Ethereum 2.0: why this update is crucial for Ethereum

Ethereum is the 2nd blockchain in the world, just after Bitcoin. Yet increasingly fierce competition is emerging. Currencies such as Solana, DOT (Polkadot), ADA (Cardano) or Elrond clearly aim to dethrone ETH. They are also nicknamed the Ethereum killers.

A major update materializes in the course of 2022: Ethereum 2.0. It aims to solve the growth problems encountered by Ethereum and which can be summarized as follows:

• disproportionate transaction costs;
• a speed processing too low.

To better understand both what made Ethereum so successful but also its weaknesses, let’s go back to its history …

An ecosystem in its own right

Ethereum was officially launched on July 30, 2015 with one major difference on Bitcoin : the possibility of making a programmable change via the smart contracts. In particular, he facilitated the development of all kinds of cryptocurrency, based on a protocol carried out around Ethereum : ERC 20. In fact, starting in 2017, ICOs – a process by which a start-up offering a new currency based on ERC 20 sought to raisemoney – have multiplied. Unfortunately, a large number of these currencies had little future and the soufflé fell from the beginning of 2019. The fact remains that Ethereum made it possible to greatly facilitate the creation of a new currency.

Ethereum also spawned the development ofapplications of decentralized finance, what is called DeFi. Most of the major DeFi apps are based on Ethereum: AAVE, Compound, MakerDAO … Finally, Ethereum is the blockchain of choice for the main platforms of NFTs such as OpenSea. So the dominance of Ethereum is major. However, this currency has experienced acute problems of growth crisis …

Ethereum’s growth crisis

Ethereum, like many other currencies has experienced so-called scalability : change of scale. Thus, from the end of November 2017, an application, Cryptokitties, was so successful that it saturated this network, slowing down or blocking the processing of transactions for endless hours.

One of the key reasons is that Ethereum, just like Bitcoin, is a currency that is based on a mining based on “proof of work” »And which therefore puts all of the ETH miners around the world in competition. This results in a long processing time (this network can only process 7 to 10 transactions per second) and gas fees (transaction fees) excessive, of the order of several tens of euros and sometimes a great deal more for the slightest transaction.

Due to these worries of scalability, other currencies appeared with more flexible blockchains, and a new processing model, “the proof of stake” (from English proof of stake) which only relies on the validation of transactions on a very limited number of minors. Certain currencies, BNB (Binance), SOL (Solana), DOT (Polkadot) or AVAX (Avalanche) have made real breakthroughs. Each highlights its qualities of speed, respect forecology or from scalability. Thus, on Solana, the cost of processing a transaction is of the order of a thousandth of a euro.

7 years of reflection

Ethereum 2.0 is the answer to these growth difficulties and when it has been implemented, around mid-2022, it will have been the culmination of 7 years of reflection. Indeed, Vitalik Buterin realized very early on the problems of scalability of Ethereum 1.0 and he therefore launched the reflection around Ethereum 2.0 in 2014.

The improvement proposals were set out in a document called EIP 1559 with a few main axes:

• return them gas fees (transaction costs) more predictable;
• reduce the unnecessarily long processing time of transactions;
• adopt an automatic auction system rather than a “on-the-fly” auction for gas fees.

One of the main ideas of Ethereum 2.0 is to replace the blockchain original by 64 blockchains evolving in parallel and called shards. Each shard is managed by a “proof of stake” algorithm. The size of the blocks, for its part, goes from 52 kbits to 512 kbs.

By the way, Vitalik Buterin wants to democratize access to mining : any user with a minimum of 32 ETH can claim to become a validator (minor). The master chain of Ethereum 2.0 is titled Beacon, and all shards are linked to it. Beacon ensures the transition from Ethereum 1.0, communication between shards, management of validators but also the application of punitive rules …

A punitive algorithm for fraud attempts

To prevent one of the shards from being corrupted, the Ethereum 2.0 algorithm has been designed so that such corruption is only possible if all 64 shards are corrupted – which appears virtually impossible. And to avoid any attempt at collusion, shards are mixed and redistributed every six minutes.

In addition, among the algorithms implemented in Ethereum 2.0 is a deliberately punitive system called Casper. The whole idea is to prevent an individual (minor) validator from wanting to play solo, to the detriment of the community. So, if a miner tries to create two versions of the same blockchain, his assets are neither more nor less destroyed.

An update that was long overdue

On this new version, 170 developers are at work. And, in fact, the transition to Ethereum 2.0, divided into several specific stages, was longer than expected. It turns out that Ethereum is the largest ecosystem crypto in the world, due to the hundreds of applications that depend on it. Vitalik Buterin had also planned that the transition would take place over several years. One of the updates put in place (the proof-of-stake update) suffered three attacks, which revealed some vulnerabilities that needed to be corrected.

The success of Ethereum 2.0 is crucial for the future of this ecosystem. If all goes according to plan, it would be possible that Ethereum could overtake Bitcoin and therefore become the very first of the cryptocurrencies. Otherwise, failure to accomplish this mutation could ultimately doom Ethereum, which would be overtaken by more flexible and swift competitors such as Binance or Solana. This is to say if this update is critical for the 2^e cryptocurrencies.