Ethereum 2.0/ the Consensus Layer is the evolution of the Ethereum mainnet by which the Ethereum Foundation aims to fix some of its existing crises and ensure the survival of Ethereum against a constant onslaught of ‘Ethereum Killers.’ (N.B.: Ethereum 2.0, the Consensus Layer and Eth2 refer to the same version of Ethereum). This article will be my attempt at a layman’s translation/ explanation of what you can find on the Ethereum Foundation’s website pertaining to their transformation to Eth2. More detailed explanations and technical information can be perused there, but I will provide links to the necessary pages throughout, as required.
Before we explain what Eth2 is, we should first discuss why Eth2 is necessary. As with most version 2.0s, Eth2 has been brought about because Ethereum version 1.0 wasn’t good enough to do what Ethereum wanted to be able to do. Anyone who’s tried to transact with or send Ethereum has undoubtedly experienced the exorbitant gas fees required to operate on the Ethereum blockchain. As the network grows and more people adopt Ethereum, the network gets more congested and the cost of adding a transaction to a block inflates far beyond reason, and it starts to feel like using cryptocurrencies might not change the world like they promised it would. On the other side of the proverbial coin, for Ethereum miners, the computational workload for just operating a node without mining is also starting to get a little out of hand.
While Bitcoin has solved this with the development and integration of the Lightning network and Taproot, Ethereum seems to want a different approach to these problems. Since inception Ethereum has stood against the established ‘traditions’ of Proof of Work mining (although cryptocurrencies are not old enough for real traditions), developing their Ethash consensus algorithm to be resistant to ASIC machines. With the rise of NFTs in 2021, a lot of negative press against the energy costs of Proof of Work blockchains was targeted at Ethereum. For the mainstream public, this is often the only thing they know about Ethereum. This is the third of, and possibly their most contentious issues.
Ethereum 2.0 is the version of Ethereum that aims to solve the blockchain trilemma that every blockchain developer must confront: being scalable, secure and decentralised. It has since been rebranded by the Foundation as the Consensus Layer. At the moment, Ethereum is secure but is significantly lacking scalability (some also argue it lacks decentralisation, but that is a discussion for another time). Eth2 is composed of several different elements to work towards solving the trilemma: Proof of Stake, Shard Chains and the Beacon Chain.
At the core of Ethereum’s transformation is a switch from Proof of Work to Proof of Stake. These concepts are known as consensus algorithms, the former of which is used in Bitcoin and Ethereum, and are used to add transactions to the blockchain and secure the network. Proof of Work is notorious for being a power dense protocol, which becomes contentious in an incredibly ESG conscious society. It works by using powerful computers to guess a number which will produce a ‘hash’ under a certain value. Modern computers (Application Specific Integrated Circuits aka ASICs) built specifically for the task operate in the order of millions of millions of guesses a second. Briefly, hashing is a cryptographic technique which takes several inputs, runs them through a ‘black box’ encryption method and returns a ‘hash’ value (consider it a really long string of numbers). Many passwords are stored like this, and it is near impossible to reverse the encryption to figure out the inputs. Proof of Work involves guessing values that will return a hash below a certain threshold. This is in essence what ‘mining’ is: guessing over and over again until you figure out a valid input, and being rewarded for your time and effort with the chance to validate a block, and some cryptocurrency.
On the other hand, Proof of Stake requires no guesswork, and instead involves ‘validators’ staking their assets and hoping to be chosen to add a block to the chain. Validators are chosen ‘algorithmically’ (read: randomly), based on how much Ether they have staked, and are rewarded for approving valid blocks for the blockchain. Essentially, the more Ether they have staked, the higher likelihood they have of being rewarded with the block validation, much like buying more lottery tickets. The initiative to move to Proof of Stake is predominantly in hopes of becoming a more ‘sustainable’ blockchain, cutting energy costs by up to 99%. However, Ethereum also argues that there will be ‘lower barriers to entry’. Considering that you require 32 ETH (with the equivalent price at time of writing being ~10000 USD) to become a validator and run a node, the price difference is not much more accessible than buying an ASIC miner. They also argue that it makes Ethereum more secure by building a network more resistant to a 51% attack. To argue this would be to suggest that it would be easier to accumulate 51% of the world’s mining computational power (alongside the necessary infrastructure and power to operate it) than it would be to accumulate 51% of the world’s Ethereum. I’ll leave it up to you to decide whether you think that’s feasible. With these ‘lower barriers to entry,’ the Ethereum Foundation argues that more people will become validators, and further decentralise the network. This seems somewhat hard to believe when the benefits of Proof of Stake suit those with the most Ether, and Ethereum Foundation and early investors own 33% of circulating supply.
The Beacon Chain will be Ethereum’s Proof of Stake host chain, and will essentially become the new mainnet. The Beacon Chain was launched on December 1, 2020, and awaits a merge with the mainnet to become the core blockchain of the Ethereum network. It will coordinate all of the validators as well as the shard chains which will help distribute workload. It shouldn’t change how the average user interacts with the network. It currently operates parallel to the mainnet, and over 9 million Ether has been staked on the Beacon Chain, with the initial 3200 coming from Vitalik Buterin himself.
Shard Chains are the Consensus Layer’s attempt at a scaling solution. Simply put, Ethereum will split the computational workload and processing of transactions across 64 different shard chains, all of which will report back to the Beacon Chain. The Beacon Chain will delegate work to each chain, as well as randomly assign validators to each chain and rotate them as necessary. By separating work away from the main chain, Ethereum is hoping that the network will be able to maintain a much smoother and low gas transaction experience. The Shard Chains can run in parallel to the Beacon Chain and the mainnet can operate faster without having to wait for each transaction to come through. However, with 64 new chains to consider, the network will also have to be able to ensure that all of these chains are secure and properly maintained to avoid one chain contaminating the integrity of the entire network.
The promise of a better scaled and more efficient network is wonderful, but what about its execution? Will it actually be faster, more secure and lower gas fees? The attempt to lower fees with the ‘London Fork’ was unsuccessful, so it is still contentious whether the Foundation has the skill to execute a move to Proof of Stake that will provide any significant effects besides making many GPU Ethereum mining operations obsolete.
The Beacon Chain is live and ready, and the merge of the mainnet to this Proof of Stake chain is expected to take place in Q1/Q2 2022. The Foundation will focus on a smooth transition to Proof of Stake first before implementing sharding, which is expected to come into play in 2023. In the interim, they have placed their faith in Layer 2 scaling solutions.
