Ethereum 2.0 - scaling of the most popular blockchain platform
Ethereum's fleet of scientists and developers have been trying to find an adequate solution for improving the scalability of the network. Some improvements were made and the fruits of the hard work are finally becoming visible.
Ethereum brings together the largest community of developers in the entire crypto world. Among them are some of the most brilliant minds led by Vitalik Buterin. Despite the fleet of developers, adequate scaling of Ethereum presents a major challenge that will be dealt with for several more years.
Why is the scalability of Ethereum a hot topic?
You might wonder what we are talking about and why scalability is so important? Ethereum suffers from similar problems as Bitcoin, but in Ethereum's case, they are more prominent because of the complexity and huge amount of data that Ethereum has to process.
Remember, Bitcoin can currently process about 7 transactions per second, while Ethereum is slightly more advanced due to faster blocks and can process about 15 transactions per second.
Ethereum has more ambitious goals than Bitcoin. Decentralization of payment transactions through Ethereum cryptocurrency ETH is just one of many goals. Before we proceed with the story about scaling, let us remind ourselves what Ethereum is and what its purpose is.
The motto of Ethereum as a platform was best described by the founder - Vitalik Buterin. In the original introductory post on the Bitcointalk forum back in 2014, which now seems a long time ago he stated:
Ethereum is a modular, stateful, Turing-complete contract scripting system married to a blockchain and developed with a philosophy of simplicity, universal accessibility and generalization. Our goal is to provide a platform for decentralized applications - an android of the cryptocurrency world, where all efforts can share a common set of APIs, trustless interactions and no compromises.
Big ambitions with a lot of goals with a common denominator that simply wants to decentralize the entire internet.
Emphasis on DeFi
In recent weeks, the emphasis has been on decentralized finances (DeFi), whose popularity is growing rapidly. Maker DAO and its fierce rival Compound protocol are the most popular decentralized DeFi services built on the Ethereum platform.
Maker and Compound tokens live on the Ethereum network and must pay fees for execution in ETH. In addition, ETH coins serve as collateral for various types of loans – currently around 3m ETH coins are in various smart contracts.
This increases the demand for ETH coins, which in simplified theory means greater popularity of Ethereum and the growth of its value.
Be careful when using DeFi services; smart contracts can contain security lapses, the value of centralized tokens can fall overnight while fees can eat up potential profits. When using loans, make sure you have enough collateral to cover extremely volatile price changes.
Ethereum 2.0. - first layer scaling
There are many potential scaling solutions. Some of the better-known solutions use NANO (DAG structure), EOS (PoS), XRP, and others.
Most of the available solutions that can handle thousands of transactions per second are more or less centralized. Reaching a satisfactory level of scalability while maintaining decentralization is a difficult task.
Ethereum will use PoS as a base and sharding as an additional upgrade for theoretical unlimited scaling. How much of these solutions will be decentralized in practice remains to be seen. But let us go back to the beginning of the story of scaling and explain unfamiliar terms.
Ethereum has been planning a major upgrade of the entire network for several years. ETH 2.0 of the code name Serenity will bring many novelties.
The most important change is certainly the transition from mining, i.e. Proof Of Work (PoW) to Proof Of Stake (PoS) where the network is secured by collateral in the form of ETH coins.
Switching to PoS unlocks the scaling option in the form of Sharding. Sharding essentially divides the main network (Beacon chain) into multiple branches, which function independently and thus enable the simultaneous execution of numerous operations. The number of operations is scaled proportionally to the number of shards.
Given the complexity of the upgrades described, the transition to the new system will take place in several stages to eliminate problems and difficulties in operation.
The world's second most popular blockchain cannot afford delays - everything has to function perfectly without interruption at all times. That complicates and hinders development, so it is not surprising that relatively slow progress is made.
Phase zero - Pos activation
The initial phase will be marked by the activation of the Proof Of Stake system on the new ETH 2.0 blockchain, while the current ETH 1.0 blockchain will continue to function in parallel.
The PoS upgrade will be enabled by the switch to modern cryptography designed by the company behind ZCash. BLS12-381 cryptography provides numerous advantages over the current one.
Users will be able to convert ETH and switch to a new network (Beacon chain), but a return to the old one will not be possible.
A minimum of 32 ETHs must be provided to become an independent validator on the Proof Of Stake network. Users with fewer ethers do not need to despair – they will be able to join staking pools that will allow staking with smaller amounts of ETH. A detailed calculator of potential profitability is available here.
There is a chance this phase will be available by the end of 2020, but forecasts should be taken with a few grains of salt due to breaches of deadlines that are very common in the ETH world.
The first stage - sharding
The first phase will initiate 64 shards on the ETH 2.0 blockchain. The ETH 1.0 blockchain will continue to function in parallel.
The shards will be coordinated by the main POS blockchain - Beacon chain.
Each shard will be able to be viewed as a separate blockchain, as Ethereum is today, but individual shards will be operated by validators from Beacon Chain who will control all data and write it down to the main blockchain.
Phase 2 - blockchain merger
Final phase. Activation of smart contracts on the ETH 2.0 blockchain and the shutdown of the ETH 1.0 blockchain - the closing of the mine. Interestingly, the ETH 1.0 blockchain will be converted into one of the shards to be operated by the Beacon chain. The exact specifications and details around this phase are not defined and deviations are likely.
Second layer scaling
In parallel with the development of the ETH 2.0 blockchain and the transition to POS, numerous solutions that promise second layer scaling are currently are being developed.
Such alternative scaling methods shift the most of processing outside the blockchain, while blockchain is used as a courtroom to resolve disagreements, i.e. finally writing down the state of smart contracts and transactions.
Vitalik explained in simple words the ways which are trying to increase scalability on the second layer:
Squish the transactions together so they don't take up too much space. Instead of everyone checking everything, have a few people check things and raise an alarm if they see something wrong. Or use fancy math to check everything at the same time.
There are several possible solutions. The most popular are Plasma and Rollups. You can see the implementation of Plasma technology on the example of OmiseGo sidechain (OMG Network) which was launched in early June. The network is currently operating, and some projects such like Tether (USDT) already use it to process transactions.
Tether is certainly one of the biggest consumers on the Ethereum network. By switching part of transactions to a second layer, it reduces the burden on the blockchain, which in practice means that transactions are cheaper and relatively speaking, faster.
There is also a whole range of solutions that are not very known even though they have been working well for some time. This is the case with Liquidity Network sidechain which supports free transactions.
Reddit coins - a fleet of new users of Ethereum blockchain
Reddit is an American social network (a modern forum) with more than 430 million users. Reddit users buy and share a centralized virtual currency that serves as a reward for activity and sharing information. Of course, by buying currency, users support and finance the platform.
Reddit's team decided to initiate a gradual transition of virtual coins to Ethereum's blockchain. In the initial test phase, Moon coins were launched as part of the r/CryptoCurrency subreddit. Read the post for more information.
Imagine how much traffic on the Ethereum network would increase if all Reddit transactions were switched to the blockchain. But I am sure you are already guessing where the catch is. In scalability, of course.
Ethereum in its current release is not capable of supporting so many active users. That is why a solution is sought in the form of a second layer implementation of the Reddit coins. A competition has been launched to find the most suitable solution, you can read all the details here.
With the publicity that Reddit offers to the Ethereum platform and the inexhaustible fleet of developers, we have no doubt that the solution will be found and successfully implemented. The selection of the most competent solution should be completed in September. This is the time frame when work on the implementation should begin.
That concludes the story of the scaling of Ethereum. We will monitor developments and keep you informed of new changes and achievements.