricity is low as mining requires much electricity. In Ethereum 2.0, one of the goals is for PoS to offer a fair leveled ground for more individual validators to participate.

Proof of Stake (PoS) Explained

Proof of Stake (PoS) is one of the consensus mechanisms used by some blockchains. The first blockchain project to implement this consensus method was Peercoin, after which other projects like Blackcoin, ShadowCoin and NXT followed suit. In PoS, those that hold the network’s tokens, have the right to earn rewards for validating blocks. This is unlike Proof of Work (PoW) which assigns block confirmation rights to those that demonstrate the largest amount of computing power. In PoS, once a validator agrees to stake his or her tokens, the stake is locked up. In many cases, it will be forfeited fully or partially if the validator does not act in the interests of the network. 

Theoretically, the platform is open for anybody stake tokens; but practically, who gets chosen to validate blocks and earn staking reward will be determined by  a set of  protocols. one gets the right to validate a block and earn rewards based on the proportionate value of his or her stake. For instance, someone with  5% stake of the total value will get to validate 5% of all blocks. However,  coin age which is the length of time that the stake has been locked up as well as randomization, may also criteria to look into when selecting a validator in the network. The major advantages of the PoS algorithm are energy efficiency and security. People are encouraged to be validators since it is easy and affordable. This, along with the randomization process, makes the network more decentralized. 

How Staking Works on Ethereum 2.0

To become a validator on Ethereum 2.0,  the minimum amount one needs to stake is 32 ETH. Each user that want to participate in this process, will be expected to deposit the funds into the official deposit contract that has been developed by the Ethereum Foundation. Validators will be expected to run Ethereum 2.0 client software. One interesting part of this process is its cost effectiveness in the area of setting up the devices needed in the system. Unlike in the PoW system where the cost of setting up a mining rig is so exorbitant, a consumer-grade computer or laptop can be used to run a PoS system. However, it will be necessary that validators stay online always, or face minor penalties.  validators will be selected randomly to bet on the block on the Ethereum 2.0 blockchain and whoever correctly proposes and attests to blocks, will be rewarded with ETH according to the percentage of his or her stake.

Advantages and Disadvantages of Proof of Stake (PoS)

Proof of Stake is more energy efficient. This is because it removes the high-powered computing from the consensus algorithm.

The mind-blowing benefit in PoS architecture is the opportunity to earn passive income from holding cryptocurrency which is staking. Also, users have the opportunity to engage in almost every events concerning the project.

However, one of the downsides of the PoS system is that, by staking, users lock up their cryptocurrency holdings for a defined period. This means that if there is a sudden market crash or surge, they would be unable to take advantage of such an event, to either cut losses or take profit. 

Furthermore, in a situation whereby people decide to participate in a staking pool, someone else might be taking custody of their cryptocurrencies; and this is usually  accompanied with great risk. One of the generally accepted and recognized rules in the crypto world is the issue of users’ private keys. Every user is expected to guard his or her private keys with all diligence and never to allow another party have access to them.

Proof of Work (PoW) VS Proof of Stake (PoS)

Difference between PoW & PoS
  1. In PoW, those that validate and create blocks are called miners; whilst in PoS, those that validate blocks are known as validators. 
  2. In PoW systems, more cryptocurrencies are created as rewards for miners, while PoS systems often use transaction fees as a reward to validators.
  3. In PoW, to add each block to the chain, miners must compete to solve a difficult puzzle using their computers’ processing power; while in PoS systems, competition is virtually non-existent, as the block creator is chosen by an algorithm based on the validator’s stake.
  4. In PoW, in order to add a malicious block, you need to have a computer that is more powerful than 51% of the network; whilst in PoS, in order to compromise the network, you need to own 51% of all the circulating pieces of cryptocurrency on the network.
  5. In PoW, creation of blocks is known as “Mining”; while in PoS, block creation is known as “Forging”.

Conclusion

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.

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