Even if you are someone relatively unfamiliar with the crypto ecosystem, you’ve probably heard of Ethereum. The de-facto number two, and indeed probably the most famous cryptocurrency after Bitcoin, Ethereum forever changed the use cases of the blockchain. From an open ledger to facilitate only peer-to-peer transfers of money, the blockchain became a platform upon which smart contracts and decentralized applications, the famous dapps, could be built. So What is Ethereum? “A global, open-source platform for decentralized applications”. That’s the one-line description on ethereum.org. With thousands of games, decentralized exchanges, and finance apps running on top of the Ethereum blockchain, not to mention tokens, it’s right on point. This extended functionality for the blockchain was envisioned in 2013 by Vitalik Buterin. In the months that followed, Vitalik joined forces with several other people to launch the new blockchain, but usually only he, and to a lesser degree Gavin Wood, are referenced as the co-founders of Ethereum and the Ethereum Foundation. I guess I just did it too.
The Ethereum main net was launched in July 2015 and was very quickly widely adopted, which led Ethereum to climb to number two of the market cap within just a few months from the launch, and except for very brief periods, it has kept that place ever since. Ethereum, of course, is not the only smart contract blockchain out there. Several “competitors” have emerged during the years, like EOS, Tron, Algorand, Cardano, and many, many others, which look to build on the successful model of Ethereum while overcoming some of the limitations. Ethereum, however, is still the most popular smart contract blockchain, with almost half of the top 100 coins running on the Ethereum Network.
But Ethereum does have shortcomings, with the most significant being its limited scalability. This became abundantly clear during December 2017. But it wasn't the increased transactions due to the Bull Run that brought the network to its knees. It was a game, the infamous Cryptokitties, where the users spawn, collect, and exchange digital kittens. It was the first dapp that tested and broke the network’s limits. During that time, transaction fees skyrocketed and many transactions never made their way onto the blockchain. The reason for this congestion is because every action in the game, and in every dapp, is a transaction on the blockchain. With thousands of kitties being “born”, sold and bought every second, and the network being able to facilitate only 15 transactions per second, the herd of kitties overwhelmed it. Cryptokitties’ popularity has declined since then, but today another industry has emerged to saturate the network: Ethereum Defi, Decentralized Finance. This is a collection of dapps, with Compound Finance being the most popular amongst them that offer traditional banking products on the blockchain, without the need for banks.
Users can lend their ETH, and other Ethereum ERC20
tokens, usually stablecoins like DAI
and USDC, and other users can borrow them, by providing collateral with their own crypto. The borrower pays an
interest, which goes to the lenders as a reward.
And, of course, everything happens automatically and on-chain, with the
use of smart contracts. In that way, one can get access to money, without
having to liquidate their own funds and, most importantly, without having to go through a bank. This is DeFi’s most significant promise: to bring
banking services to the millions of the unbanked. Although DeFi gets the lion’s
share for congesting the network, it’s Ethereum’s overall popularity that’s led to it.
Most Tether tokens are now ERC20 tokens, decentralized
exchanges, like the Kyber Network and
Uniswap, run exclusively on Ethereum, even whole virtual worlds, like
Decentraland, live on the blockchain.
And again, not to mention the thousands of tokens that run on top of it. The applications of smart contracts
are endless, and Ethereum is the spear’s head.
It’s only natural that the limits would be reached, especially if we
consider that it was designed more than
5 years ago, when even the word cryptocurrency was unknown to most. Enter
Ethereum 2.0! The much expected upgrade to Ethereum will change significantly
the way Ethereum works and promises to solve
the scalability issue, making Ethereum
capable of supporting the tremendous workload from all these smart contracts.
The most significant change that Ethereum 2.0 will bring is that it will
transition Ethereum from a
proof-of-work consensus mechanism to proof-of-stake.
Right now, blocks
are validated and added to the chain by miners who run expensive mining
equipment and consume a lot of energy
in an attempt to be the first to solve a mathematical problem and add a block to the chain. This high cost
is necessary to keep miners honest and secure the network. With proof-of-stake, the energy cost is replaced by a
financial commitment. Ethereum 2.0
staking involves committing 32 ETH to the network. By staking that amount you
become a validator, which gives you the
opportunity to add new blocks to the chain. This can be done even with a laptop and, of course, you get
rewarded for your efforts in securing the network. The other significant change
that Ethereum 2.0 will bring, is the introduction of shard chains. These are individual blockchains that run in
parallel with the main chain, called the Beacon chain.
Each shard chain’s purpose is to take on part of a load of
validating and adding new blocks to the
chain, while the Beacon chain makes sure all shard chains are up-to-date
with the latest data. This way the
network can process an increased number of transactions per second.
Additionally, the nodes in each shard will need to download and process only
the transaction history of that shard,
not the whole network. These two
characteristics combined will increase the capacity of Ethereum and aim to solve the scalability problem.
Ethereum will become “a super highway of interconnected blockchains”, as the
Foundation calls it on ethereum.org. The new version of the network will launch
in three phases, and although there
isn’t an exact Ethereum 2.0 release date, Phase 0, which will see the introduction of the Beacon
chain, is expected to become live by end
of the year.
The latest Ethereum 2.0 news on the matter is that the final tenet of the Beacon chain, named “Medalla”, launched on August 4, and when all hiccups are overcome and all the bugs squashed, the mainnet Beacon chain will be launched. So, no exact date yet. At first, the Beacon chain will be of limited capabilities, because there won’t be any shard chains to keep in sync, only itself. Its main purpose during this phase will be to register validators and coordinate everyone’s staked ETH. Then comes Phase 1, which is expected to launch in two steps within 2021. The first step is the debut of shard chains, which will start to validate transactions, but won’t support accounts or smart contracts just yet. The Ethereum Foundation plans to launch Phase 1 with at least 64 shards. The second step is named Phase 1.5. I guess this is the result of realizing you need a fourth phase, but don’t want to renumber the whole thing. In this second step of Phase 1, the current mainnet of Ethereum will become a shard itself and it’s at that time that the full transition to proof-of-stake will happen. Finally, Phase 2, the final phase, will include the full capabilities of the shard chains, where they will be able to process smart contracts, communicate with each other more freely and developers could even design shards in their own ways. The concluding Ethereum 2.0 release date that of Phase 2, is the most uncertain at the moment, as it’s placed at some point after 2021. As is reported on Ethereum’s official site, the phase is currently “very much in the research phase”.