During the preparation for Metropolis, it became clear how large and impactful all the Ethereum Improvement Proposals (EIPs) would be. The upgrade was split into two phases: Byzantium and Constantinople which were implemented 1½ years apart.

The two Metropolis hard forks both reduced the Ethereum block reward. They also introduced other improvements aimed at security, scalability and additional functionalities. For example, the introduction of zero-knowledge proofs, zk-SNARKs, which are known from Zcash.

With momentum strong in the blockchain space and with Ethereum-enabled ERC20-tokens as the most popular use case, the demand for blockchain scalability was higher and became greater than the core development team could keep up with.

Thus, the need for scalability in multipliers instead of increments became pressing – something that would require an architectural overhaul. New methods of tackling the scalability issue, such as sharding, were the focus of continuous research and soon it became a top priority for the Ethereum Foundation. In parallel, Casper – the implementation of proof-of-stake in Ethereum – had been in progress for a long time.

During the spring of 2018, the Ethereum core development group worked to merge the two teams that had been working on Casper and sharding together into one team. The goal was to align the roadmap towards scalability and proof-of-stake consensus – unified under the project name Ethereum 2. This merger led to the major breakthroughs now visible in the current Ethereum 2 specifications.

Understanding the Phases of Ethereum 2

There will be three major phases in Ethereum 2 as outlined below.
Ethereum 2 will not be a traditional hard fork, but instead, an entirely new blockchain is launched – arguably the largest development upgrade in Ethereum history. As such, the deployment is carefully planned, and Ethereum 2 will be split in several phases.
Rewards will be paid out in Ether on the beacon chain (bETH), which will be non-transferable in its early phase. Ether on the legacy Ethereum 1 chain will still be normally transferable. Thus, two “types” of Ether will exist until the current Ethereum blockchain becomes part of the new chain.

Phase 0 – The Beacon Chain

In the first part of the implementation, the backbone of the consensus system is established. The beacon chain will have validators doing proof-of-stake, with all the rules governing the new consensus algorithm. Validators will be rewarded for securing the network and validating blocks (similar to miners in proof-of-work); malicious behavior will be economically punished by slashing (deleting) part of the stake the validator put in.

Additionally, validators on the beacon chain will provide finality for blocks on the Ethereum 1.0 chain. Finality means that the validators continually agree and commit their stake to a recent specific block, which (in their view) will always be a part of the chain and can be relied upon. Should that block later become orphaned from the chain, at least one third of the total validator’s stake will be burned. Finalizing a block implicitly finalizes all its previous blocks – back to the very first block ever mined in 2015.

Phase 1 – The Shard Chains

This phase focuses on establishing the 1024 shard chains. The shards themselves are relatively simple – they can be described as a sort of “separate blockchains” that coordinate/communicate through the beacon chain launched in phase 0. Validators will be assigned to stake on random shards. As such, an efficient cross-shard communication protocol is crucial.

Phase 1.5 – The “Docking” Phase

In Phase 1.5, the current Ethereum chain will be integrated into the Ethereum 2 either as a shard or even directly in the beacon chain. This would spell the end of Proof-of-Work on Ethereum and lead to a sharp drop in ETH issuance (by about 66%).

Phase 2 – The Execution Layer

With Phase 1 completed, shards can communicate and have their blocks finalized. But they still cannot run any smart contract code – which is what Phase 2 is all about. A low-level execution layer based on Web Assembly (eWASM) will facilitate shards focused on payment speed or privacy. At least equally as important, it marks a clear path to migrating the Ethereum 1.0 chain into an Ethereum 2 shard.

What Does This Mean for the Future of Ethereum?

The switch of Ethereum from proof-of-work to proof-of-stake will be its most impactful event since the launch in 2015. The change aims to create a blockchain that solves a “trilemma” in the crypto space – having a scalable blockchain, with a high degree of security, while remaining decentralized by nature. Besides overcoming these difficulties, an added benefit is that proof-of-stake is less wasteful in terms of energy consumption – a common criticism of proof-of-work blockchains such as Bitcoin. While the completion date for all of Ethereum 2 is unclear, current developments are going well. Just recently, interoperability tests between Ethereum 2 clients proved successful, marking another important milestone on the road to launching the beacon chain. Hence, the excitement in the crypto community is certainly justified.

This article has been updated to include developments regarding a Phase 1.5.