Ethereum 2.0 (Eth2) is the next phase in the evolution and improvement of the public Ethereum network. With a shift from a Proof of Work to Proof of Stake consensus algorithm, Ethereum 2.0 will result in improved scalability, security, and usability for the network. Eth2 will go live in multiple phases, beginning with Phase 0 in 2020.
Proof of Work
Proof of Work (PoW) is a class of consensus algorithm that rewards miners who expend computational energy to solve mathematical problems to propose new blocks. With PoW, the probability of mining a block and thus receiving block rewards is a function of how much computational energy (known as hash power) a miner expends. Popular blockchains such as Bitcoin, Ethereum (1.0), and Litecoin are all Proof of Work blockchains.
Proof of Stake
Proof of Stake (PoS) is a class of consensus algorithm that selects and rewards validators as a function of a validator’s economic stake in the network. Unlike PoW, the probability of creating a block in a PoS network is not a result of hash power from burning energy, but rather the result of economic value-at-loss. Proof of Stake will be the consensus mechanism that Ethereum 2.0 uses to maintain the network. Unlike Proof of Work networks, Proof of Stake networks can achieve finality.
Staking replaces mining as the consensus mechanism in Proof of Stake blockchains. A stake is a fixed amount of funds that are ‘committed’ to a blockchain by a validator in order to participate in block creation and attestation. On Ethereum 2.0, validators will stake 32 ETH to the network and will be rewarded in ETH for their effort. If an ETH holder does not have 32 ETH, they may elect to use a staking pool to participate in Ethereum 2.0. Validators that break the rules of the network are subject to slashing of their stakes.
A validator is an actor on Ethereum 2.0 who proposes and attests new blocks on the network. In Proof of Stake, a validator stakes 32 ETH in order to participate in maintaining the network. If a validator is chosen to attest the next block, they are rewarded in ETH as a percentage of their stake. Conversely, validators who do not perform their duties––if they are offline, for example––receive penalties, or slashes, in the form of small amounts of ETH subtracted from their stakes.
Phase 0 of Ethereum 2.0
Phase 0 is the first upgrade to the Ethereum blockchain, and marks the first stage of Ethereum 2.0. Phase 0 is the launch of the beacon chain. Phase 0 will exist only to implement the Proof of Stake consensus mechanism by managing the list of validators. It will not offer other blockchain features such as shard chains or execution: in short, participants won’t be able to make transactions or call smart contracts on Eth2 yet.
The beacon chain stores and manages the registry of validators, and will implement the Proof of Stake consensus mechanism for Ethereum 2.0. The beacon chain will go live in Phase 0. The original Ethereum 1.0 PoW chain will continue to run alongside the new Ethereum PoS chain, ensuring that there is no break in data continuity.
The Ethereum 2.0 deposit contract will be released before the beacon chain goes live in Phase 0. In order to register as a validator on the network, a user must generate Ethereum 2.0 keys by making a one-way deposit of ETH into the deposit contract that will be live on the Eth2 Launchpad, hosted by the Ethereum Foundation.
Staking providers offer services––such as staking-as-a-service and/or staking pools––that stake funds and create, propose, or vote on blocks added to the blockchain on behalf of token holders. Staking providers help offload the technical burden of maintaining an online validator and/or reduce financial barriers to participation for participants.
Staking-as-a-service tools with offload the technical efforts of running one own’s validator node by allowing an individual with 32 ETH to select which client they wish to use to remotely run a node and stake their funds.
In order for an individual to become a “full” validator on Ethereum 2.0, they must stake 32 ETH. Should a user be unwilling or unable to stake 32 ETH, they may elect to send fewer than 32 ETH to a staking pool, which will combine the funds of others and stake on their behalf. Pool participants will receive rewards as a percentage of their contribution.
Phase 1 of Ethereum 2.0
Sharding / Shard Chains
Sharding is a form of database partitioning, also known as horizontal partitioning, wherein large databases are divided into smaller, more manageable clusters to reduce data burden and improve scalability. On Ethereum 2.0, sharding will take the form of 64 chains running alongside the beacon chain, increasing overall throughput and scalability.
Phase 1.5 of Ethereum 2.0
Phase 1.5 is a term being used to describe a period during the Phase 1 upgrade where the Ethereum 1.0 and Ethereum 2.0 blockchains are merged. After Phase 1.5, the Ethereum 1.0 chain will run as a shard of the Ethereum 2.0 PoS blockchain. This will be the moment when the full functionality of the Ethereum 1.0 chain – including the use of ETH – will become functional on Ethereum 2.0 without risking a break in data consistency.
Phase 2 of Ethereum 2.0
Phase 2 is the third phase of Ethereum 2.0, following Phase 0 and Phase 1. This phase is currently less clearly defined than the preceding two phases, but it will involve adding ether accounts, enabling transfers and withdrawals, implementing cross-shard transfers and contract calls, building execution environments so that scalable applications can be built on top of Ethereum 2.0, and bringing the Ethereum 1.0 chain into Ethereum 2.0 so that Proof of Work can finally be turned off.
Proof of Stake blockchains can offer finality. After a small period of time, a block is declared final, which means that it can never be changed. All the transactions in that block and all previous transactions are permanent, immutable, and guaranteed forever. Proof of Work chains offer much weaker guarantees around finality.
Ethereum 2.0’s consensus mechanism has a couple of rules that are designed to prevent attacks on the network. Any validator found to have broken these rules will be slashed and ejected from the network. Slashing means that a significant part of the validator’s stake is removed: up to the whole stake of 32 ETH in the worst case. Validator software and staking providers will have built-in protection against getting slashed accidentally. Slashing should only affect validators who misbehave deliberately.