Ethereum is already the king, why bother to upgrade to 2.0?

Produced | Vernacular Blockchain (ID: hellobtc)

Produced | Vernacular Blockchain (ID: hellobtc)

On June 24th, the London upgrade of the Ethereum test network was launched, and 100,000 Ethereum, worth about 200 million U.S. dollars, was pledged on ETH2.0 within one day. The opening of the London upgrade means that the arrival of ETH2.0 is getting closer getting closer.

As the king of blockchain public chain applications, Ethereum launched the ETH2.0 test network at the end of April 2020. After half a year of testing, it officially launched its 2.0 main network in December, which marks the official launch of the Ethereum 2.0 era. start.

Ethereum 2.0 is a major upgrade to the current Ethereum 1.0 mainnet, aiming to accelerate the use and application of Ethereum by improving its performance, including scalability, security, and sustainability.

Ethereum 2.0 will be released mainly in four "Phases", and each phase will improve the functions and performance of Ethereum in different ways.

Unlike 1.0, these upgrades are led by different teams in the Ethereum ecosystem, each focusing on building a specific part of the overall upgrade, which is like a corporate product release.

Phase 0: This is the first phase of Ethereum 2.0, focusing on the launch of the beacon chain.
Phase 1: This phase focuses on sharding or data sharding which we will describe later.
Phase 1.5: The focus of this phase is to connect 64 shard chains to the beacon chain, making the current Ethereum chain one of the shards, with a total of 65 chains.
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01 Why upgrade?

As the leader of the public chain, Ethereum has far surpassed other public chains in terms of market value and transaction volume, and has always been firmly seated as the "big boss" of the public chain.

So why is there an upgrade to Ethereum 2.0?

1. Demand and trend

From the data provided by Etherscan.io, it can be seen that from the beginning of its establishment to the present, the transactions on the Ethereum chain have increased by a thousand times, and the highest daily transaction volume is nearly 1300 times that of the lowest transaction volume. The high growth of Ethereum also makes the demand for Ethereum high.

As a platform for carrying users and applications, the value of the public chain is actually reflected in users and their applications. Commercial value is the foundation of the existence of the public chain. With the increase of users and applications, more funds and traffic will flow into the public chain, thereby attracting more high-quality applications to be deployed and developed on the chain, which will attract more users. Form a good circulation effect.

However, as more and more users understand and use blockchain technology, people have more requirements for technology and applications. From the perspective of the application development of the blockchain, the user's demand for the blockchain is more reflected in privacy and new application types based on this, which mainly include safe and transparent application requirements, and a wider range of financial services. need.

On the one hand, with the development of the Internet, users have increasingly strong demands for privacy protection, and they are also used to activities in this secret state. Therefore, a brand-new Internet application that can not only ensure security and transparency, but also achieve privacy Become a strong demand of users.

The world of blockchain is an open and transparent world. This feature can generate application value in many fields, such as traceability, but it may not be an advantage but a disadvantage for finance.

The data shows that since February 2021, the TVL lock-up volume on the Ethereum chain has basically remained at more than 40 billion US dollars, and reached a high of nearly 54.5 billion US dollars in mid-April.

Financial applications are the basic applications for the development of Ethereum, which promotes the development of Ethereum. The blockchain world is too open and transparent. Obviously, this will become an important restriction on financial development and make users scruples. This is also an important factor restricting the development of Ethereum. factor.

Therefore, how to achieve better privacy protection while ensuring security is actually the focus of blockchain financial application exploration, and for Ethereum, which occupies more than half of the country, this shows one of the future directions of Ethereum. one.

2. The threat of the rise of similar public chains

The public chain has played the role of the underlying infrastructure in the blockchain industry, and has always been one of the most competitive directions in the industry. In the past, people believed that because Ethereum has formed its own ecological barriers, it is difficult for other public chains with similar functions and positioning to Ethereum to threaten it.

But now, unlike past expectations, this type of public chain has begun to rise and has gained a lot of traffic and users, which poses a great threat to Ethereum to some extent.

In the past, the goal of public chains was to kill ETH, but now the goal of public chains is more extensible. They are characterized by compatibility with EVM and belong to the category of public chains connected to Ethereum. In terms of application design, it is a public chain that is very similar to Ethereum or an imitated public chain.

Now, they are gradually rising, such as SOL, HECO, and BSC, etc., among which the BSC chain is the leader, which is also the public chain that can most threaten Ethereum at this stage. Why these public chains can threaten Ethereum, it boils down to:

(1) Due to network congestion on the Ethereum chain, the gas fee for exchange on its chain is too high, and these public chains can meet the needs of a large number of users with small funds due to their low handling fees.

According to Bscscan.io, the BSC chain can process more than 50 transactions per second, and a total of more than 550 million transactions have been processed, which is obviously higher than the number currently processed by Ethereum (about 10-20 transactions per second). much.

(2) Some of the new public chains represented by BSC are compatible with Ethereum EVM, and after a considerable period of polishing, the infrastructure has been relatively mature.

(3) Public chains like BSC and SOL are backed by powerful “gold masters” like Binance and FTX platforms, so they can enjoy “natural” user bonuses and financial support to a large extent.

The introduction of a large number of user traffic and the support of funds spare no effort to allow these public chains to grow rapidly, but the most essential reason is that due to the low exchange efficiency of the current Ethereum ecology, network congestion leads to high fees, making it difficult for ordinary users to The continuous daily interaction through the Ethereum public chain has led to the spillover of users and funds, giving similar public chains with similar functions and applications an excellent opportunity to rise and develop.

This is a further "reminder" that Ethereum needs to enter ETH2.0 as soon as possible to solve the problem of network congestion, improve efficiency, and reduce its transaction costs, so that it can secure its "throne".

3. Ethereum itself

The defects of Ethereum’s low efficiency and high exchange fees have always been criticized by people, and there are many development teams to develop related applications in order to solve these problems.

At present, the most successful one is the Flashbots developed with the support of the Paradigm Foundation launched some time ago. By attacking the pre-emptive exchange robots on the Ethereum, it reduces the negative external impact of MEV (miners can extract value) on the smart contract blockchain. Risk to greatly reduce transaction fees on the Ethereum chain.

According to the data of Etherscan.io, the average gas fee price of Ethereum has dropped from the highest point in April of 166Gwei on April 19th to 166Gwei after the official launch of Flashbots on April 20th. The fee is about 50Gwei.

However, after the first and middle days of May, the gas fee of Ethereum has risen rapidly again. When there are a large number of frequent exchanges on the chain, the gas fee has also risen rapidly.

For example, on the evening of May 19th, due to the violent market fluctuations, the gas fee of Ethereum rose extremely quickly. According to the data, its quick confirmation gas fee once rose above 2000GWei.

Although Ethereum can improve exchange efficiency and reduce costs to a certain extent by using external applications, when a large number of on-chain transaction needs appear, it will still cause those "old problems" to appear on the Ethereum chain.

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02 Major upgrade of ETH2.0

Performance greatly limits the number of Ethereum transactions and inhibits the growth of users of the public chain. Ethereum has focused and targeted solutions in this 2.0 upgrade, the most important of which is the addition of two new technologies/mechanisms: Shard Chains and Proof of Stake.

1. Shard chain

Shard chains are a scalability mechanism that can greatly increase the throughput of the Ethereum blockchain.

At present, Ethereum generally can only process a dozen transactions per second at most, which is very inefficient. The purpose of sharding is to divide all network computing resources into shards, so that nodes do not have to process, calculate, store and read Fetch every exchange in the blockchain history to make a new exchange (write and upload).

In Ethereum 2.0, each "shard" is basically an independent new chain, which will directly solve the scalability and efficiency issues of Ethereum, because sharding will greatly increase the workload of the network.

A new proof-of-stake network is essentially created through the beacon chain and runs in parallel to the current Ethereum network. As the hub chain, the beacon chain will become a shard to communicate with other 64 shards in two-way communication for information transmission.

Through two-way communication, a shard block will have a much higher amount of data than the ETH1.0 chain block can currently hold. Best of all, each Ethereum node only needs to run one shard.

This means that only a small portion of data is stored, and it is easier to run nodes without powerful hardware. The ease of running nodes will attract more network participants, bringing more decentralization and higher security.

But initially, shards will only provide additional data, and shard chains cannot handle exchanges or smart contracts. At this time, you may have such a question: How can sharding improve scalability without processing? This is because of Layer 2 extensions - specifically Rollups.

Rollups is an extension solution of Layer 2. Through Rollups, all exchange status and execution are performed off-chain, while the Ethereum main chain only stores transaction data.

Rollups allow off-chain wrapping and executing smart contracts, generating cryptographic proofs and submitting them on-chain. And this process only requires an available data shard to store proofs, which means it can be used with the initial version of sharding. The mixture of data sharding and Rollups makes it possible for Ethereum to process more than 100,000 transactions per second.

Rollups are also considered to be the most ideal expansion solution at present.

2. Proof of Stake

The current operation of the Ethereum network is based on Proof of Work (PoW), which requires a lot of computing power and energy. In Ethereum 2.0, Proof of Work, which consumes a lot of energy, will be replaced by Proof of Stake (PoS).

Proof of Stake (PoS) 2.0 improves the security and scalability of the network, and is more resource-saving. After entering the Proof of Stake (PoS) mechanism, new blocks will be built by validators and pledged ETH. Replace miners with validators by replacing a large number of mining rigs with a single smol server.

Proof-of-stake attempts to solve the problem of power consumption by completely separating miners. It will protect network security by means of economic incentives, which will reduce the energy consumption of Ethereum by more than 99%. Ethereum 2.0 may be more Better achieve sustainability and reduce external doubts.

In the POV Crypto podcast, V God also emphasized the impact of the transition to PoS on the Ethereum network and ecosystem, and why such a transition is very suitable for Ethereum and its issuance model.

He noted: “One of the reasons for doing PoS is that we want to reduce issuance significantly. I think we have calculated that the theoretical maximum issuance of ETH 2.0 is about 2 million per year if everyone participates.”

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03 PoS Staking of ETH2.0

During ETH1.0, Ethereum used the PoW consensus mechanism, which is the same system used by many other blockchains, such as Bitcoin. Miners process package exchange and get ETH for it.

However, using the PoW mechanism for staking has such disadvantages: long consensus time, high energy consumption, high cost of bookkeeping, and the trend of centralization of computing power is getting stronger and stronger.

The PoS used in ETH2.0 does not need the computing power of the entire network to snatch a block at the same time like PoW, and requires a large amount of computing power to protect the network, resulting in a large waste of computing power and low processing efficiency.

Under the proof-of-stake mechanism, users only need to mortgage ETH to become a verifier on the network to obtain the proof of equity representing the share. income), and determine the packaging right of the next block based on the number of your pledged coins and the age of the coins.

The change of the staking mechanism is to pack the original computing power of the whole network into a block, change it to distinguish the computing power of the whole network, and then allocate each block to the distinguished computing power, so that the computing power of the whole network can be Pack multiple blocks at the same time to increase the efficiency of data processing across the network.

So how to get involved? First, you need to have 32 ETH.

Because, to become a verifier of ETH 2.0, users must deposit 32 ETH into the ETH2.0 deposit contract, which is a necessary condition for becoming a verifier and being activated. That is, you can only stake 32 ETH to get rewards.

In addition, two key parameters must be specified at the same time: the public key of the validator and the withdrawal certificate of the deposited 32 ETH.

To stop validators from gaming the system and validating fraudulent transactions, proof-of-stake systems implement a mechanism called "slashing". If the verifier acts dishonestly, he will lose part of his pledged Token.

Users then need to run an ETH2.0 validator node and sign blocks when it is their turn, otherwise, they will be penalized for not following the protocol.

But a key point here is that the public key and withdrawal credentials need not be controlled by the same entity. Therefore, if you don’t want to build your own facilities and want to participate, you can entrust the verified private key to a third-party pledge service provider to participate in the consensus, but you need to prevent single-point failure risks such as third-party running away and being punished.

Currently, ETH2.0 is still in phase 0 (beacon chain), that is, in this phase, the Ethereum network will have two chains, one is the PoW chain, and the Token is ETH1, and the other is the PoS chain, and the Token is ETH2.

However, currently, due to the one-way movement, users can transfer ETH1 to ETH2, but cannot exchange ETH2 back to ETH2. ETH2.0 upgrade is not a simple hard fork upgrade. In the past hard fork upgrades of ETH, the old chain stopped and the new chain ran.

But in ETH2.0, the Ethereum Foundation believes that the old chain, the PoW chain, will coexist in parallel with the PoS chain for at least 3-5 years. (That is, stage 1.5: the demarcation point when PoW is completely converted to PoS) But there is also news that ETH developers conservatively plan to end PoW Staking by the end of 2021.

1. Barriers to participating in ETH2.0 PoS pledge

To become an ETH 2.0 validator, users must deposit 32 ETH into the ETH2 deposit contract, and specify two key parameters at the same time: the validator's public key and withdrawal proof, and bear the cost of validating nodes and matching facilities.

In particular, participation requires a minimum of 32 ETH, how many users can satisfy it? All else being equal, I believe they would prefer being able to stake any amount of ETH, delegate the work of running the facility to others, and withdraw their deposit instantly.

In contrast, it has become the best choice for ordinary users to participate in the PoS Staking of ETH2.0 through a well-known platform or institution with a large scale.

Because these institutions, on the one hand, have a high degree of trust, and have a relatively complete risk mechanism, which greatly reduces the risk of running away; in addition, they have a professional technical operation and maintenance team that can operate and maintain 24 hours a day, and any punishment will be borne by the institution , and most of the costs of verifying nodes and facilities are borne by them.

The most important thing is: Most platforms only need 0.1 ETH or even 0.01 ETH to participate in ETH2.0 Staking, which greatly reduces the threshold.

Finally, although the pledged ETH cannot be redeemed due to the development progress of ETH2.0, there will be a new native anchored ETH 2.0 pledged Token named "BETH" on ETH2.0 during the coexistence of the two chains. Token, BETH can be exchanged and circulated in the market on the platform. When the ETH 2.0 main network is launched, its BETH can be exchanged back to ETH at a ratio of 1:1, which can reduce risks.

2. The pros and cons of participating in ETH2.0 PoS

But participating in ETH2.0 Staking in this time period has both advantages and disadvantages.

(1) Disadvantages

• To participate in pledge, the threshold is relatively high: 32 ETH;

• The lock time is too long and cannot be redeemed. The specific time needs to be determined according to the development progress of ETH2.0. For miners, this is a relatively large risk and disadvantage, which will lead to insufficient liquidity;

• In the early operation stage of ETH 2.0, the technology is not stable in all aspects, there may be some loopholes, there are certain technical risks, causing losses, which has not happened before;

• Compared with other staking, the rate of return of participating in ETH2.0 staking is not high, especially compared with the extremely high annualized rate of return of DeFi staking and other methods, while the general 6%-20% (or even lower) of ETH 2.0 , which is very low in comparison.

(2) Advantages

• Once 2.0 is fully implemented, staking through the PoS mechanism will greatly reduce the market circulation of Ethereum, which will greatly solve the current inflation problem of Ethereum. The relationship between supply and demand in the market will change, and demand will gradually exceed supply, which will help increase the value of ETH.

• With the steady advancement and landing of ETH2.0, its ecological development can also be more diverse, which is very good for the potential value increase of ETH in the future. From this perspective, early participation may be able to obtain greater benefits.

04 Summary

04 Summary

Throughout the market, the PoW consensus mechanism ecology of ETH1.0 has formed a large system, ETH1.0 will continue to exist, and the construction of 2.0 will also proceed steadily.

ETH2.0 aims at the deficiencies in ETH1.0, making changes to the PoS mechanism, in-depth reference to data sharding, and upgrading changes at the grassroots level, which will affect the entire blockchain technology and market.

As the king of the public chain, Ethereum has accumulated a large number of native users and an excellent development team for its ecology in the past. I believe it can continue to provide a strong support for its future development.