Since its launch on July 30, 2015, the Ethereum blockchain network has undergone a succession of upgrades. The next upgrade, Ethereum 2, is its most significant so far, involving three major changes to the network.

Proof-of-Stake

Like Bitcoin, Ethereum is currently a proof-of-work (PoW) blockchain. An algorithm sets the rules – mathematical problems – for nodes, or “miners”, who create the “blocks” (set of transactions). When a new block appears on the network, miners compete to find the solution first and be rewarded by the network.

While PoW has relatively long track record supporting blockchain networks it has a major drawback: energy costs. PoW is costly as the miners require specialized computer hardware. With a lot of miners competing to solve the same problem, a lot of energy is consumed.

In Ethereum 2, the network will become a proof-of-stake (PoS) blockchain. Transactions are confirmed by “validators”.Each validator needs to stake its own funds (minimum 32 ETH) to participate in the validation of blocks on the blockchain. While they are rewarded for validating blocks successfully, validators are “slashed” (fined) if they behave badly or maliciously. This economic incentive supports “good behavior”, creating more security in the system.

Proof-of-stake uses significantly less energy to run and generally allows for smaller players to participate in block validation without needing to run massive computing operations.

Sharding

While previously Ethereum existed as one blockchain, the new structure of Ethereum 2 consists of a core blockchain, also known as the “beacon chain” connected to different shard chains (expected to be 64 initially).

The shards are parallel blockchains that allow parallel processing of transactions. The transactions in each shard will be verified by validators and confirmation passed to the beacon chain, thus maintaining consensus throughout the network.

The beacon chain is also responsible for randomly assigning validators to the shards. As validators are randomly assigned over different blocks, this reduces the risk of malicious attacks.

Scalability

Scalability in blockchain refers to the ability of the network to handle an increase in demand. It usually focuses on transaction throughput as a metric. The Ethereum 2 upgrade increases scalability, expanding Ethereum’s capacity to process transactions and store data.

While traditional credit card providers such as Visa can process at least 1,700 transactions/second, Ethereum currently only processes around 15 transactions/second; even less when the network is congested. With the aid of off-chain rollups (encrypted packages of data), Ethereum 2 aims to increase this to up to 100,000 transactions/second.

Summary

The Ethereum 2 upgrade will bring many benefits to the Ethereum network: a reduction in energy consumption and cost, an increase in data storage and transaction speed, and increased security.

As the network continues to develop with the implementation of the Ethereum 2 upgrade, these changes may lead to significant advances in usability, especially as regards scalability.

Staking on Ethereum 2

As a proof-of-stake network, Ethereum 2 also offers the opportunity to stake your tokens and earn rewards. Bitcoin Suisse offers an all-in-one staking service for clients. Learn more here.