All about ETH 2.0 and how it differs from ETH 1.0

As the long-anticipated Ethereum merge, slated for mid-September approaches, discussions about what  ETH 2.0 is have come fast and furious. While crypto veterans debate the potential consequences of the merge, this concept might remain unfamiliar to crypto newcomers. This article explains the basics of ETH 2.0 and how it differs from ETH 1.0.

What is ETH 2.0?

Compared with ETH 1.0 or ETH 1.X, ETH2 could be viewed as an update to the network that aims to upgrade the entire  Ethereum chain’s efficiency and scalability to better meet demands caused by increasing transaction volumes. The major difference between ETH 1.0 and ETH 2.0 is the consensus mechanism employed: ETH 1.0 applies the Proof of Work (PoW) model while ETH 2.0 uses the Proof of Stake (PoS) model. 

ETH 1.0 is commonly known as the execution layer where smart contracts are located. ETH 2.0 is called a consensus layer that ensures the contributors to the network will act according to stipulated rules.

When did the concept of ETH 2.0 emerge, and how does it work? 

ETH 2.0 is a phased project that started at the end of 2020 with the goal to improve the capacity and scalability of the network. The whole process could take a few years to complete. Each phase brings new improvements to the Ethereum network’s functions and capacity.

During the first phase which started on December 1, 2020, Ethereum released the Beacon chain – a ledger of accounts that conducts and coordinates the network of stakers. Unlike the Ethereum mainnet of today, the Beacon chain does not process transactions or handle smart contract interactions. Instead, it served to introduce PoS to the Ethereum ecosystem. 

The second phase is known as the merge, which refers to the merge of the Beacon chain and the Ethereum mainnet that is likely to take place on September 19. After the merge, the Ethereum network’s consensus mechanism will shift from PoW model to PoS model.

The last phase is sharding. This is a common concept in computer science. In the Ethereum context, sharding will work synergistically with layer 2 rollups by splitting up the burden of handling the large amount of data needed by rollups over the entire network. According to Ethereum’s official website, the sharding that is expected to take place in 2023 after the merge phase will continue to reduce network congestion and increase transactions per second.

What are the major differences between ETH 2.0 and ETH 1.0?

Compared with ETH 1.0, ETH 2.0 should be viewed as being more akin to a revolution versus a regular upgrade. The following major changes will take place:

  • Consensus mechanism shifts from PoW model to PoS model for the first time. It is the first realization of the innovative PoS-based consensus protocol Casper FFG.
  • Under the PoW consensus mechanism, ETH1.0 only has one main chain. ETH 2.0 will have the Beacon chain and 1024 shard chains to expand scalability. The different shard chains can communicate with one another and are uniformly controlled and verified by the Beacon chain.
  • The tokenized asset on ETH 2.0 is likely to be called BETH or Beacon ETH. The original ETH token cannot be used on ETH 2.0 and ETH token holders should redeem ETH token to BETH at a 1:1 ratio. This redemption mechanism will be processed by the smart contract on ETH 1.0 and supervised by the Beacon chain.
  • Staking will be one of the major functions on ETH 2.0. Users can stake 32 BETH in order to become a validator on the Beacon chain.

“The user benefits of ETH 2.0 are that it makes rewards more inclusive and available to a wider network of users, as staking enables more users to participate in maintaining the blockchain ledger, as opposed to mining under the previous Proof-of-Work framework. Users will be able to stake ETH 2.0 by running their own validator nodes or using third-party staking providers. Huobi Global plans to offer such staking opportunities to its users as well.” said Lily, CFO of Huobi Group.

Advantages of ETH 2.0

Put simply, the final goals of the ETH 2.0 roadmap are the PoS consensus mechanism and shard chains, which will transform the network into a more environmentally friendly, safer and efficient one, according to ETH official website.

At present, ETH1.0’s consensus mechanism is based on the PoW model. PoW relies on hashing (computing) power, which is known as “mining”, to create blocks on chains. Due to the inherent nature of mining, PoW demands high electricity consumption which is a key reason some countries have implemented a ban on the mining business. 

The PoS model is widely considered to be an improvement to the PoW model, bringing energy savings alongside higher security and stability, as it relies on validators instead of mining for consensus. 

ETH’s main chain is a single chain that consists of consecutively connected blocks. Its current transaction processing capacity is limited by the need for each node to process and validate every transaction in these consecutively connected blocks. 

Sharding is a mechanism that divides ETH’s main chain, distributing the data handling to many nodes. In this way, transactions can be processed in parallel shard chains at the same time. Consider each shard chain as a new lane being added to a busy highway, upgrading Ethereum from a single lane to a multi-lane highway.

Currently, ETH 1.0 can handle about 30 transactions per second, which often leads to delays and traffic jams. ETH 2.0 promises the capability to handle 100,000 transactions per second, which can be realized through the shard chains.

ETH 2.0 was also designed with security in mind. Most PoS networks have a small number of validators, which makes the system more centralized and compromises on network security. ETH 2.0 requires a minimum of 16,384 validators to achieve decentralization and higher security.