What is Ethereum 2.0, and Why Does it Matter?

In the years since founder Vitalik Buterin’s 2013 ‘Ethereum Whitepaper’ publication, Ethereum has more than accomplished his initial vision of the network as “a next-generation smart contract and decentralized application platform”.^[1] The Ethereum Mainnet launched in July of 2015 and quickly redefined blockchain functionality with its general programmability. Today, the Ethereum Blockchain, powered by the digital asset Ether (ETH), is host to a wide variety of apps that comprise a flourishing ecosystem of decentralized finance (DeFi). Decentralized apps facilitate lending, borrowing, and other financial functions administered by traditional financial institutions until now.  

By design, DeFi has the potential to offer traditional banking services, without bias, to millions of unbanked people across the globe. The possibility of executing smart contracts and instantaneous transactions in a borderless, frictionless environment has piqued the interest of sophisticated investors. As user adoption increases and developers continue to innovate, the founders of the Ethereum Blockchain are looking for ways to optimize and increase efficiency.

Transitioning to ETH2

The rapid adoption of Ethereum 1.0 inspired a number of network upgrades aimed at resolving Ethereum’s evolutionary challenges. Two main challenges remain: overcoming the transactional limitations of a congested network and resolving proof-of-work’s increasing energy requirements––enter Ethereum 2.0 (eth2).  

Eth2 is defined as a “set of interconnected upgrades designed to make Ethereum more scalable, more secure, and more sustainable.”^[2] The engineering of eth2 resolves security and sustainability concerns through a balanced workload distribution. It transitions the network to an energy-efficient Proof of Stake (PoS) mechanism.

What is proof of stake and how does it work?

Proof of Stake on Ethereum 2.0 requires a 32 Ether (ETH) commitment to the network––known as ‘staking’–– in exchange for potential validator status. Only after receiving validator status are individuals given an opportunity to propose building a block and running a node. This process requires demonstrated competency and a formidable staking infrastructure. Prospective validators can opt to execute staking protocols personally or via proxy, using third-party stakers. Validators chosen to add new blocks to the chain receive staking incentives for contributing to network security. Quality vetting ensures PoS’s ability to efficiently validate activity across the Ethereum Blockchain, freeing the network to support thousands of secure transactions per second.

The Beacon Chain and Shard Chains on Ethereum 2.0

The Ethereum 2.0 transition introduces two important functionalities: the Beacon Chain and Shard Chains. Think of the Beacon Chain as the coordinator of the network. It introduced the PoS consensus mechanism. Eventually, Ethereum Mainnet will “merge” with the Beacon Chain, supplanting the PoW consensus mechanism with the PoS system. This merge is referred to as “the docking.”

Once the merge is complete, the introduction of Shard Chains will occur in phases. Shard Chains - individual blockchains operating in step with, and parallel to, the main Beacon Chain - are intended to improve Ethereum’s scalability and capacity. Shard chains distribute the network’s load across new chains and each staked Validator running a node is responsible for processing and validating transactions native only to that shard. The Beacon Chain simultaneously validates, syncs, and secures data additions to shards.

Ethereum 2.0 solves traditional blockchain scalability concerns by retiring the need to process and store the blockchains’ complete transaction history. Shard and Beacon chains work in unison, streamlining transactions across Ethereum and expanding network capacity. We expect the transition to Ethereum 2.0 to solidify ETH’s position as an efficient, value-integrated digital asset.