Background and initial roadmap: Ethereum 2

The transition from ETH 1 to ETH 2 will take place in several phases. A provisional roadmap provides a high-level overview. As new research is undertaken and as the technology evolves, the chronological order of the phases may change. However, the end goal remains the same: a fully functioning Ethereum network, running at scale, utilising PoS with full inclusion of smart contract capabilities and all the present functionality of the existing chain.

Below is an update on:

  • the progression of the ETH 2 phases
  • statistics on the adoption of staking
  • proposed changes to the roadmap
  • Other new developments.

Original, high-level ETH 2 roadmap (due to ongoing changes, the exact steps in each phase may vary):

Phase 0 – Beacon Chain: With the launch of the Beacon chain on December 1, 2020, ETH 2 began its official rollout and the first step in the move from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

Phase 1 – Sharding: Sharding will expand the capability of Ethereum to process transactions and store data. The implementation of sharding itself will undergo several of its own phases as new features are added.

Phase 1.5 – Docking: ETH 1 mainnet will merge with the ETH 2 Beacon Chain and sharding. PoW will end and a full transition to PoS will take place as the original PoW Ethereum chain will exist as one of 64 shards alongside the Beacon Chain. Note that the sequences of these phases may change. Recent proposals suggest prioritizing the merger before sharding. See below.

Phase 2 – Full functionality: This phase is still less well-defined than the other phases. It is intended to be the final phase into a fully functioning ETH 2 blockchain. However, following recent potential changes in the roadmap and advances in scaling technology, it may be that this stage is reached at the end of phase 1.5. Phase 2 may then include ongoing updates as required.

The move to ETH 2 will have implications for scalability, security, decentralization, and economics. A key goal of the ETH 2 project is to be more scalable and secure while remaining decentralized. There are significant technical problems associated with achieving these three objectives of scalability, security and decentralization. The challenge can be summed up by the so-called scalability trilemma.

For the ETH 2 project, solving the scalability trilemma rests on two key concepts: Proof-of-Stake (PoS) and Sharding.

 

Learn More

Need more information on staking and Ethereum 2?  Check out our resources:

What is Staking?

What is Proof-of-Stake?

The Three Biggest Changes Coming to Ethereum 2

Ethereum 2 Matters – Validators Economics

Ethereum and Its Transition to Ethereum 2

 

The Beacon Chain and Proof-of-Stake

The mechanics of Proof-of-Stake and the Beacon Chain has been covered here. More information on how to stake is included here.

The launch of the Beacon Chain on December 1, 2020, marked the beginning of phase 0 and the opportunity to stake ETH and earn staking rewards. The required minimum amount of 524,288 ETH was staked by 16,384 validators.

After the Beacon Chain launch, the number of validators grew rapidly. To date, more than 4 months later, approximately 110,000 validators are staking on the Beacon Chain.

Chart 1: The number of active validators on ETH2 has tripled since the beginning of 2021.
glassnode-studio_ethereum-total-number-of-validators
Source: Glassnode

In order to qualify as a validator, 32 ETH must be staked. Circa 3.6 million ETH have been staked to date. This represents roughly 3.1% of current total circulating ETH supply.

Chart 2: An additional two million ETH have been staked since January 1.
glassnode-studio_ethereum-total-value-staked
Source: Glassnode

At the launch of the Beacon Chain, when the minimum required amount of ETH was staked, validators and early adopters enjoyed an initial annual percentage rate (APR) of 21.6%. It should be noted that these returns are denominated in ETH. The USD or fiat return depend on the ETH/USD exchange rate which fluctuates. It paid to be one of the early stakers and earn higher returns. As new stakers joined, the APR declined. Currently, the APR rate is at 7.6%. From here on, the APR rates will continue to decline asymptotically as more valuators are added to the network. This is illustrated in the chart below. If 10 million ETH are staked (ca 8.6% of total ETH supply) the APR rate will be 4.9%.

Chart 3: As more ETH are staked, the APR declines, but at a decreasing rate.
Picture3
Source: ethereum.org

It is important to note that the Beacon Chain does not represent a fully functional Ethereum blockchain, but simply provides the base layer and serves as a test for the economic incentive structure of ETH rewards for validators, as well as testing how nodes interact and agree on consensus. No withdrawal capability is planned until the launch of phase 1.5, the PoW-PoS merge.

 

Sharding

The goal of sharding is to reduce congestion and increase transactions per second by initially spreading the network load across 64 new chains that will run in parallel and interoperate. This will enhance scalability by allowing multiple transactions to be processed simultaneously, with the burden spread across the 64 shards. There is no firm date for the launch of sharding. However, most of the research is already done. The remaining work will focus on client implementation and how to ensure sharding works in practise.

 

Latest developments: The rollup-centric roadmap

Layer 2 (L2) scaling solutions such as optimistic rollups, zkRollups, plasma, payment channels and side chains, will enable immediate scaling of Ethereum layer 1 without waiting for the move to Sharding.

In particular, promising developments in rollup technology, is estimated to increase scaling by 100x. This means up to 4000 TPS are theoretically possible on the existing ETH 1 chain. Rollups move computation off-chain but keep crucial transaction data on-chain. This helps achieve the key goal of decentralization while preserving Ethereum layer 1 security.

Optimism, that uses optimistic rollup technology, is set to launch on ETH 1 mainnet in late March or April 2021. DeFi projects such as Synthetix, Uniswap, and MakerDAO have already successfully tested the scaling solution. zkRollups, an alternative to optimistic rollups, is already deployed on mainnet and has successfully implemented by projects such as: Diversifi, Looping, and zkSync.

In the original ETH 2 roadmap, scaling enhancement dependent on sharding, while phase 2 included the addition of an execution environment. However, the proven success of L2 scaling technologies, mean that ETH 2 can be used as a data availability layer for rollups in phase 1, before ETH 2 becomes useable for L1 applications. This means that rollups on Ethereum can handle computation, while benefiting from the Ethereum layer 1 security. Hence, as Vitalik Buterin has suggested, the Ethereum ecosystem is likely to widely adopt rollups as a key scaling approach in for the near to mid-term future.

 

Docking – The PoW-PoS merger may happen sooner than planned

In the current roadmap, docking, or phase 1.5, will occur when the present Ethereum mainnet “docks” with the rest of the ETH 2 upgrades. This means ETH 1 mainnet will merge with ETH 2 Beacon Chain and sharding system. This will be the end of PoW for Ethereum and a full transition to PoS. In this approach, shards would serve as data availability layers, using for example, zero-knowledge proofs to record transactions and smart contract interactions.

It seems that the recent L2 scaling developments have attracted broad community support and that implementing shard chains may not be as urgent as originally planned in the road map. This means moving Ethereum from PoW to PoS can happen sooner than planned. This new proposal has also gained support from leading Ethereum researchers. At present, however, it has not formally been introduced into the roadmap, and is still at the proposal stage.

The proposed minimal merger is technically less complex than sharding. By prioritising the merge now, the benefits of PoS would become immediately available. It would also give more time to researchers to solve the complexities and challenges of data sharding. Finally, if the merge is prioritised, a post-merger hard fork might then add support for staking withdrawals, which would provide liquidity to PoS stakers earlier than planned.

 

Conclusion

The launch of the Beacon Chain went smoothly and with over 110,000 staking participants it has attracted broad support and interest. The roadmap to a fully functioning Proof-of-Stake based Ethereum chain is still in flux and is drawing upon new proposals, research and ideas as they emerge from the Ethereum community and elsewhere.

It should be noted that the planned phases of ETH 2 development are happening in parallel, not in sequence. This means that the phases need not happen chronologically and indeed phases such as the PoW-PoS merge may happen before data sharding. This is still an open question though, and it will be interesting to see how ETH 2 evolves in the months ahead.

Currently, 4.8% of total supply is issued annually to miners on the PoW chain. Once the merger happens, the issuance rate is likely to drop to a range between 0.4% to 1.2%. This will constrain supply, and will have interesting economic consequences, on par with two Bitcoin halving happening at once.

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