This article first appeared in CityAM.
Ethereum 2 goes live
The 1st of December 2020 at 12pm UTC has been selected as the exact moment when the Ethereum 2 beacon chain can go live - but there are conditions to be met first. The Ethereum community has risen to the challenge and there are now 21,063 validators ready to start. Each has put down 32ETH meaning there is 674,016 ETH ready to secure the beacon chain.
At the time of going to press a single ETH had rocketed in value to 576 USD making the starting condition worth a whopping $388million. That is the amount of money being put on the line by those involved in the next step of Ethereum’s future.
These people are not shareholders. They are engineers, scientists, developers, corporations, financial institutions and ordinary people who hold ETH that want to see Ethereum catapulted into a powerhouse of computation spanning the globe.
So why is this important?
The Ethereum 2 beacon chain is the first milestone in the published roadmap for switching the entire Ethereum ecosystem to a much more efficient, and faster, transaction processing system. After all the upgrades are put in place (which includes roll ups), it is believed that this new system will be capable of delivering over 1 million transactions per second. This is astonishing. It is an upgrade which makes Ethereum around 100,000 times faster.
To put this into perspective, VISA has reported that they process around 65,000+ transactions per second as of August 2017 (PDF). Stock exchanges process around 80,000 per second. Once the full Ethereum 2 roadmap is rolled out Ethereum will be 10 times faster than these titans and available to everyone, everywhere.
Imagine the impact this would have on real time payment systems, and the time to finalise a transaction. At the very least it delivers on the promise of real time digital cash payments.
Fast is good, but what about scale?
Of course, it is relatively simple to create a blockchain in a lab that, given enough computing power, can burn through massive amounts of data in a very short time. The difficulty is making it work in real life. In university computer science courses everywhere there is the distributed systems trade-off: you can have security, decentralization and scalability, pick any two. This trade-off has been the bane of distributed computing since networking was invented and has led to highly-centralized and scalable systems, such as VISA, dominating the current economic model.
Bitcoin was the first to show that it was possible to introduce a lot more decentralization without sacrificing security, but it came at the expense of some scalability. This manifested as the very low throughput of around 3 to 7 transactions per second but with the promise that it was simply an engineering problem that needed to be solved.
It took years, and many false starts, for researchers and engineers to work out how to increase scalability without undue compromises on security or decentralization. The result of all this effort is the Ethereum 2 beacon chain and what it enables beyond other competing crypto ecosystems. For example, one design goal was that it had to be possible for someone with an ordinary consumer laptop to be able to act as a validator. This is in stark contrast to the enormous investment required of a Bitcoin mining operation.
So what happens after the beacon chain goes live?
From the perspective of a user of Ethereum - not a lot at the start. Life will continue as normal while a long “burn in” period is started to ensure that the beacon chain is resilient against a wide variety of attacks. Those running honest validators will be rewarded handsomely for their efforts while those attempting to subvert the network will be punished.
The next step in the roadmap is the introduction of sharding. A single shard is essentially an entire Ethereum 1 ecosystem and this upgrade will introduce 64 of them. More may be added later if needed. These shards, while independent of each other, will be able to communicate via the beacon chain. This introduces scalability through specialization with certain shards taking on roles that are optimised for certain instruments. Shards also have their own data roots, which can allow purely data-based operations (e.g. rollups) to operate. However, it is important to note that this upgrade does not introduce any economic activity. It is all simply a large scale, live test of the system to ensure that everything works as it is supposed to.
Finally, there is the state execution upgrade. This is where it gets truly fascinating because it is at this point where actual economic activity will begin. Remember, by this point all the major testing and verification of the underlying support structures will have been completed, and it is time to introduce real work to the system. State execution is essentially the activation and processing of smart contracts which is what makes Ethereum so different from Bitcoin.
With the activation of smart contracts onto the system the full power of Ethereum 2 is unleashed and there will be a huge surge forward in the creativity and ingenuity of online businesses as a result. Tasks which before seemed unwieldy, such as fully distributed real time identity management (with full privacy built in), will become straightforward.
As a user of Ethereum 1 the changeover should be seamless. Various smart contract addresses will need to be updated as developers choose the optimal shard on which to run their systems but much of that will be invisible to end users.
So is Ethereum 2 a long term solution?
Yes. One of the design goals was to create a system that could react to changes in the surrounding environment by allowing components to be swapped out. A great example of this is the use of quantum-secure cryptographic algorithms. Another is the economic model of the beacon chain itself.
You may recall that honest validators are rewarded for their work in securing the network. This reward gives rise to a “credit risk free rate” which creates a strong incentive for those securing the network to continue to do so for as long as possible. It is not dependent on an ever-increasing difficulty level which demands more and more energy to be expended. Instead, it simply relies on validators acting in their own interests and efficiently securing the network, possibly for decades to come.