Serenity is on the way. The long awaited journey to Ethereum 2.0, codenamed “Serenity” has finally kicked off with the launch of phase zero of the upgrade to the network.
These planned upgrades to the network over the next two to three years aim to make Ethereum more scalable, secure and sustainable, with the first step underway in the form of the launch of the Beacon Chain. The Beacon Chain will act as the spine of the revamped network, with the Ethereum 2.0 deposit contract currently holding roughly 245% of the requisite ETH required to activate this chain.
Already, the effects of this launch are visible on the wider crypto markets with over a million ether ($550m+ as of today) already taken out of circulation and deposited into the deposit contract. This amounts to 1.14% of the supply of ether. Although unlikely to dramatically influence the liquidity of ether, the interest being generated from Eth2 staking may compete with returns that can be generated in decentralized finance, which may have knock-on effects on such projects and their interest rates and prices.
One of the main changes from Ethereum 1.0 to Ethereum 2.0 will be the switch from its current consensus mechanism, proof of work (PoW) to proof of stake (PoS). This move is set to address a number of concerns that have plagued PoW-based blockchain protocols, including scalability — Ethereum is currently limited to around 15 to 45 transactions per second — and energy efficiency, with transactions secured by staked native currency, rather than wasteful computational power.
The community has generally been quite positive of this transition to proof of stake (PoS), as evidenced by the dramatic demand for staking ether in Eth2 phase 0. Many existing Ethereum mining companies intend to transition to staking companies, and currently there does not seem to be a vocal community advocating for long term use of proof-of-work (PoW) consensus instead of PoS.
Indeed, this shift to PoS is indicative of a wider industry trend, with many of the major protocols coming to market in 2020 (Polkadot, Keep, SKALE, among others) opting for PoS. With Ethereum’s gradual transition to PoS, the original PoW dominant era of blockchain consensus looks to be coming to an end, with Bitcoin remaining the last major PoW based player.
Unlike other PoS chains, Ethereum 2.0 doesn’t have a formal governance structure at the protocol layer. Instead, it intends to become a fixed, neutral and unmodifiable base layer once it reaches the maturity and scale needed to support global settlement. This process is known as the ossification of the base layer.
It is important to note here that the transition to Ethereum 2.0 will not take place overnight, with the PoS based Ethereum 2.0 chain expected to run in parallel with the PoW Ethereum 1 chain for approximately two years. The impact of the operation of these chains in parallel will be fascinating. For a start, both chains will be issuing ether as a block reward, and as a result, the inflation rate will be higher than if only one chain was in operation. Although it is worth noting that the rewards on the Ethereum 2.0 chain are locked until the two chains are merged.
Currently, the Ethereum 1 chain issuance has an inflation rate of about 4% per year, and the Ethereum 2.0 chain issues about 0.5% per year depending on participation. When Ethereum 1 is merged with Ethereum 2.0, two things are likely to happen within a short space of time. Firstly, the shared inflation rate will drop to the lower rate of Ethereum 2.0 (approximately 0.5%). It is at this point that Ethereum 2.0 staking rewards for the last two years will become unlocked and tradeable. This is likely to cause considerable price disruption in the short term, with significant incentives for trading. However in the medium term, it will facilitate Ethereum’s move towards its target architecture.
The next step in the transition to Ethereum 2.0 will be scaling the execution side of Ethereum from one execution chain up to a theoretical 64 parallel chains. While the actual number of these chains has yet to be finalized and remains a topic of fervent debate within the community, these shard chains will significantly increase network capacity and transaction speed. Network security will also become significantly stronger, as the Beacon Chain will randomly assign stakers to validate shard chains. By doing so, it becomes close to impossible for stakers to collude and initiate a hostile takeover of a specific shard.
The journey to Eth 2.0 cannot come quick enough for many in the industry. As the surge in gas fees which occurred throughout the summer demonstrates, there is high demand for use-cases on the Ethereum network, with the network simply unable to scale effectively in proportion to demand.
Ethereum 2.0 will finally solve the issues of scalability and security which have hampered the network, without compromising on its ethos of decentralization.
With the launch of the Beacon Chain, this glittering future for the Ethereum network is finally underway.