Ethereum 2.0 FAQ
What is Ethereum 2.0?
Ethereum 2.0, also called Eth2 or “Serenity”, is the next major change to the Ethereum blockchain. The launch of Ethereum 2.0 is a much more substantial change compared to previous ones as it introduces an experimental Proof of Stake consensus mechanism, moving the network away from its existing Proof of Work architecture.
After many years of anticipation, the deposit contract went live on November 4th. The Beacon Chain staking deposit contractreached its necessary trigger limit of 524,288 ETH on November 24th, and the launch date of “Phase 0” is now set for December 1st (i.e. 7 days after the threshold was met).The Ethereum Foundation has made clear that the Serenity updates will not take place at a single point in time; instead, they will roll out in several phases over the next few years.
Ethereum 2.0 is launching in several phases: Phase 0, Phase 1 (including Phase 1.5) and Phase 2. The first phase, Phase 0, is now set to launch on December 1st, 2020. According to the Ethereum Foundation, the next two phases (i.e. Phase 1 and Phase 2) will be released in the following few years after Phase 0. These dates are not yet set.
Phase 0: the Beacon Chain
The first phase of Ethereum 2.0 includes the launch of the Beacon Chain. The Beacon Chain stores and manages the registry of validators and will deploy the Proof of Stake consensus mechanism. The original Ethereum PoW chain will run alongside this, ensuring that there is no break in data continuity.
In order for the Beacon Chain to launch its genesis block, at least 524,288 ETH must be staked on the network, divided among a minimum of 16,384 validators (these numbers were chosen to ensure sufficient security and validator distribution). This threshold was met on November 24th
The launch of the Beacon Chain will mark the beginning of Phase 0. After the Beacon Chain is launched, the Ethereum 1.0 and 2.0 chains will exist in parallel for some time. Ethereum 1.0 will eventually become a shard in the Ethereum 2.0 system, merging the two chains.
Phase 1 - Shard Chains
The second phase of Ethereum 2.0 will take place at some time after the launch of the Beacon Chain in Phase 0. The primary improvement of Phase 1 is the implementation of Shard Chains. Shard Chains are a scalability mechanism in which the Ethereum blockchain is “split” into 64 different chains, lowering the workload on Ethereum nodes who now only need to validate whichever shards they are interested in.
Phase 1.5 is part of Phase 1 and it represents the moment when Ethereum 1.0 merges with Ethereum 2.0. Specifically, the Ethereum 1.0 chain will become one of the 64 shards that make up Ethereum 2.0. This is to ensure that the entire data history will be preserved.
Phase 2 - State Execution
The third phase of Ethereum 2.0 is not yet very clearly defined, however, it is hoped that it will be the phase where the functionality of the entire system will start to come together. With Proof of Stake and sharding at this point implemented, Phase 2 will probably involve adding Ether accounts, enabling transactions, transfers and withdrawals, allowing smart contracts execution and bringing Ethereum 1.0 chain into Ethereum 2.0 so that Proof of Work can be turned off.
The overall goal of Ethereum 2.0 update is to increase the performance of the network. To achieve this, Ethereum 2.0 introduces:
- The transition to Proof of Stake; and
- The implementation of Shard Chains
Proof of Stake (PoS) is the most significant change in Ethereum 2.0 as it will completely change the economic incentive structure for validating the blockchain. Currently, Ethereum 1.0 runs on a fully trustless consensus mechanism known as Proof of Work (PoW). PoS hopes to retain PoW’s existing benefits while avoiding its main issues: if successful, it would shift the cost of writing the blockchain from an externally verifiable measure (energy) to an internally verifiable one (ETH stake). One of its main tradeoffs is a change away from the trustless auditing model of PoW to the PoS model whereby new entrants must trust some subset of existing network participants to tell them which blockchain is the correct one. The benefit would be a drastically reduced energy expenditure for the system as a whole.
Shard Chains are like parallel blockchains that sit within Ethereum and take on a portion of the network's processing work hence improving its scalability. At present, all nodes (i.e. computers) in the Ethereum network must download, compute, store and read every transaction in the history of Ethereum before processing a new one. In Ethereum 2.0, nodes will be dispersed across a subset of shards. They'll only need to download, compute, store, and read every transaction on that subset – not the whole network. The number of validators on each shard would be limited to whichever validators care for whichever shard.
How will Ethereum 2.0 affect the current Ethereum 1.0 chain?
The current plan is for the Ethereum 1.0 chain to effectively become the first shard on Ethereum 2.0 when Phase 1 takes place. 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.
At present, Ethereum uses a Proof of Work (PoW) system. In a PoW system, transactions are added to the chain by “miners”, who use their computer hardware to solve complex mathematical equations in order to prove that a certain amount of time has passed since the previous block and that all new transactions provably came after all previous ones in time.
Proof of Stake (PoS) represents a class of consensus algorithms in which validators vote on the next block, and the weight of the vote depends upon the size of its stake. Hence, an individual’s ability to create new blocks is proportional to the amount of Ether they have locked in staking contracts. The idea is that the cost of misbehaviour by miners is internalised through the “slashing” of their staked Ether instead of externalised through energy opportunity cost.
In contrast with PoW, PoS mechanism does not require validators to consume energy but instead, requires them to stake their funds in an Ethereum smart contract as collateral. As a result, PoS does not use energy as a verifiable measure of time passed, reducing the energy consumption of the network.
How will Ethereum 2.0 affect ETH holders?
During Phase 1.5, the Ethereum 1.0 chain will become part of Ethereum 2.0 and specifically, Ethereum 1.0 will become one of the 64 shards that make up Ethereum 2.0. That means that ETH holders will not be affected and can continue using their ETH just as they were before. In other words, the ETH holders who are interested only in holding, trading, or using their ETH on dapps do not have to actively do anything to prepare for Ethereum 2.0.
There will not be a new type of ETH token. For more information, please refer to the “How will Ethereum 2.0 affect ETH holders? ” FAQ on the Ethereum Foundation website.
However, there are ways for ETH holders to participate and earn rewards for staking on Ethereum 2.0:
There will be a minimum threshold of 32 ETH (~$12,000 at 4 November 2020 prices) required to participate in staking, and validators will need to be running a validator node. This can be done on a consumer-grade computer or laptop and does not require powerful computers like the Proof of Work mechanism does. However, validators will be expected to be online consistently or face penalties. The annualised rate of return for staking ETH is expected to be around 4%–10%. A function of the Proof of Stake consensus model will “slash” (destroy) part of the Ether balance of any validator acting “maliciously”, either on purpose or not, toward the network.
We are currently reviewing all possible options. The final announcement will be made via our website in due course.
A main risk of Ethereum 2.0 is that Proof of Stake (PoS) does not work as hoped. Unlike Proof of Work (PoW), PoS has not yet been proven to work at significant scale and its vastly increased complexity compared to PoW creates a much larger surface area for unintended behavior (bugs) and attacks.
PoS also has the potential to centralise the holding of ether in the hands of whoever are the currently largest holders. Because PoS rewards validators based on stake held, not work performed, there could emerge a plutocratic tendency in ether distribution whereby current large holders perpetually retain their proportions of ether holdings at the dilution expense of everybody else.
Another major risk is that these code changes are being done on a currently live system, potentially imperiling currently functioning dApps and smart contracts. While this should not be an immediate issue of Phase 0, it will resurface when the Ethereum 1.0 and 2.0 chains must at some point become fully integrated.
- Vitalik Buterin, "Overview of Ethereum 2.0" - Youtube
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