Kryptolesson #15

Why Ethereum is moving to Proof-of-Stake?

Since launching in 2015, Ethereum has grown into the world’s most used programmable blockchain settling millions of transactions and tens of billions of dollars in volume every day. It is now home to most decentralized finance (DeFi) protocols and non-fungible tokens (NFTs). Its burgeoning ecosystem has created billions of dollars in value and has pioneered entirely new kinds of decentralized applications (Dapps). To some extent it has also become a victim of its own success. Ethereum can only handle about 15 transactions per second. The rapid increase in applications and tokens has led to a surge in transactions forcing users to pay higher gas fees (a unit of measure that specifies how much it costs to execute a transaction on Ethereum), effectively rendering entire Dapps unusable. Scaling Ethereum has always been part of the Serenity roadmap - Ethereum’s last stage of development which will also introduce a new Proof-of-Stake (PoS) consensus mechanism. The urgency to tackle Ethereum’s scalability issues has become blatantly obvious during the 2020 DeFi summer and more recently, amid the NFT boom.

In terms of scaling, solving Ethereum’s current limitations appears like an easy task. Many other blockchains have been optimized for throughput i.e., they are optimized for processing far more transactions per second. However, these blockchains tend to be far more centralized, typically in the form of powerful validators that can censor transactions or block addresses. In other words, other solutions sacrifize decentralization in favor of scalability or security. According to the Ethereum, open blockchains should be sovereign entities free from outside interference and unable to be shut down. By introducing the concept of the “Scalability Trilemma ↗”, Ethereum founder Vitalik Buterin outlined the unholy trinity of decentralization, security and scalability, arguing that proof-of-work (PoW) blockchains, like Bitcoin or Ethereum 1.0, can only achieve two of the three at the same time. Ethereum 2.0 ↗, the solution to Ethereum’s current challenges, is a much-awaited network upgrade aiming at vastly improving on

A. scalability,
B. security and
C. energy efficiency, without compromising on decentralization.‍

The major bottleneck to scaling up used to be that every node needed to verify every single transaction. Broadly speaking, there are two approaches to scaling in computer science: either by making nodes more powerful (vertical scaling) or by adding more nodes to the system (horizontal scaling). Open blockchains need to scale horizontally and Ethereum 2.0 attempts to solve this through a process called “sharding ↗”. It will introduce sharded chains – 64 blockchains that will run in parallel – which will significantly increase throughput by a factor of 64. These shards are tied together by the Beacon Chain ↗, a new blockchain at the heart of the protocol ensuring consensus among all sharded chains and coordinating block production via PoS. Each of the sharded chains will create new blocks and report them to the Beacon Chain which will also manage the registry of Ethereum 2.0 validators. Anyone with 32 ETH will be able to activate a validator client using simple consumer hardware instead of requiring expensive GPUs for Ethereum’s energy-intensive PoW mining.

To guarantee its security, Ethereum 2.0’s PoS consensus mechanism makes sure that validators have a large amount of economic value at stake that can be taken away (“slashed”) in the event of malicious behavior. Staking rewards will be dynamic, ultimately depending on a validator’s staked ETH in proportion to the total amount of outstanding ETH being staked. While Ethereum 2.0’s monetary policy is defined as “minimum necessary issuance ↗”, staked ETH theoretically have a perpetual claim on new issuance.

Ethereum 2.0 will be rolled out in three phases ↗ over a multi-year period, with Ethereum and its upgrade initially running in parallel. The beacon chain was launched in December 2020 as part of Phase 0 along with the initial validator set. In Phase 1, expected in 4Q21, PoS will be extended to its 64 shard chains. Ethereum’s current mainnet will merge with Ethereum 2.0 as part of Phase 1.5 and become a single shard. In Phase 2, which is not expected until the end 2022, shards are expected to become fully functional chains that support smart contract functionality.

Photo by Caroline Grondin