The news about Ethereum’s 2.0 deposit contract launching passed almost unnoticed, as the U.S. election was commanding all media space. But for our crypto space, it was one of the most expected news over the last 2 years. And here we are, Ethereum 2.0 has launched its phase 0. But what does it mean in fact? Can users already stake? And at what stage of completion is the project? Our developers carefully researched the concept of the whole project and phase 0 of Ethereum 2.0 in particular. Below you can find our thoughts on Ethereum 2.0. 

The Main Problem of the Ethereum Network

Right now, the decentralized software platform Ethereum is able to process no more than 20 transactions per second. That is definitely not enough, since the time between sending a transaction and the time it gets into the block is 1.2 minutes on average, and this is despite the fact that each new block is created every 10-12 seconds. Due to high demand for Ether, this leads to network overload and all of us know what happens then: extremely high fees & long transaction times as a result. 

The main reason for such low network capability is that now, every node has to verify and execute every transaction. Such a scheme slows down the process and this was a challenge that Vitalik Buterin decided to solve with his team by creating the Ethereum 2.0 network.

What is behind the Ethereum 2.0 network

The main idea for Ethereum 2.0 is adding 64 shards (affiliated blockchains) to the network, which will be run on consumer hardware, distribute the transaction verification process between Validators (virtual miners) and as a result, make the operation process 64 times faster. Each shard will be responsible for the transactions sent to it. You may ask why just 64? Will it be enough to unload the network? Or how the security of these shards can be provided? Let’s explain step by step. 

To provide security, the Ethereum 2.0 developers included a Committee of 128 validators to process the validators and certify their work. The validators will be randomly shuffled and the committee will be randomly chosen. 

To better understand, let’s imagine the whole process as a village with 64 “virtual houses” (Shards), where each house responds to the transactions sent to it. Each house has a “virtual controller” (Validator) and “virtual inspectors” (Committee), who attest to the controller’s work.

After the transaction passes to one of the 64 “virtual houses” (Shards), it goes up to a “virtual floor”, so-called Epochs, where validators verify transactions. 

Each “virtual floor” (Epoch) has 32 “virtual rooms”, so-called Slots, where controllers (Validators) create shard blocks with the transactions. Validators have 12 seconds to create each block. If the validator does not “open the door” for the transaction, the room will stay vacant, as well as some slots can be empty. For each “virtual house & room” (Shard & Slots), a controller (Validator) is randomly assigned. Moreover, “virtual inspectors” (Committee) of at least 128 validators control each house & room (Shard & Slots). After the “virtual controller” (Validator) proposes a block, the “virtual inspectors” (Committee) approve this proposal.

To break into a single house or floor (to hack the shard or slot), the attacker needs to control ⅓ of all validators and ⅔ of the committee. Due to the random shuffling of validators, it is mathematically improbable that a scammer would be able to do so, there is a less than one in a trillion probability of controlling ⅔ of a committee.

To keep all transaction information in one place, a “special language” will be used, so-called  Crosslink (references to the shards). It will be added to the “book”, so-called Beacon Chain, where all information about validators’ addresses, the state of each validator, attestations, and links to the shards are securely stored. 

Validators in Ethereum 2.0

The validators play a key role in the upgraded Ethereum network – they provide transaction security. The more validators included in the network, the more secure it will be. Right now, in the testing mode of phase 0, only those who stake 32 ETH in deposits (around $14,700) can become a validator. This wasn’t done by chance, if the price to become a validator is very cheap, attackers can run the system by becoming validators and confirm the wrong transactions to steal money from users’ wallets.

Validators get rewards for attesting, but they also have a lot of penalties. Speaking of rewards, it’s still not clear how much they will be, according to some information it varies from 8-15% annually. As for penalties, validators can earn them for different reasons. For example, if the validator doesn’t propose a block. In practice, this means that validators should be active 24/7 and never be offline, otherwise, it can lead to losing 0.7% – 7.5 % of the amount. From 0.5 ETH up to a validator’s entire stake may be lost due to a slashable offense, this also may lead to a validator’s deactivation. As you can see, being a validator is a huge responsibility with a proportional risk.

Phase 0

At this stage, developers need to attract at least 16,384 deposits (validators) of 32 ETH each. That is 524,288 ETH or about $261 million (at a price of $499 for 1 ETH). By November 20th, already 108,832 ETH, worth $54,2 million, was locked up in the deposit contract. $1.4M of this amount was sent by Vitalik Buterin, the founder of the Ethereum network, which created 100 validators. Once they collect this sum, the launch will proceed, and the Beacon Chain will go live. And then it will be time for phase 1 (shards) & phase 2 (execution). 

What users should expect from Ethereum 2.0

If you haven’t got 32 Ether, or just don’t want to become a validator and potentially have to rescue your funds, right now you can’t operate on Ethereum 2.0 network. After a while, there will be some pools that will collect different small deposits into one (32 Ether) and create validators on the users’ behalf, so users can take part in Ethereum 2.0 staking. Most likely, the rewards will be shared between users according to their deposit amounts. 

As for transaction speed, in theory, it should be faster 64 times, in practice, most likely it won’t be so fast. First of all, it is possible that transactions won’t be evenly distributed among shards, also it is not a fact that synchronization with the beacon chain will normally occur, as well as the speed of the slots themselves could vary. The way of processing transactions will still be the same — if you pay a smaller fee, your transaction will not be priority, so if the network overloads for some reason, you will be waiting anyway. 

Conclusion

Some questions still persist among crypto society, for example, the operating speed of the network and the validators’ rewarding and penalties rules, which objectively have not been finished properly yet.

But at the same time, the main idea of Ethereum 2.0 is amazing and ambitious. Integrating validators into the process will help avoid possible centralization, as for example in Bitcoin’s case, where most of its computing power is in the hands of several pools. The model of random shuffling of validators and choosing committees, in combination with a high entry threshold of 32 ETH, makes any effort to attack Ethereum 2.0 extremely expensive and almost impossible.

We will keep researching Ethereum 2.0 and await phase 1 & phase 2. For sure, it will be something great that will change the rules of crypto and bring new possibilities to the market.