Revisiting Ethereum’s upgrade path

Ethereum is positioned as the world computer. In order to achieve this goal, developers planned an upgrade path for it at the beginning , which consists of four stages: Frontier, Homestead , Metropolis , and Serenity.

At present, the entire network has reached the third stage. The first three stages belong to Ethereum 1.0, and the last stage, Senerity, is what we often hear about Ethereum 2.0 (in order to avoid misleading , Ethereum officials have abandoned the term Ethereum 2.0, but we will continue this usage in this article).

The Ethereum 2.0 upgrade is mainly to solve some problems that have arisen during the development of Ethereum and have restricted the development of the entire network. There are three main issues:

• The first is the high energy consumption caused by mining. Since the PoW (Proof of work) mechanism is used as the consensus mechanism, Ethereum requires nodes to provide computing power for mining. The computing process of various mining machines consumes a lot of electricity, so the network is often accused of not being green and environmentally friendly.

• The next issue is performance. Currently, the Ethereum chain produces one block every 12-15 seconds, and the TPS (Transaction per second) is about 15. This processing speed is not even enough to support an ordinary commercial application. The congestion that occurs from time to time on the Ethereum network also limits its development.

• The third is the cost of using the Ethereum network. Using the Ethereum network requires paying a gas fee to the miners who maintain the network, which is usually a few dollars to tens of dollars, depending on the congestion of the network, and sometimes even hundreds of dollars. The high gas fee has caused some protocols to turn to Ethereum's competitors, such as Solana , Near and other public chains .

In response to these issues, the developer community has planned several steps for the Ethereum 2.0 upgrade. The following is an introduction to the Ethereum 2.0 upgrade roadmap.

Ethereum 2.0 Roadmap

The Roadmap of Ethereum 2.0 mainly includes three steps: parallel chain-beacon chain, merging and sharding. The purpose of the first two steps is to change the consensus mechanism of the entire network from PoW to PoS (Proof of Stake), and the last step is to improve the performance of the entire Ethereum network and increase scalability.

1. Parallel chain - beacon chain

In order to achieve a smooth transition of the consensus mechanism, on December 1, 2020, Ethereum first enabled a parallel chain called the Beacon Chain while running the current PoW mainnet. The Beacon Chain uses PoS as a consensus mechanism and runs independently of the mainnet. Participants need to pledge 32 ETH as proof of stake to a smart contract on the chain, and after review, they will be included in the validator list and become validators of the Beacon Chain. On this chain, validators replace the role of miners and become chain builders.

In the PoW mechanism, nodes generate the next block by computing mining, while in the beacon chain of the PoS mechanism, the generation of the next block is selected by the validators. This selection is random and not determined by a single validator, which reflects the characteristics of decentralization. If the validators perform well, they can get rewards. On the contrary, if they do evil, the system will deduct part of the 32 ETH they staked. When the staked ETH is less than 16, they will be removed from the validator list.

Before the merger , which is the current stage , Ethereum is in the stage of PoW+PoS parallel operation. The early activation of the PoS parallel chain is mainly due to two considerations. The first is to minimize the impact on the currently running PoW chain and reduce the impact of consensus conversion on the network. The second is to give the new PoS network enough time to collect the staked ETH to ensure the safe operation of the network.

2. Merge

The merger often mentioned when talking about Ethereum 2.0 is to merge the PoW mainnet (Ethereum calls it the execution layer for processing transactions) with the PoS beacon chain (Ethereum officially calls it the consensus layer). Ethereum's merger needs to be tested on the test network first. If any problems are found during the test, the node will repair them as appropriate.

Currently, Ethereum's test networks Ropsten and Sepolia have completed the merger on June 9 and July 6 respectively. The remaining Goerli test network will also be merged in the near future. If everything goes well, the Ethereum official network will complete the merger in mid-to-late September. After that, the PoW mechanism will be abandoned, and the entire network will generate new blocks through PoS.

In order to ensure the success of the consensus mechanism switch, Ethereum developers proposed to implement a difficulty bomb to increase the difficulty of PoW mining. The difficulty bomb was added to the Ethereum code in 2015. It is described as: increasing the difficulty of the puzzle in the PoW algorithm at a predetermined number of blocks , making the calculation time of generating blocks longer and mining more difficult, thereby reducing the mining rewards of miners and discouraging their enthusiasm . After the implementation of the difficulty bomb, miners will become unprofitable and the original PoW network will not be able to continue to operate.

3. Sharding

The change in consensus mechanism cannot improve the performance of Ethereum. Performance improvement needs to be achieved through sharding.

Sharding is a database partitioning concept used to optimize storage and fast processing. It divides the organization's network into smaller partitions, horizontally splits the database, and distributes the load. Each shard has its own independent data, and multiple shards can be processed in parallel, thereby reducing network congestion, increasing TPS, and achieving network scalability.

Ethereum's earlier sharding plan was to divide the main network into 64 shards. Each shard has an independent block proposer and committee. The block proposers and committees are randomly selected and assigned. The block proposers select transactions to be included in the block from the transaction pool. Once they obtain two-thirds of the votes of the committee, the block can be included in the chain.

This early sharding scheme aims to expand the performance of the Ethereum main chain. However, it is complicated to implement. In addition, after a few years, layer2 has developed rapidly and Rollup has flourished. Therefore, Ethereum developers centered on Vitalik gradually abandoned this original plan and turned to a new technology selection, that is, no longer directly sharding on the Ethereum main network to pursue carrying more transactions, but switching to a roadmap of the underlying chain centered on Rollup, with Rollup expanding at the transaction level and the main chain only providing data availability for Rollup.

In the new scheme, Ethereum aims to serve as a scalable data availability layer, which can be simply understood as the final settlement and accounting. The main chain expansion will focus on expanding the data capacity of the block rather than improving the efficiency of on-chain computing, that is, Ethereum sharding aims to provide more data blob (binary large object) space to support Rollup . Ethereum does not need to interpret this data, but only collects the calculation and proof results of Rollup to ensure data availability, while more calculation execution and transaction validity are achieved by Layer2 Rollup. More specifically, Rollup calculates and verifies transactions, and incorporates multiple verified transactions and proof results into one package, while the blocks on the main chain only record these packages.

Since a block can include packages generated by multiple Rollups, there will be multiple Rollups on Ethereum in the future to expand the capacity of the entire network. The current mainstream ones are zkRollup and Optimistic Rollup, which correspond to the two proof methods of validity proof and fraud proof respectively.

The impact of Ethereum 2.0 upgrade

• Reduced energy consumption

After switching to the PoS mechanism , the entire network no longer relies on miner nodes that consume a lot of electricity, so it becomes more environmentally friendly . The energy efficiency of nodes under the PoS mechanism is more than 99% higher than that of PoW, so the energy efficiency of the PoS network will be greatly improved. When the PoW mechanism is adopted, miner nodes need powerful and energy-intensive hardware equipment to perform complex mathematical calculations. Whoever completes the calculation first will be qualified to build a block and receive a block reward. In this case, miners can only run their mining equipment at full capacity 24 hours a day to obtain the maximum benefit. These high-energy-consuming equipment undoubtedly has a huge demand for electricity.

In the PoS network, the proposer of the block is selected randomly, and there is no need for a large amount of mining hardware to compete for the right to produce blocks, which means there is no need for huge electricity consumption.

• ETH Production

After Ethereum switched from PoW consensus to PoS, it no longer generates miner rewards, but staking rewards instead. Therefore, the issuance rate of ETH will be reduced by 90%. People call this situation "Triple Halvening" because it is equivalent to three Bitcoin halvings at the same time. Ethereum will experience an instantaneous reduction in issuance, and since the staked ETH cannot flow into the market, ETH will enter a deflationary phase.

• ETH Staking

After the merger is completed, more users will choose to stake their ETH because they can get an almost risk-free staking income. According to estimates, the annual yield of staking ETH is about 4%. Kraken predicts in its report "Staking Status in the First Quarter of 2022" that after the Ethereum merger is completed, the annual yield of staking users can reach 8.5%-11.5%.

In addition, due to the increase in staking needs, the staking service track is expected to have a wave of explosion. Currently, more than 13 million ETH are staked on the beacon chain, which is more than 10% of the total Ethereum, and a total of 410,000 validators have participated in the staking.

Since the network requires a minimum of 32 ETH to be staked, and there are certain technical and financial barriers to running node equipment, choosing a staking service provider is much more attractive than staking on your own. The current leader in the staking track, Lido (see the previous article starting from the discount of stETH - the pricing, liquidity and risks of stETH) has already occupied more than 90% of the market share in the liquidity staking market.

• miner

After the merger of Ethereum, the original PoW chain will gradually be abandoned, and the whereabouts of the original miners will also become an important concern. As the second largest mining ecosystem in the crypto world, what will the miners choose? Will they choose to fork the original chain, or switch to ETC to continue mining? As a forked chain of Ethereum, Ethereum Classic can use Ethereum's mining machines for mining, but the computing power that Ethereum Classic can carry is limited. First, because the price of ETC is relatively low, the cost and benefits of mining are difficult to balance. In addition, if a large amount of computing power pours in after the merger, competition will intensify, which will further reduce the income of miners. The plan to fork the original chain may also be difficult to implement due to the design of the difficulty bomb.

Conclusion

The Ethereum merger is just around the corner. Although the upgrade plan has changed several times, it has been basically smooth so far. As the most influential public chain in the blockchain world with the most developers, the upgrade of Ethereum will undoubtedly have a huge impact. With the arrival of Ethereum 2.0, the development of public chains has also entered a new chapter. The problems of low performance, high cost and high energy consumption that have plagued Ethereum users for a long time are expected to be solved through a series of upgrades. We are full of expectations for everything that is about to happen.