🚨 Major Ethereum 2.0 Upgrade Incoming
VYSYN Ventures Weekly Insights #58 - Ethereum approaches London hardfork
Ethereum has always been in a state of evolution. The vision it has set out to materialize starkly contrasts the ambitions behind the Bitcoin network. While Bitcoin thrives in a state of slow but secure innovation, Ethereum has been forced to iterate its blockchain rapidly as it seeks to retain its status as the predominant decentralized computing blockchain. Since its inception, Ethereum has been hosting a growing share of applications that are looking to leverage the benefits of decentralized technology.
Ethereum 2.0 has long been a focal point of Ethereum’s envisioned evolution. In late 2020, the initial phase of the Ethereum 2.0 iteration, known as Serenity, was finally introduced after years of delays. However, the stage has recently been set for even more changes to the Ethereum network as developers aim to introduce the second phase of Ethereum 2.0.
It has recently been announced that the London hard fork upgrade will launch around August 6th. This will implement sharding technology into the Ethereum 2.0 Beacon Chain. With such a significant upgrade quickly approaching, we dedicate this release of the VYSYN Ventures weekly insights to covering the upcoming changes and the implications they hold for Ethereum holders.
Ethereum positions itself as decentralized computing leader
Since it’s 2015 launch, Ethereum has retained its position as the leading blockchain for decentralized computing. It remains the leading choice for developers seeking to launch decentralized applications (DApps) and also hosts the lion's share of the decentralized finance (DeFi) ecosystem.
DApp development accelerated in 2017 and early 2018. An explosion in emerging projects fundraising via the issuance of new tokens (i.e. initial coin offerings) led to huge growth on the Ethereum network during this period.
Ethereum was also the first blockchain to facilitate smart contracts. Conceptualized by Nick Szabo, smart contracts are coded operations that execute based on predetermined conditions. Their deployment on blockchains enable them to function independently from an intermediary. While complex computations carried out by an innovative tech startup may be processed by the Amazon Web Servers, Ethereum smart contracts are processed and maintained by the thousands of nodes running the blockchain.
However, amid such rapid development and innovation, the Ethereum network faced its fair share of issues. Network congestion and high fees have been a recurring concern raised about Ethereum. Ethereum developers have always acknowledged such issues and they hold that the transition to Ethereum 2.0 will address such incidents.
Introducing Ethereum 2.0
Ethereum developers have spent years designing the 2.0 iteration of their network to optimize for scalability, security, and sustainability. At its heart, the Ethereum 2.0 upgrade transitions the consensus mechanism of the network from proof-of-work (PoW) to proof-of-stake (PoS). Ethereum advocates foresee the PoS implementation eliminating bottlenecks like transaction congestion.
The initial phase of the Ethereum 2.0 upgrade was launched on December 1st 2020 and was titled the Serenity upgrade. The aim of the initial phase was to launch what is known as the Beacon Chain. The Beacon Chain is a distinct chain which introduces the new tech infrastructure of Ethereum 2.0. The Beacon Chain will remain distinct from the Ethereum main until it is rolled in during a later phase of Ethereum 2.0 implementation. This is expected to happen within the next two years.
In early November of 2020, an Ether deposit contract was deployed that allowed Ethereum users to stake their ETH to Beacon nodes. The staked ETH would earn a return for users but they will also face the risks of running Beacon nodes. At the time of writing, a total of 6,220,002 Ether had been deposited into the Beacon Chain contract.
The next phase of Ethereum 2.0 implementation has yet to come. This phase will introduce sharding to improve the scalability of Ethereum. Sharding is a concept that is prevalent in traditional databases and splits the computational node into shards so that each node will not have to process the entire data. The Ethereum network will split the load across 64 shards.
Sharding is expected to increase the throughput of the Ethereum network by roughly 100x. Additionally, computational load is also expected to drop significantly, allowing smaller devices like laptop computers and machines with small disk spaces to be used to run the Ethereum client.
The final phase of upgrading to Ethereum 2.0 will involve merging the Beacon chain with the existing Ethereum blockchain (Eth1) through a process referred to as Docking. When the merger is completed, the newly formed protocol (Eth2) becomes the “real” and upgraded Ethereum network, while Eth1 continues as another shard on the network. At this point, Ethereum would become a fully-fledged PoS protocol with PoW mining activities no longer required.
London Hard Fork set to change the environment for Ethereum users
The above-mentioned upgrade processes are not simple stand-alone alterations but a complex process that consists of a series of forks involving the entire community. In this regard, the anticipated London hardfork has been a subject of debate for some time.
The London hard fork comprises five different Ethereum Improvement Protocols (EIPs). The most notable amongst them is EIP-1559 which aims to restructure the fees-payment system on the Ethereum blockchain. EIP-1559 is seen as a major step towards the elimination of Ethereum PoW mining. Naturally, this particular change has not received much support from the miners. Other network users such as investors, traders, and DeFi participants have welcomed the development. Ahead of the London hardfork, EIP-1559 has been successfully implemented by developers on Ropsten and Goerli testnets. Barring last-minute changes, the full launch of this protocol will happen on August 4th.
From a broader perspective, the London hardfork is expected to open up the Ethereum network to more participants as a result of lower fees. Although miners’ rewards are expected to drop, other categories of network users are expected to derive more benefits from the ecosystem. One section of users that are expecting to experience a significant boost is the NFT marketplace. It is predicted that the London hardfork will help NFT market capitalization to grow by up to ten times its current value.