What Is Ethereum?

To learn Ethereum from A to Z, you know what to do! However, to put it shortly, Ethereum is programmable money. It is a DIY (Do It Yourself) platform to run decentralised applications (AKA dApps) and programs via smart contracts. Bitcoin aims to decentralise money, but Ethereum takes this goal one step further by planning to decentralise the Internet itself. Smart contracts are the key to achieving this goal. Smart contracts are contracts run by no third party, are essentially codes, and can be programmed to do various tasks.

Ethereum is not the only smart contract blockchain. Other smart contract blockchains like EOS, Tron, Algorand, Cardano and many more aspire to build a successful network similar to Ethereum while overcoming some of its limitations. Ethereum is still the most popular smart contract blockchain, with half of the top 100 coins running on its network!

What Are Ethereum’s Limitations?

The most significant shortcoming of today’s Ethereum is its limited scalability. You have no clue what it means? Follow me to the next section to find out.

Ethereum’s Limited Scalability

The present Ethereum can process 15 transactions per second, which certainly won’t satisfy the needs of its huge user base. Ethereum’s limited scalability became clear during December 2017 because of CryptoKitties. CryptoKitties is a blockchain NFT game where users can spawn, collect and exchange NFTs of cartoon kittens. It was essentially the first dApp that tested Ethereum’s limitations and actually pushed Ethereum to its limit. The gas fee price skyrocketed, and many transactions ended up not being validated at all.

Why did the Ethereum network crash by CryptoKitties? The reason was that every action in the platform is actually an Ethereum transaction. Remember we said Ethereum was only capable of processing 15 transactions per second? With thousands of kitty NFTs being created, sold and bought, the network got overwhelmed quickly. CryptoKitties hasn’t remained popular since then, but another phenomenon is testing Ethereum’s limit once again: Ethereum DeFi.

Ethereum DeFi

DeFi (short for Decentralised Finance) is a collection of dApps and programs like AAVE, Compound, Uniswap, and many more. These dApps offer TradFi (short for Traditional Finance) services on the blockchain in a decentralised manner and without the need for any third party or middleman. DeFi’s true goal and promise is to decentralise traditional finance services.

Proof of Work Drawbacks

Proof of Work is a tried and tested consensus mechanism used by many blockchains, such as Bitcoin and the current Ethereum. In the Proof of Work mechanism, miners invest their resources like electricity and computing power to solve a puzzle (AKA finding the hash). Learn hash functions once and for all. By doing so, they validate transactions, push the blocks forward and participate in the network. Miners receive both the block rewards and the transaction fees.

Why Is Proof of Work Bad For The Environment?

The Proof of Work consensus model requires the miners to prove their commitment to the network by the “work” they do, i.e., by investing their energy, computing power and electricity. This model is very energy-consuming and, therefore, bad for the environment.

What Is a 51% Attack?

A 51% attack, AKA a majority attack, is when a group or an individual takes control of more than 50% of the hashing power on a blockchain network. This is typically done by renting the hashing power from a third party, as it is extremely hard to accomplish. However, it doesn’t mean their risk of such an attack is zero. Also, a 51% attack is harder to launch on blockchains that use the Proof of Stake consensus mechanism.

Ethereum 2.0 (Eth2): The Great Upgrade

Ethereum 2.0 isn’t just one upgrade. Instead, it is a series of interconnected upgrades to the Ethereum network, each launching in a different phase. Ethereum 2.0 also aims to solve Ethereum’s current issues: limited scalability and issues related to the Proof of Work models, such as sustainability and security. These changes were formerly called Serenity, but they are now mostly referred to as Eth2. These goals and improvements were always in Ethereum's roadmap and were discussed even before the network was officially launched!

How Does Eth2 Improve Scalability?

As mentioned above, the current Ethereum can handle only 15 transactions per second. There are times the network can’t keep up with millions of users launching many dApps all around the world. Eth2 aims to increase the transaction per second rate; in fact, it plans to make Ethereum able to process 100,000 transactions per second! We will discuss this later on.

How Does Eth2 Improve Security?

Today, Ethereum is already a very secure blockchain, but it doesn’t make the team stop and not go further. Eth2 aims to increase Ethereum’s security by transitioning from the Proof of Work (PoW) to the Proof of Stake (PoS) consensus mechanism. This transition further secures the network from attacks, such as the 51% attack discussed above.

How Does Eth2 Improve Sustainability?

The Proof of Work consensus mechanism is infamous for requiring massive computing power and energy. Eth2 makes Ethereum more environmentally friendly by transitioning to a “greener” consensus mechanism, i.e., Proof of Stake.

Why Is Ethereum Moving To Proof of Stake?

Proof of Stake is an alternative consensus mechanism to Proof of Work. It aims to avoid the computational cost and energy usage of the Proof of Work scheme. In Proof of Stake, validators are selected in proportion to their amount of staked cryptocurrency. Learn staking and make millions! In Proof of Stake, users don’t mine blocks to validate them; they instead stake their assets, meaning they lock their assets up in the network. Proof of Work is like a race; everyone is trying to solve the block at the same time. Whereas in Proof of Stake, an individual is chosen at a time to finish the race and receive the block reward. The more crypto a user stakes, the more they are likely to be selected to solve the block.

Instead of machines securing the network by investing their resources and “proving their work”, the Proof of Stake consensus model relies on financial proof. Users who want to secure the network and earn more ETH need to stake some ETH and become validators.

How Does Proof of Stake Secure The Network?

Validators are incentivised to validate transactions by receiving both the block reward and the transaction fees. To discourage users from manipulating the system or committing fraudulent acts, the Proof of Stake system implements “slashing”. Slashing is a concept in Proof of Stake models to discourage stakers from manipulating the network. With a slashing penalty, bad actors are removed from the network and a portion, or in some cases, all of their staked cryptos, are burned. For example, in the case of Proof of Stake Ethereum, users need to stake at least 32 ETH to be able to validate the blocks and participate in the network. If a staker breaks the rules, they are removed from the network, and around 18 ETH of their staked ETH gets burned. 

How Do I Become An Eth2 Validator?

A minimum of 32 ETH is required to stake in order to become an Eth2 validator. Stalking smaller amounts is also made possible via staking your ETH in a staking pool.

51% Attacks In Proof of Stake Models

To pull off a successful 51% attack in a Proof of Stake model, the attacker needs to take control of 51% of the validators. To put it simply, they need to own 51% of the entire staked ETH on the network. It is a massive amount of capital, really. Proof of Stake consensus mechanism makes Ethereum more sustainable. It removes the energy-incentive miners, makes the network more secure by making a 51% attack even harder, and makes it more scalable with sharding, which is next to impossible to implement in a Proof of Work environment.

What Is Sharding In Ethereum?

In computer science, sharding is the practice of spreading a database horizontally into multiple instances. It allows for spreading the load as each instance contains only a portion of the whole dataset. In the case of Ethereum, sharding will reduce network congestion and increase transactions per second by creating new chains, known as “shards”. This part of the upgrade directly addresses Ethereum’s scalability issues, as it will allow Ethereum to process 100,000 transactions per second!

How Will Sharding Improve Ethereum?

With sharding, each Ethereum node only has to run one of the shards instead of the entire chain. This allows storing a small subset of data and makes it easier to run a node without having powerful hardware. With sharding, users can even run Ethereum on personal laptops or phones. For this reason, sharding is a good way of keeping Ethereum decentralised. Making nodes easier to run will bring more participants to the network, which means more decentralisation and security.

Everyone Can Run A Node With Sharding!

The alternative for sharding is to scale by increasing the size of the current database, which is not the best course of action. Because it makes Ethereum less accessible to network participants since it requires the participants to have powerful computers, increasing the rate of transactions per second shouldn’t come at the cost of increasing the size of the nodes in the network. What sharding in Ethereum does is it requires the validators to only store or run data for the shard they are validating and not the entire network. Not only does sharding eliminate the need for expensive computers, but it will also speed up the network.

At first, sharding will only provide extra data to the network. Shard chains won’t be able to handle transactions or smart contracts, but they will still speed things up by combining with rollups. Transactions and smart contracts will be handled by the Beacon Chain instead, which is explained later in this article.

Sharding and Rollups

Improving scalability is possible through the layer 2 scaling solutions. One solution, in particular, will have a significant role in this improvement: Rollups. Rollups are present in the current Ethereum chain, and they allow dApps to bundle or “rollup” transactions into one single transaction off-chain. Then they generate a cryptographic proof and submit it to the chain. The rollup process only requires a data shard to be available to store the proof, meaning it is ideal for the first phase of sharding. See how cryptography works. The mix of sharding and rollups will make Ethereum process 100,000 transactions per second. However, there are other upgrades that can be made through sharding.

How Does The Beacon Chain Handle The Transactions?

The Beacon Chain will introduce Proof of Stake to the Ethereum network. The Beacon Chain, also known as Phase 0, is currently live and is responsible for coordinating a Proof of Stake-based system. It randomly assigns stakers so they can validate different shards. This process of randomising is essential for preventing stakers from malicious acts, such as taking control of a shard. The Beacon Chain Created a new Proof of Stake network, which runs parallel to the current Ethereum blockchain.

Does The Beacon Chain Work Independently?

The Beacon Chain will exist separately from the Ethereum mainnet, but they will connect later. Initially, validators are adding new blocks to the Beacon Chain. However, they won’t be validating the current Ethereum mainnet transactions. Validating Ethereum mainnet transactions through the Beacon Chain will be made possible once the current Ethereum blockchain becomes one of the shards. The plan is to combine or “Merge" mainnet into the Proof of Stake system, which is controlled and coordinated by the Beacon Chain.

The Merge

In the process of the Merge, formerly known as docking, the current Ethereum chain will become one of the shards in the Ethereum 2.0 Proof of Stake system. Merging marks the end of Proof of Work Ethereum and will bring the ability to run smart contracts to the new Proof of Stake model. Ethereum’s Merge will also provide the entire history and the current state of Ethereum. This allows a smooth, seamless transition for all the users and builders of Ethereum. It is estimated that The Merge will ship sometime around the second quarter of 2022. 

Outro

Not only does Eth2 solve Ethereum’s current issues, but it also improves some of the most significant features of Ethereum. Indeed, this upgrade is much awaited! To learn more and hunt down significant updates like this, you can check out Cryptologi.st for educational posts, coin reviews, and hot news!