Ethereum 2.0 Upgrade is Reshaping and Decentralizing the Global Financial System

Currently, Ethereum is leading the revolution of Decentralized Finance (Defi) with a market share of over 95%. However, the existing structural limitations of the network created the need for a key upgrade in 2021.

This upgrade is called Ethereum 2.0. and promises to make the network more secure, cheaper to use, and capable of handling many thousands of transactions per second.

 

Introducing Ethereum and Ethereum 2.0

Launched in 2015, Ethereum is an open-source software platform incorporating decentralized applications (dapps) and smart contracts. Ethereum is the most actively used blockchain in the world and the second most valuable in terms of market value (after Bitcoin). These are some key Ethereum numbers:

• Hundreds of thousands of users and tens of thousands of developers (about 3,000 dapps are built on Ethereum)
• Leading the revolutionary Decentralized Finance (Defi) with a market share of over 95%
• Over 25 billion USD are locked in Ethereum’s DeFi -Check here the Total Value Locked in DeFi

The native cryptocurrency of the platform is Ether (ETH). Ether works as the transactional token for the operation of smart contracts and dApps.

What is Decentralized Finance (DeFi)?

DeFi refers to a new global financial ecosystem that is built on top of blockchain technology. DeFi aims to create a permissionless and transparent financial environment that is open-source and available to everyone without centralized control. DeFi includes a wide variety of financial applications such as payments, lending and borrowing money, insurance, and trading via decentralized exchanges.

What is Ethereum 2.0?

Ethereum 2.0 or else ‘Serenity’ refers to a combination of interconnected upgrades in the current Ethereum 1.0 ecosystem, aiming to achieve scalability, security, and efficiency. The Ethereum 2.0 includes 3 phases: Phase 0 which was launched in late 2020. Phase 1 is anticipated in 2021 and Phase 2 and beyond are anticipated for 2021 or later

Who is developing Ethereum 2.0

There are hundreds of programmers behind the Ethereum 2.0 upgrade. Overall, there are seven (7) independent teams using several different programming languages and coordinated by the Ethereum Foundation.

• Trinity
• Chainsafe Ethereum Dev Team
• PegaSys
• Prysmatic Labs
• Parity Technologies
• Status
• Sigma Prime

The specifications of the upgrade are stored at GitHub: » https://github.com/ethereum/eth2.0-specs

 

New Ethereum 2.0 Features at a Glance:

• Ethereum 2.0 will be divided into many “Shards” which means more efficiency and a considerably more scalable network
• Fully compatible with ETH 1.0 (Existing ETH will be added as a Shard Chain)
• No more need for mining by moving to Proof of Stake (PoS) which is a significantly more energy-efficient method
• Considerably faster transactions
• Lower gas fees (tightening the cost of all transactions)
• Managing inflation (burning a portion of Ethers)
• Supporting staking nodes (earn Ethereum as passive income)
• Implementing eWasm (re-designing ETH smart contracts using WebAssembly)

 

 

Ethereum 2.0 Moves to Proof of Stake (PoS)

The Ethereum 1.0 is based on a Proof of Work (PoW) consensus model that has a lot of limitations. On the other hand, Ethereum 2.0 is based on a Proof of Stake (PoS) model which allows improved efficiency and scalability.

□ PoW is a consensus mechanism that relies on miners. Currently, in order to validate transactions, miners get 2 ETH per new block.

□ PoS is a different consensus mechanism that relies on validators who stake ETH, instead of miners. Every validator is required to allocate 32 ETH into a deposit contract. If the validator successfully validates a block, receives 1 ETH reward. If the validator misbehaves by jeopardizing the operation of the blockchain, he loses a part of his initial 32 ETH deposit, or even all his staked Ethers.

 

EIP 1559 Changes Ethereum Economics by Burning New ETHs

EIP 1559 is the last key piece of the new Ethereum’s economic system. EIP 1559 is an Improvement Proposal by Eric Conner (@econoar) which allows the burning of the majority of the ETH involved in the transaction fee.

• An estimated 10.000 ETHs per year will be burned during the first year
• Hundreds of thousands of ETH per year will be burned after the full implementation of ETH 2.0

EIP 1559 Impact on the Ethereum Monetary System

EIP 1559 adds a deflationary mechanism to Ether:

• Controlling and rationalizing the rewards of ETH validators
• Achieving sustainable gas management
• Protecting Ethereum holders by making Ethereum more scarce
• Improving the long-term efficiency of the whole Ethereum monetary system

 

The Ethereum 2.0 Phases

The Ethereum 2.0 upgrade includes 3 phases: Phase 0 which is already launched, Phase 1 will be completed in 2021, and Phase 2 will be completed in late 2021, or a little bit later.

Image: Ethereum 2.0 Architecture

 

Phase 0: – Beacon Chain (Launched in 2020)

Phase 0 aims to test and manage the Casper Proof of Stake protocol and its shard chains by providing randomness. The launch of Phase 0 signifies the birth of the ETH2 token. The old ETH can be converted to a new ETH2 at a 1:1 ratio. In addition, staking ETH2 is becoming available for all Ethereum users who can allocate 32 ETH2.

What you need to know about the Beacon Chain

• On December 1^st, 2020, Ethereum Phase 0 went live (the launch was a success)
• At the point of completion of Phase 0, there will be two different Ethereum chains (the old and the new)
• During Phase 0, the old ETH chain will operate uninterruptedly
• The main objective of the Beacon Chain is to manage ETH2 validators and their stakes
• Rewards and penalties to ETH2 validators will be applied and tested
• During Phase 0, 1, and 2, there will be rewards to both Eth1 miners and Ethereum 2.0 validators (combined inflation for a short period of time)
• Phase 0 will use "Attestations". These are proof of stake votes for a shard block. When the number of these votes reaches a ‘crucial’ level, then a "crosslink" is created which confirms the shard into the Beacon Chain

What you need to know about ETH2 Token

• The old ETH can be converted to a new ETH2 at a 1:1 ratio
• You need 32 ETH2 to become a validator and earn staking
• ETH2 cannot be converted back to ETH
• ETH2 will be fully usable at Phase 3 of the upgrade

Phase 1: - Shard Chain (2021)

Phase 1 aims to scale Ethereum via shard chains. The objective is to create and validate these shards. There will be 64 shard chains that will allow parallel transactions.

What you need to know about ETH2 Shard Chains

• 64 shard chains will be deployed in Phase 1 (as the network scales, more chain shards could be added in the future)
• Crosslinking will make it possible for shards to communicate with each other via (asynchronous cross-shard communication)

Phrase 2: – Execution Engine (2021-2022)

Phase 2 will complete Ethereum 2.0 by merging ETH into ETH2. The old proof of work (PoW) network and the new proof of stake (PoS) network will come together.

What you need to know about the Merging of ETH1 and ETH2

• The existing ETH1 network chain will run parallel to the ETH2.0 chain
• The mining of ETH1 will probably continue for a few more years

Key Features of Ethereum 2.0 after completion

• Shard chains will convert form data containers to a complete chain state (supporting accounts, contracts, etc.)
• Smart Contracts will get a new form
• Each shard will manage a virtual machine using eWasm (Ethereum WebAssembly, check below)
• The 'Execution Environments (EEs) will be introduced, that allow the existence of different execution environments within a shard (all 64 shards have access to these execution environments and can execute transactions with them)
• Ethereum 2.0 developers will be allowed to choose the shard where their dApp will be deployed

 

Ethereum WebAssembly (eWasm)

The eWasm is a proposed upgrade of the existing Ethereum smart contract execution layer that is based on the power of WebAssembly. WebAssembly is an open standard for executable programs that became a World Wide Web Consortium recommendation in late 2019. These are some benefits of upgrading to eWasm:

- Making Ethereum more compatible with the traditional internet and more usable to programmers outside the blockchain

- Achieving very fast execution of smart contracts (near-native execution speed)

- Accessing the vast available resources and tools of WebAssembly

- Developing smart contracts in traditional programming languages, such as C, C++, and Rust

 

Resources:

• Consensus: https://consensys.net/knowledge-base/ethereum-2/faq/
• ExpertSignal.com: https://expertsignal.com/index.php/cryptocurrencies/defi-guide
• Boxmining.com: https://medium.com/prysmatic-labs/how-to-scale-ethereum-sharding-explained-ba2e283b7fce
• Ethhub.io: https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-phases/
• Medium.com: https://medium.com/rocket-pool/ethereum-2-0-whos-building-it-54a735442e
• EIP 1559: https://medium.com/@TrustlessState/eip-1559-the-final-puzzle-piece-to-ethereums-monetary-policy-58802ab28a27

 

■ Ethereum 2.0 -Revolutionizing the Global Financial System

Giorgos Protonotarios, Financial Analyst

for TradingCenter.org (c)

25th of January 2021

 

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