Eth 1.0 and Beyond: Part 1

The biggest change to Ethereum since its inception, the switch to a fully functional Eth 2.0, is planned for 2022. In part one of this non-technical, two part series we take a quick look at the problems that face Eth 1.0 and why Eth 2.0 is different. 

What is Eth 1.0?

If you are using the Ethereum network today, that is buying, selling, sending Ethereum, or interacting with Ethereum apps and dApps, then you are using what is known as Eth 1.0.

Eth 1.0 is secured, like Bitcoin, by a Proof of Work (PoW) consensus. This process is essentially a race to solve a complex mathematical puzzle that verifies all transactions and produces a new block on the blockchain, with the winner receiving a reward (a payment in Eth). 

When there are a large number of decentralised computers solving these mathematical problems, then Proof of Work becomes a very secure system – certainly more secure than a traditional centralised database. In fact, the system becomes more secure as the network grows. Given that the Ethereum network currently has over 4,000 nodes around the world, it is considered to be an extremely secure blockchain.

There are, however, issues with Ethereum’s Proof of Work consensus that cannot be ignored;

  • Environment – The computing power required to run a large Proof of Work network is extremely energy intensive, and has a significant environmental impact.

    An argument often put forward is that cryptocurrency ‘mining’ can use renewable energy, thereby reducing its environmental impact. This is fine with a blockchain like Bitcoin, which, at this point, requires dedicated and very expensive mining devices, known as ASIC’s. These devices are not widely available, are mostly bought by wealthy entities, and are housed in large centralised mining farms. While these farms use a huge amount of power, their centralised nature means that you can pretty much guarantee a specific, renewable, power source – like volcanoes
El Salvador have recently announced using geothermal power from volcanoes to power Bitcoin mining.

Ethereum is slightly different. It was designed to be ASIC resistant. This doesn’t mean that ASICs don’t work, just that their cost makes mining Ethereum a lot less cost effective. This is great for decentralisation as it allows anyone to mine ETH from home, using technology that has traditionally been accessible and affordable. The downside of this is, while great for decentralisation, the use of renewable energy cannot be guaranteed.

  • Speed – Ethereum’s Proof of Work consensus cannot scale efficiently meaning there is a significant limitation in the number of transactions it can process –  around 15 transactions per second (TPS).

    In comparison, Visa currently handles around 1,700 transactions per second.

    Fees
    – The limited transaction throughput creates a race to get to the front of the transaction queue, i.e. get included in the next block of transactions, this results in ever increasing transaction fees, particularly during busy periods. 

There is no denying that Ethereum is a fantastic technology. It has given anyone with a computer, or smartphone, the chance to access financial systems that would otherwise be out of reach. Irrespective of the positives it would be stupid to ignore its problems – so how does Eth 2.0 aim to fix this?

What is Eth 2.0?

“Eth2 is a set of upgrades that improve the scalability, security, and sustainability of Ethereum.”

ethereum.org

Eth 2.0 sees Ethereum moving from Proof of Work, to what is known as a Proof of Stake consensus mechanism. Proof of Stake is where blocks of cryptocurrency transactions are validated, or confirmed, by users (validators) simply for holding a particular coin or token (ETH).

With Eth 2.0, validators are required to hold a minimum of 32 ETH (unless they join a staking pool). These validators are then chosen at random to create new blocks, and are responsible for reviewing and verifying any blocks that have been created by others. 

To keep the system running, these validators get rewarded, in ETH, for completing these tasks. Conversely, should a validator attempt to attack the system, they get penalised by losing some, or all, of their staked ETH. 

One of the main attack mechanisms of concern for a blockchain is what is known as a 51% attack. In this type of attack, the attacker must gain 51% control of a network, which, in a Proof of Stake consensus, means that they have control of 51% of the staked tokens. If there are enough validators to secure the system and prevent a 51% attack then a Proof of Stake mechanism is very secure. 

With Eth 2.0, the cost of undertaking a 51% attack is hugely prohibitive. There are currently in excess of 5 million ETH staked in Phase 0 of Eth 2.0, which means that an attacker would need to make a massive purchase of ETH to gain the 51% required for an attack. Not only do they need a huge outlay, but such an attack would also cause the value of ETH to drop, so it makes little financial sense.

What are the benefits for Ethereum using Proof of Stake over Proof of Work? 

  • Environment – Ethereum moving to Proof of Stake will reportedly use at least ~99.95% less energy than it’s current Proof of Work consensus.
  • Scalability –  while Proof of Stake itself doesn’t increase scalability, or the network’s ability to function efficiently under an increased workload, it allows Ethereum to undergo what is called sharding. In the case of Eth 2.0 this sharding will partition Ethereum into 64 different chains, each of which can process blocks individually, and without impacting security*.

    The result is a minimum 64x increase in transaction speeds – or around 960 transactions per second for Ethereum.

    *Sharding isn’t recommended on a Proof of Work system as it would dilute the amount of computing power required to corrupt the network. 

  • Cost – increased transaction speeds means less demand on the system, which in turn should result in a reduction in transaction fees (Gas).

In part 2 we will go into Ethereum’s Layer 2 (particularly zkRollups), what they bring to Ethereum, and ask, do we still need Eth 2.0?

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