Intermediate Series

What Is Ethereum 2.0?

Ethereum’s vision is to “open access to digital money and data-friendly services for everyone – no matter your background or location.” This ambition is almost a reality thanks to the blockchain’s censorship resistance, openness and near-unbreakable security. But there’s a few problems.

As the platform has been such a success, the increase in usage has dramatically increased the amount of data that needs to be stored, increased the fees to unsustainable levels, and is using huge amounts of energy to run. Ethereum 2.0 fixes this.

Thanks to a scaling solution known as sharding, combined with moving from proof of work (PoW) to proof of stake (PoS), the Ethereum protocol is set to bring open finance to billions of people across the globe, fulfilling the original vision.

Contents

  • What are the problems with Ethereum?
  • How does Ethereum 2.0 solve these problems?
  • When will Ethereum 2.0 be implemented?
  • The future of Ethereum 2.0

What are the problems with Ethereum?

1. Clogged network and high fees

Network congestion creates bottlenecks that make fees too high and transaction times too slow. If Ethereum cannot find a way to make transactions faster and fees more affordable, it will not fulfil its mission of helping billions of people.

Already, we’ve seen many people and projects move to the more centralised Binance Smart Chain because Ethereum was too clogged. While this problem is a result of Ethereum’s success, it must still be overcome.

2. Running a node requires too much disk space

The more popular the Ethereum network gets, the more data you have to store if you want to run a node. As Ethereum is designed to be completely decentralised, it’s important that it remains affordable for anyone to run a node. If Ethereum cannot find a solution to reduce the disk space required to run a node, it will not remain truly decentralised in the future.

3. Unsustainable energy use

With the current proof of work consensus mechanism, Ethereum uses a lot of energy. With concerns around climate change and sustainability, it’s important to the Ethereum community, regulators, and society in general that they find a decentralised solution.

How does Ethereum 2.0 solve these problems?

It’s easy to solve the above problems with a more centralised blockchain, like Binance Smart Chain. But the Ethereum community believes that decentralisation is the most important aspect of their network. Therefore, they need to find a way to increase scalability and sustainability, while still being decentralised. Achieving all three aspects at once, decentralisation, scalability, and security, is known as the blockchain trilemma. Ethereum 2.0 solves the blockchain trilemma.

1. Scalability through sharding

To access Ethereum's network, you must enter through a node. Each node must store a copy of the entire network history, including every single transaction since the beginning of Ethereum’s existence. As the network continues to grow, it gets harder for people to keep up with the storage requirements of running a node. Sharding fixes this.

Sharding lets nodes only download and process only a fraction of the network — a single shard. Sharding will split Ethereum’s databases, letting a node store a fraction of the Ethereum blockchain rather than the entire chain. This will increase storage capacity and reduce congestion, ultimately lowering fees during periods of high demand.

As each shard remains a subset of the overall Ethereum blockchain, this design radically increases Ethereum’s capacity while maintaining its decentralisation.

2. Security with staking

Proof of stake is the new way that everyone in the Ethereum network agrees on what transactions have occurred. It works by letting people validate block transactions according to how many coins they hold. The incentive is clear. If you hold a lot of ETH, you’re going to process transactions honestly as you have lots of money tied up in the network. And if you act dishonestly, the protocol can destroy your coins.

3. Sustainability with PoS

The mining that’s required for proof of work uses a great deal of computing power and energy. Proof of stake makes that far more efficient by attributing the mining power to the proportion of coins held by a miner, rather than by how much computing power they’re using. This means the network is secured by aligning economic incentives with the miners, rather than relying on energy-dense computations.

The future of Ethereum 2.0

“Once Ethereum has scalability via layer-2 tech or ETH 2.0 all questions are answered,” said Jamie Anson, founder of Nifty Orchard. “By the time ETH 2.0 and rollups work together there will be 100,000 transactions per second capacity. That’ll mean a completely seamless experience for the next billion people.”

Along with the potential to scale to billions of users, Ethereum is likely to become a deflationary cryptocurrency, meaning that more ETH is burned than issued. As investor Nikhil Shamapant calculated, Ethereum 2.0 would reduce sell pressure by an estimated 90% — the equivalent of three Bitcoin halvings. As the supply decreases while demand increases, this is bullish for the price of ETH.

If Ethereum 2.0 scales successfully, couldn’t it take market share from the traditional financial sector? Ethereum's founder Vitalik Buterin isn’t worried if it does. “If you talk about empowering the little guy, as much as you want to couch it in flowery terminology that makes it sound fluffy and good, you are necessarily disempowering the big guy. And personally, I say screw the big guy. They have enough money already.”