STAKING

Goodbye, Ethereum 1.0… Hello, Ethereum 2.0! | by Henrique Centieiro | Mar, 2022

Are you fed up with the crazy high Ethereum gas fees, highly congested network, and failed transactions when you transact on Ethereum? I don’t know about you, but I certainly am!

When I found out how much gas fees I’ve paid transacting on Ethereum blockchain so far, I was totally blown away. You can also check yours here if you want to be surprised…

Just by transacting NFTs for a few months on Ethereum, I spent $1.9 million on gas. Kidding 🤣 unfortunately this is not my account.

It’s certainly time for the Ethereum blockchain to have ht belong promised upgrade to make it a lot cheaper, much faster, and more scalable. Here comes Ethereum 2.0 (also known as Serenity), the exciting makeover of the current Ethereum blockchain (also known as Ethereum 1.0), in which phase 1 — The Merge is expected to roll out in Q1/Q2 2022.

Let’s explore Ethereum 2.0 today, shall we?

Here’s a special shoutout to Ms. Bee Lee, for her crucial effort contributed to create this article. Enjoy!

As Ethereum 2.0 is a series of upgrades, it has been (and will be) rolling out in phases.

The First Phase: Phase 0 — Beacon Chain

The Beacon Chain is the new Proof of Stake consensus layer that was implemented in Dec 2020, that the current Ethereum 1.0 chain will eventually merge with. The Beacon Chain not only introduces PoS consensus mechanism which sets Ethereum up for staking and shard chains, it is also a testnet for the future PoS version of the Ethereum 2.0. The Proof of Work chain still continues to run alongside the new PoS chain, to ensure there is no break in data continuity. Each validator (node) represents 32ETH staked on the Beacon chain.

The Second Phase: Phase 1 — The Merge

The current Ethereum network will merge with the Beacon Chain. The merge represents the official switch to the Proof of Stake consensus model, which will end the Proof of Work model. The merge is expected to happen in Q2 2022 (very soon!). After the merge, Ethereum will officially become a PoS blockchain which allows holders to stake their ETH and earn rewards. As the merge is going to be automatic, Ethereum holders do not need to do anything while Ethereum goes through this phase.

On 15 March 2022, the Kiln Merge Testnet was launched. Kiln will be the last Merge testnet before the existing public testnets are upgraded. Ethereum developer Tim Beiko has tweeted about the success of Kiln:

By the way, talking about Kiln:

The Third Phase: Phase 2 — Sharding

Sharding is expected to launch in late 2022 after the Merge happened. Shard chains will provide a lot more capacity to store and access data for the Ethereum network. With the development of rollups scaling solutions in 2021, which takes much of the burden of computation and storage out of the blockchain, rollups now plays a key part on the scalability side of the Ethereum 2.0 upgrade.

Please no more delay, ETH 2.0

Proof of Stake (PoS)

Proof of Stake (PoS) is a consensus mechanism. To understand what PoS is, first let me explain what a consensus mechanism is.

Typically, companies and organizations have certain databases that store users’ data such as their names, e-mail addresses, addresses, etc. The computers that store such data usually exist in one location and are controlled by one person or one small group of people.

A blockchain however, is a type of database with its information dispersed among many locations and individuals. With such a decentralized and distributed linked data structure, even with one computer goes down, there are plenty more computers continue to keep the data and network alive, it can also at the same time ensure the data is resistant to any kind of modification.

With such structure, these individuals need to find a way to agree on the correct set of data (in the case of a cryptocurrency, the data refers to transactions), so that all of the versions of their data would match. That is why some sort of mechanism is necessary to form such a consensus.

Proof of Work vs Proof of Stake

So, what is Proof of Stake (PoS)? There are many types of consensus mechanisms, PoS is one of the most well-known ones among the others like Proof of Work (PoW), which is what the current Ethereum 1.0 is adopting.

In the PoS system, nodes (or “validators”) process transactions and create new blocks of data of a blockchain like the way miners do in a PoW blockchain. The difference lies in the way of gaining the right to create a block. In the PoW system, miners need to compete to be the first to solve complex mathematical problems which require a lot of computing power and electricity.

In the PoS system however, consensus is reached by using an algorithm that chooses a node to win a block of transactions, instead of the nodes having to race to win the block by spending a lot of computing power and electricity. When a node is chosen, it forges the next block of transactions in the chain.

From those who have staked a minimum amount of coins, a node is then semi-randomly chosen by an algorithm. The chosen node creates the block and other nodes validate it, it will then gets rewarded for creating the new block by getting paid with the blockchain’s native coin from the transaction fees. For example, Cardano blockchain nodes get rewarded in the form of ADA. However, if the block that the node created turns out to have any fraudulent transactions, both the node who creates the block and the ones who validate it would lose part of or even all of the staked coins.

In order to determine who can be the next block creator, the PoS algorithm uses different factors such as the size of the stake. To ensure the wealthiest stake pools do not always win, other factors like the duration the coins have been staked are also being factored. Some PoS blockchains have also added a degree of randomization to the selection process, so the bigger and older stakes do not always win. Holders of the coin can then “stake” their holdings to a staking pool, when a node is selected to forge a block, the reward it receives is then distributed among the individual stakers.

How to get chosen to create a block in PoS

Unlike the PoW system which the miners need to be the first to solve a complex mathematical problem in order to be able to create a block, PoS requires way less computing power and electricity needing to spend. It is also way less time-consuming than the PoW system.

That is why Proof of Stake is chosen as the consensus mechanism of Ethereum 2.0, as it is a much more environmentally friendly and efficient choice, allowing Ethereum transactions to be a lot faster and cheaper.

Currently, the 10 million ETH the investors staked in the Beacon Chain is earning about 4.8% in yield per year. It is expected the yield will grow to as high as 15% after the Merge, while the network transaction fee will be reduced to a fraction compared to the current PoW system, all thanks to PoS!

By the way, if you are interested in ETH staking, Lido Finance provides great options with way better liquidity (you don’t need to have your ETH locked).

Sharding

Sharding is a method Ethereum 2.0 plans to use in order to scale its capacity. With the Proof of Work blockchain (which is what Ethereum 1.0 is using right now), most nodes in the network have an entire copy of the history of all the transactions. Such a copy can take up a lot of space, especially for the older cryptocurrencies like Bitcoin and Ethereum which come with a long list of transaction record. The Ethereum blockchain is almost reaching 1 Terabyte whish is not good for decentralization since only big computers can handle it.

Sharding is a common technique used among the newer PoS cryptocurrencies to help with scaling without sacrificing security and decentralization. It is a form of database partitioning that breaks down a large database into smaller and more manageable pieces, to boost the efficiency in a large scale.

A simple breakdown of how sharding works

Shard chains are created by sharding, which decrease the workload of network nodes by requiring each node to only store and manage one shard of the network, instead of the whole blockchain. On the other hand, shard chains enable parallel processing which reduces the latency of linear processing that occurs when using only one single blockchain.

Let’s imagine a blockchain network with three nodes — A, B and C. In a sequential format, in order to verify a dataset D, they would each have to verify it individually. With sharding, D can then be broken down into multiple shards, D1, D2, D3 and so on. Node A, B and C can then each take up one individual shard and process them at the same time. Can you see how this parallelizing can dramatically speed up the whole verifying process?

So how is Ethereum 2.0 upgrade going to implement sharding to scale its blockchain?

Phase one of the upgrade will spread the whole Ethereum network load across 64 separate shard chains, which will be coordinated by the Beacon Chain. As part of Phase 0, the teams of validators which have deposited collateral into the Ethereum 2.0 deposit contract, will be randomly assigned to manage particular shard chains on the Ethereum network.

Eventually, shard chains will be able to execute nodes, just like the main Ethereum blockchain. It will then be able to support smart contracts as well as decentralized applications (dApps). It is believed they will need to do a lot of testing on the movement and aggregation of data between the Beacon Chain and the shard chains before finalizing. Creating more shard chains other than the assigned 64 ones is also possible in the future.

Rollups + Sharding

The implementation of rollups is another strategy being developed as part of the Ethereum 2.0 Phase 1 update. Rollups are already existing today, they are a “hybrid” Layer 2 scaling solution, which aims at achieving the best of these two worlds by fully relying on the security of Ethereum while creating a scaling solution for general purpose applications.

Rollups are a type of Ethereum-scaling solution that works by executing transactions outside Layer 1, but posting transaction data on Layer 1. This can allow the rollup to scale the Ethereum network while not sacrificing its security from the Ethereum consensus.

The 2 different types of rollups include Optimistic rollups and ZK rollups. They are able to scale the Ethereum network at around 15–45 transactions per second, it can however be able to scale up to 1,000 to 4,000 transactions per second depending on the type of transactions.

With the exciting sharding method of Ethereum 2.0 upgrade, which offers a significant amount of space by creating multiple shards, it creates an amazing synergy when combining together with rollups. The combination of the two is expected to bring the transaction speed of the Ethereum blockchain up to 100k transactions per second.

Vitalik Buterin’s Twitter post

Rollups is especially useful in boosting the throughput of decentralized applications (dApps). The way they allow dApps to “roll up” the transactions and bundle them into one single transaction off-chain before settling the final state on-chain, makes data processing of smart contracts a lot more efficient. This can also largely lower gas fees due to the popularity of Ethereum dApps and DeFi (decentralized finance) offerings, such as UniSwap.

Want to learn more in-depth about rollups? Check my 2 other articles dedicated to rollups!

Ethereum 2.0 & DeFi

Currently, Ethereum 1.0 blockchain has a massive DeFi (Decentralized Finance) ecosystem. However, most of it is nearly unusable due to how slow and congested it is. Such congestion is also the reason to cause very high gas fees, which sometimes is even higher than the amount of money the users want to transact.

Right now, only those with larger holdings and transact in larger amount are able to benefit from the ecosystem. I still remember how ridiculously expensive it has costed me (close to $150 in transaction fee) when I tried to swap a small amount of an altcoin on UniSwap a few months back, which also stopped me from hoping to participate in the liquidity pools provided on these decentralized exchanges on the Ethereum network.

The transaction fee is so ridiculously high as they are controlled by miners due to the Proof of Work mechanism, which create a large conflict of interest. With the switch to Proof of Stake, such issue will no longer exist. Should Ethereum 2.0 prove successful, it will certainly has a drastic effect on the current bottlenecks that slow down the current DeFi development.

Final Thoughts

If there is no delay, Ethereum 2.0 is set to roll out sometime this year (Yay!). This is by far the most significant blockchain network upgrade ever (and probably ever will be?). If Ethereum can achieve its goals of becoming the global settlement layer for the metaverse, this Ethereum 2.0 upgrade will certainly be one of the most significant events in the entire crypto history.

Imagine some day in the future, your kids (hopefully not grandkids) will think you were insane spending $100 on gas fee buying a $25 NFT on Ethereum 1.0. Same as the way we now think about how we needed to dial-up to log into the internet back then when we were all kids. Don’t you still remember that dialing sound?!

What an exciting time we are at, don’t you think? Let’s wait and see how it will all play out!

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Traciwininger
Author: Traciwininger

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