Ethereum1.0 is a blockchain project that was launched in 2014 by a group of young developers aspiring to carry the technology one step further and that created a tremendous impression with the innovations it brought along. Went from strength to strength in various projects, it has gained a large community and great support. Aiming at continuing their achievements and innovations, the Ethereum team and society works hard for the preparations and development process of Version 2.0.
The process until today
Since 2014 when the project was first announced, Ethereum followed a specific development process and so far, has passed 4 important stages.
- Homestead, March 2016
- Metropolis: Byzantium, October 2017
- Metropolis: Constantinople, February 2019
- Istanbul, December 2019
Following all these update phases, Etherum society is preparing for a new update called “Ethereum Version 2” or “Ethereum: Serenity”. With this version update, the Ethereum project is expected to be more green, fast, stable, and flexible for new areas of use.
“Ethereum V2: Serenity”
Ethereum V2 update will consist of particular phases and every phase will include particular main updates. Let us have a look at these phases and the updates they include:
Phase 0: Beacon Chain
In this phase, the Proof of Stake (PoS) consensus structure will start to be used instead of the Proof of Work (PoW) consensus protocol, which is known as Beacon Chain and which is the current consensus protocol of Ethereum inspired by Bitcoin. Furthermore, Casper (The Friendly Ghost) protocol to manage the consensus structure is activated. Before diving into the functions of this protocol, let us first have a look at the main features of PoS consensus structure:
- Proof of Stake (PoS):
Proof of State is a consensus structure that requires the validation of blocks just as Proof of Work. In this consensus protocol, the individuals that stake (i.e. bind by contract) a specific amount of ETH are called validators. In this process, it is the system that allows Ethereum holders to lock an amount of ETH they would like to (it must be the multiples of 32) for a specific period of time by utilizing the smart contract infrastructure of the network.
In this consensus model, a voting process takes place among the validators to create a new block. During the voting process, the weight of the voting validators increases based on the staking period of their ETH’s. This method provides for an architecture that is more energy-efficient and 51% safer against attacks than PoW architecture.
The Ethereum network assigns a new validator every 10 seconds on average and this validator creates the new block, signs it, and adds it to the chain. Since there is only a voting algorithm involved, the consensus will be achieved quickly by only validating signatures.
- Staking Mechanism: How does it work? What are the rewards and penalties?
Let us first start with explaining why Ethereum holders would like to stake their ETH with a contract. When an individual stakes ETH’s as a validator after fulfilling all conditions, they receive a reward. For an amount of 32 ETH, the monthly staking reward is 1.13 ETH on average, and this translates as 13.6 ETH per year.
To participate in this rewarding mechanism, alongside 32 ETH, you should own a computer that meets the system requirements and this computer should remain continuously online during the staking period. Yet certain flexibility is provided by Casper in case of certain unforeseeable events. For example, signing a block with the same key twice calls for a penalty and such a thing should never take place. If a validator does not meet the basic requirements by staying online, Casper protocol activates the penalty mechanism and burns some of the ETH’s at stake.
We can explain the penalty with an example:
If you stay offline in the finalizing phase of a block higher than a specific percent of the time (in time this rate has changed, but it is currently 33%), an amount of ETH equivalent to your current profit is burnt from the ETH pool locked by the contract. As an example, if your annual staking yield is 5% that means your daily profit on the total amount is 0.0139%. The system burns this amount, i.e. 0.0139%, of ETH’s on the contract.
Another case to discuss: If the blocks cannot be finalized (if more than 33% of the nodes are offline or cannot validate the blocks created) and you are one of the offline blocks, you lose 3.4% of your total stake amount daily.
As a penalty, the ETH’s are burnt and cannot be used again.
- Staking Pools
Just like in PoW mining, the pools are already started to be created (https://etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa). The pools allow users to invest with amounts less than 32 ETH.
Finally, if the staking pool is created with a proper infrastructure, the risk of penalty for the validator will be significantly lower and ordinary users who would like to invest will no longer need to continuously monitor the system anymore.
As a result, the minimum requirements to be a validator at the Beacon network have not been determined yet. However, there are 3 options offered to the users who would like to create a network.
- Only Beacon Chain
- Beacon Chain + validator client
- Beacon Chain + multiple validator client
When Phase 0 is completed, there will be 2 Ethereum chains living simultaneously. The first one is the Ethereum network (ETH V1.X) that works on PoW architecture at the moment and the second one is the Ethereum network (ETH V2.X) that will have PoS architecture when the Phase 0 development process is completed.
The users can transfer ETH’s between the two networks to be a validator, and they can declare themselves as a validator. After Phase 0 is completed, the users should set up Beacon client to use PoS network.
Phase 1
When Phase 0 is completed successfully, Phase 1 will begin. The main purpose of the Phase 1 development process is to enable the Sharding mechanism so that it can work with PoS architecture. By creating shard chains, it is aimed that Ethereum will be faster, more user-friendly, and modular.
- Sharding:
Scalability and performance are the main issues of the basic blockchain architecture. A significant number of the projects that are currently in development or that completed the development process aim to solve the aforementioned issues of the Bitcoin project by Satoshi.
Sharding is a method that is essentially a database solution and that is tried to be integrated into blockchain projects to currently solve these problems. In brief, Sharding aims to bend the keystone rule of the blockchain technology i.e. “all nodes need to store the entire chain” without compromising on security and centralization and solve the scaling issue.
The nodes are expected to keep the transactions of their own shard rather than all nodes keeping the entire transactionhistory of the network. In this way, there will be a scalable structure.
Since sharding allows the creation of a scalable network architecture without compromising decentralization and non-reversibility of the record, which are the main principles of blockchain technology, this technology has recently become really popular among blockchain start-ups in particular. As in the PoW consensus model, any transaction information can be reached at any time with proof of non-reversibility. It is easier to find and store the data because the location of every data is marked by mapping technology.
Last but not least, since sharding allows the processing of parallel transactions in parallel shards, the performance issue, which is one of the main problems of blockchain, can be solved as well.
Potential problems due to sharding:
There are 2 main problems to be considered and solved related to sharding.
- Security and continuous communication: The nodes within the same shard can communicate securely and easily as a PoW blockchain. However, the continuity of the communication between shards and maintaining their continuous synchronicity are important.
- Shard Takeover: This is the case when one of the shards is taken completely under control by a malevolent party. To avoid this, Etherum validators are continuously being assigned to different shards, and it is prevented that one node directly manages a shard.
To have a safe architecture, ⅓ + 1 of the nodes should be honest and the shard count should exceed a specific minimum value so that the attacker nodes will not come across the same shard simultaneously.
Phase 1 will be completed when sharding modules are fully integrated into the system and the Ethereum network will become more flexible, faster, and safer platform for various assignments. The number of transactions to be validated by validators at the network will be increased with the sharding structure after the sharding optimization is complete and the required shard and validator count is met.
Node types required by ETH 2.0 will appear upon the completion of the sharding mechanism. At the moment, we can list them as follows:
- Super-full node – Stores the entire Beacon Chain by itself, in other words, it behaves as an ordinary PoW full-node.
- Top-level node – Validates the blocks on Beacon Chain without downloading the entire Beacon Chain. This validation covers headers, signatures, and blocks published under shards.
- Single-shard node – Works similar to a top-level node however, it records the entire blockchain data of a specific shard at the same time.
- Light node – It is a type of node created to validate the block headers of the main chain, but does not download blocks unless it needs to read a specific detail on a specific shard directly. When data reading is required, this node reads the most recently signed header and calls Merkle root value based on the last status of the data required.
There is no certain information available as to precisely how much space will be needed by the nodes. We can only be sure about it when Phase 0 is completed and the preparations for Phase 1 are started.
After Phase 1 is completed, ETH V1 and ETH V2 will continue working in a parallel way and once Phase 1 is completed, the rewards will be distributed among both ETH V1 miners and ETH V2 validators. There is some anticipation that this will cause miners to stop mining; however, time will tell what will happen.
Phase 2
The second phase includes the process of different pieces connecting each other, getting live with all features of ETH 2.0, and finally, taking over the main chain. At that phase, all familiar features from ETH 1.0 such as
- smart contracts;
- developing platforms such as Truffle;
- a similar infrastructure such as Ethereum Virtual Machine (EVM);
- accounts, signatures which are the main structures of Blockchain;
- and status controls will be available.
ETH 2.0 address types and signing schedules
Elliptic curve signature mechanism, the BLS12-381, will be launched with Ethereum 2.0. This signature mechanism is used in the projects such as Skale, Algorand, Dfinity, Chia, and Zcash and will have a special place for Ethereum 2.0 validators. The key feature of this signature mechanism is to be pairing friendly – it allows for cryptographic transactions and validation between two groups with mapping.
Unlike the commonly used ECDSA/EdDSA signature algorithms, BLS (Boneh-Lynn-Shacham signatures) signature algorithm uses the Elliptic Curve cryptography and therefore makes it possible to collect signatures from different parties efficiently and to perform a single validation at an appropriate scale. Thus, the signature validation transactions of the networks are significantly accelerated. If we explain the algorithm through two different EIPs (Ethereum Improvement Proposal):
- EIP 2333:
This feature is not exclusive to the Ethereum 2.0 standard but it is also designed for a bigger group of projects that adopts BLS12-381 signature standard as well. Therefore, it is developed by taking the needs of the industry alongside the features of Ethereum.
- EIP 2334:
This is a modification of EIP 2333, which is developed for Ethereum and other chains with similar architecture to Ethereum and that aims to perfect the system security. BLS12-381 awards its keys key-based entropy and it only uses the secret key of the validator node while doing so (validator client). It does not only prevent the key to be revealed but also provides a larger space for the backup of signature information.
This level is designed to provide multiple keys for any purpose. This system is designed with the idea that a single account does have many uses in relation with each other but for security reasons, they should remain separate. At the very base of this idea lies the view that secret keys can be obtained with ease due to validator nodes being continuously online and BLS12-382 key architecture is utilized. Also, this system provides security against post-quantum supported attacks.
Transaction Fees and operation of smart contracts
The volatility of transaction fees or “gas fees” as it is called in the Ethereum network has always been a significant problem that the users face. The importance of the optimization of these fees is undeniable considering the fact that in 2020 the “gas fees” have increased by approximately 500%. Ethereum Foundation has published an EIP (Ethereum Improvement Proposal) on this matter:
- EIP 1559
EIP 1559 is fundamentally developed to determine the lower and upper limit of “gas fees”. To this end, the individuals making transactions at the Ethereum network will pay a standard basic fee and reward fee to the validators. The first blockchain project to apply PoS architecture with this logic will be Ethereum 2.0 meanwhile the developers mention that it is a bigger risk and development than switching to PoS architecture. Naming this system “cost auction”, Ethereum Association aims to reduce the fees that were increased by almost 500%. Vitalik Buterin, the founder and chairman of the Ethereum Foundation, has validated that up to 2M ETH can be released into the system annually starting with 100,000 ETH with this EIP. Therefore, it is expected that the new system will have a more economical structure.
Ethereum 2.0. key structure
While it is possible to own only a single private key in Ethereum 1.0, there are two different keys in Ethereum 2.0.
Source: https://kb.beaconcha.in/ethereum-2-keys
- Validator public and private keyhttps://www.paribu.com/blog/sozluk/private-key-nedir/:
The purpose of the validator private key is to actively sign on-chain operations on Ethereum 2.0 chain such as block proposals and approvals. Therefore, these keys can be treated as a hot wallet.
- Withdrawal public and private key:
Withdrawal key is used to withdraw the validator balance. Losing this key means losing access to the validator balance. But the validator can still approve and sign blocks; however, when the key is lost, the transaction is expected to be stopped in parallel. Furthermore, the validator status needs to be exited in order to withdraw.
Anticipations and developer notes on Ethereum 2.0
This Ethereum switch is expected to bring some problems that we encounter at different phases. Let us list them one by one:
- According to some, it will be possible to carry Ethereum from Ethereum 2.0 blockchain to the former Ethereum blockchain within the first few months (or years) after the launch. Since Ethereum developers have not yet finalized the two-way data bridge model, it is said that at this point that transactions between the two chains will not be allowed, and to create a validator they will use a one-way and primitive solution. It is also being discussed that due to the low number of validators the risk of an attack will be very high in the first months.
- It looks like it is almost certain that initially, Ethereum 2.0 will work like another chain that belongs to Ethereum 1.0 main chain.
- According to another view, Ethereum 2.0 will have half of the planned initial transaction capacity. The main argument of this prediction is the expectation that there will not be enough validator transactions.
Smart Contracts and Ethereum 2.0
- It will be pricier to recall data to the applications on the new network due to the changes in data storage. The communication protocol between shards has a great impact on this. Apparently, the shard on which the transaction is made will be an important element in pricing.
- It is expected that Ethereum will lose its atomic operation feature (lots of transactions can be made at once) soon. This means that this structure which is frequently used for ERC20 tokens cannot be used anymore and a new learning/adaptation process awaits the developers.
References
- https://docs.ethhub.io/Ethereum-roadmap/Ethereum-2.0/eth-2.0-phases/
- https://docs.prylabs.network/docs/how-prysm-works/bls-cryptography/
- https://ethereum.org/en/eth2/
- https://www.coindesk.com/ethereum-2-0-staking-need-to-know
- https://cointelegraph.com/news/ethereum-20-devs-discuss-medalla-issues-as-network-stabilizes
- https://www.coindesk.com/5-takeaways-on-ethereum-2-0-from-vitaliks-beast-mode-blog-posts
- https://medium.com/chainsafe-systems/ethereum-2-0-a-complete-guide-d46d8ac914ce
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