CoinEx Academy: From Ethereum 1.0 to Ethereum 2.0

The recent London upgrade is still echoing in the cryptocurrency industry. Its importance stems from the critical role it plays in Ethereum’s move from ETH 1.0 to ETH 2.0. The Ethereum upgrade proceeds step by step, and since the inception of the Ethereum network, a large number of forks have occurred. For the early stage, the first upgrade was a mining difficulty adjustment, the second “Homestead fork”, and the third “DAO fork” in response to a hacker attack. In November 2016, the fourth fork appeared to prevent DDoS attacks and debloat the blockchain state. In March 2019, the “Constantinople fork” and “Istanbul fork” took place to speed up scaling and improve security. In April 2021, the “Berlin Upgrade” was implemented to optimize the performance of the Ethereum mainnet. And four months later, on August 4, 2021, the well-received “London upgrade” was activated. The more established the Ethereum network, the more frequent upgrades have occurred.

Now you may ask, why were there so many network upgrades? How will Ethereum upgrade from ETH 1.0 to ETH 2.0? And what essential links are involved?

01

Why were there so many hard fork upgrades?

For starters, Ethereum’s grand blueprint of the “world computer” and “global open-source platform” is constructed on its consensus mechanism of a PoW blockchain network, where Ethereum’s continuous upgrading is “doomed”. Its “global open-source platform” will operate applications on applications, thus requiring a super-high processing speed of the underlying chain. But this is precisely where the drawback of the PoW consensus mechanism lays. PoW has all the advantages such as openness, transparency, decentralization, and high security, but its transaction processing speed is below standard. The approximate average TPS of the Bitcoin blockchain is about 7, whereas Ethereum, in contrast, could process roughly 15 transactions per second. So, the bigger the Ethereum network grows, the more users and the more applications are developed on the chain, the more intensive and frequent the upgrades will be needed.

In addition, for the past six years, Ethereum’s transaction confirmation mechanism took form in first-price auctions. That is, when there are multiple transactions to be confirmed at the same time, miners prefer those with higher fees. As a result, transaction fees skyrocketed during the peak period of the network, forcing users to spend additional fees on prioritizing transactions. And if not, for some users who offer a lower transaction fee, their transactions will be neglected. As a result, the cost of fast transaction confirmation greatly increases, and the confirmation of low-cost transactions is infinitely delayed, which will greatly harm the ecosystem of the Ethereum network.

On the other hand, the PoW consensus mechanism is also criticized for its excessive consumption of resources, which is not only unfriendly to the environment but also concentrates hashrates to the wealthy lot. With the surge in the total hashrates, the cost of crypto mining is getting higher, and thus only a few deep-pocketed can join the game. For now, 65% of Bitcoin mining is done by large mining groups, making it increasingly difficult for the average user to run a full node to verify and record blockchain data. The centralization of hashrates and full nodes has made the chain less decentralized than originally thought, which puts the security of the entire protocol at stake.

That is why Ethereum has adopted so many forks, even through the revolutionary leap from ETH 1.0 to ETH 2.0.

02

So what is Ethereum 2.0, and how is it different from Ethereum 1.0? What will Ethereum do to complete the transition? Ever since its inception, Ethereum has been following a detailed development roadmap that laid out the following key milestones:

Phase 1: Frontier, the initial release of the Ethereum network.

Phase 2: Homestead. It was the first stable release following the second upgrade of the Ethereum mainnet in March 2016. Since then, projects based on Ethereum have mushroomed.

Phase 3: Metropolis. At this stage, a series of innovations were introduced to make smart contracts programming easier and the network safer and more efficient. That marks the maturity of the Ethereum network. From the 2017 ICO boom to the rise of DeFi and NTF in 2020, the whole blockchain community bore witness to Ethereum’ success as it opened up new opportunities for wealth creation. At the same time, the inherent shortfalls of its PoW consensus have also been thrust into the limelight.

Phase 4: Serenity. The launch of Serenity will trigger a switch from PoW to PoS consensus, thus steering the network towards a scalable future. Doing so will drastically increase Ethereum’s processing capacity. Specifically, it provides an ultimate solution to long-standing problems, such as congestion and high gas fees, and strikes a balance among security, scalability, and decentralization. The aim is to make Ethereum the world’s computer by bringing about a full-fledged ecosystem and a high processing speed.

In short, the previous three phases are designed to clear the way for Ethereum 2.0. And Serenity is what makes the transition to Ethereum 2.0 a reality. It is fair to say that Serenity is Ethereum 2.0 in its own right.

02

So, how will Ethereum make the transition from ETH 1.0 to ETH 2.0? What essential links are involved?

1. Launching Beacon Chain

The heart of the transition to Ethereum 2.0 is a switch from PoW to PoS, making staking necessary. In light of this, Ethereum launched Beacon Chain on December 1, 2020, so that all users can use smart contracts to stake their Ether on the PoS chain and receive rewards for their participation. For now, however, Beacon Chain is not capable of processing transactions nor executing contracts. And the staked tokens and PoS rewards will remain locked for at least two more years.

2. Overhauling Transaction Pricing Mechanism for a More Prosperous Ecosystem

High gas fees on Ethereum have not been resolved until the rollout of the London upgrade on August 4, 2021. One of the changes introduced in this hard fork is EIP-1559, which allows the network to move from a first-price auction system to a new one that charges a “base fee” and “a tip” for each transaction. Though a base fee is compulsory, it depends on the amount of gas used to include a transaction in the preceding block and how full the block is. Moreover, miners may receive a tip from users who want their transactions prioritized. In this way, users no longer need to pay a high price for a speedy validation, nor will they risk having their transactions excluded for not paying generously. These enable Ethereum to keep transaction fees in check and strike a balance between efficiency and equality.

In addition, the base fee for each transaction will be burned under EIP-1559. That means more Ether will go out of circulation with every new economic activity occurring on Ethereum, making Ethereum a deflationary currency. These changes in the transaction pricing mechanism will make Ethereum more attractive to DApp developers and buyers. For sellers, their tokens will become even more valuable as part of miners’ income is destroyed.

3) Designed difficulty bomb to force miners to turn to PoS from PoW.

Theoretically, PoS is more efficient and energy-saving than PoW, and the transaction fees decrease after the London upgrade. It is therefore a natural choice for traders and business owners who use the Ethereum public chains to vote for PoS. But a much more difficult question is how to make that happen. Miners have invested heavily in buying rigs and building mining farms. It would be a mission impossible for them to give up the existing productivity and start all over again from zero in another pattern.

Launching the beacon chain and allowing PoW and PoS to coexist alone could not secure an easy upgrade to Ethereum 2.0. Apparently, miners may stick to PoW and things will come to a deadlock.

That’s why the difficulty bomb was designed. It was first scheduled to be released with the London upgrade, but why is it delayed again and again?

The difficulty bomb is about making PoW mining hard. At a certain stage, the increasingly difficult levels will deprive miners of any rewards. Simply put, the difficulty bomb is to force miners to give up PoW. Miner dissatisfaction may easily lead to a fork because the blockchain operation is built on consensus. In addition, if the PoS mechanism fails to solve such problems as transaction confirmation efficiency and decentralization-security balance, and miners are unable to mine as the difficulty bomb is detonated, the transaction confirmation will be denied, and the network will be congested. In the end, Ethereum will collapse. This makes a smooth transition from PoW to PoS using the difficulty bomb a top priority.

One thing is obvious. The PoS chain must be competent enough to replace PoW in handling the transaction before the detonation. It must be efficient while meeting requirements on decentralization and security.

Does Ethereum have a solution for this? Yes, the shard chains.

4) Shard chains.

In many cases, we credit the sudden performance leap of Ethereum 2.0 to the change from PoW to PoS. The fact is that PoS cannot directly reduce network congestion or accelerate transaction processing. The trick is that PoS makes sharding possible, which plays the magic of boosting network efficiency and increasing transactions per second from dozens to hundreds of thousands. How exactly does it raise the scalability?

Ethereum has only one public chain, in which blocks are generated sequentially. The speed of block generation and the number of transactions that each block can record determine how many transactions Ethereum can process per second. Just imagine such a scene: a supermarket only opens one checkout lane and everyone must queue up in that lane to pay. Unless the supermarket business is sluggish with few customers, quick payment would be extremely hard. But if several lanes are operating at the same time, the efficiency will hike.

The same goes for sharding. To make transaction processing faster in Ethernet 2.0, 64 shard chains will be created from the original chain that bears data and verifies nodes. Obviously, this approach will drive up efficiency greatly. However, if each chain processes information separately and the information is not synchronized across the network, won’t double-spending and malicious acts become easy? Ethereum 2.0 copes with them in four steps: information is shared across shards, assigning the confirmation of transactions to different shards; the beacon chain is made the main chain, on which smart contracts are established to randomly assign and verify nodes; 128 validators will form a committee to generate blocks and allocate rewards; and after every 64 blocks are generated, the beacon chain will re-elect a round of random validators. All these measures can greatly prevent the possibility of malicious acts.

To minimize double-spending and malicious nodes, Ethereum 2.0 adopts a mechanism to punish malicious actors. All deposited ETH will be confiscated when a node is found doing evil. This punishment is much more severe than that in the PoW mechanism.

All these guarantee smooth and safe blockchain operation under the PoS mechanism, rivaling that under the PoW mechanism.

03

Yet the technology package is too complicated for Ethereum to launch immediately. It may take a long time to see a fully sharded Ethereum that carries all of the existing data. Ethereum 2.0 has a promising future, but it must take things slow. That also depends on the technological progress of the Ethereum project. Why investing in cryptocurrency? We must value the technological competence of the developer team. Though technology may seem far away from us, it is critical to coin investing and whether a coin or a chain can keep growing.

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