In-Depth Analysis

【BP In-Depth Analysis】Ethereum and ETH- Part 1 The Development History of Ethereum

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This article is the first part of【BP In-Depth Analysis-Ethereum and ETH】, which introduces Ethereum 1.0, Ethereum 2.0, the development differences between them, and the London Hard Fork Upgrade that will be completed in the near future.

Ethereum 1.0

Definition-What is Ethereum 1.0

Ethereum 1.0 runs on a consensus mechanism known as Proof of Work (PoW). PoW relies on physical computing power (miners) and electricity (work) to build blocks on the blockchain. Proof of Stake (PoS) is an upgrade which enables improved security, scalability, and energy efficiency.

Key Use Cases-Colorful Dapps

Ethereum was designed to become a complete crypto ecosystem offering a blockchain for hosting all kinds of platforms and currencies. Ethereum describes itself as “a technology that is home to digital money, global payments and applications”. Many of the most valuable crypto tokens and projects run on the Ethereum network — some of them with multimillion-dollar market caps on their own. While Bitcoin focuses more on storage and transfer of value, Ethereum aims to create value and encourage the continued growth of the crypto space.

Dapps development is a rapidly evolving field since the rise of Ethereum, and today thousands of projects have Dapps running on the network across technology, gaming, art and collectibles, and — naturally — financial services. Dapps are sometimes considered as part of Web3, the next iteration of the internet following the rise of blockchain.

And it’s all thanks to Ethereum’s platform and its ability to create and issue tokens. Projects can launch their own tokens with the help of Ethereum’s ERC-20 tokens standard. These tokens will be running on Ethereum’s blockchain but can also be traded on the open markets together with other cryptocurrencies. Many of the top 100 crypto tokens actually run on the Ethereum network, such as Tether, Uniswap, or Chainlink.

The popularity of Ethereum as a blockchain for developers landed it at the forefront of the decentralized finance revolution. The Ethereum network is also heavily used by stablecoins — cryptocurrencies pegged to the value of a real-world currency like the US dollar. According to a report from ConsenSys, three-quarters of all stablecoins now run on Ethereum, and the network handled more than $1 trillion worth of transactions in 2020.

Key Problems-Safety and Transaction Speed

Ethereum has experienced its fair share of setbacks during the past few years. For example, a hack 2016 exploited the weakness in one of the projects built on top of Ethereum, resulting in $50 million worth of the coin being stolen. This was when the founders decided to split the blockchain in order to recover the stolen funds. That fork is known as the Ethereum Classic, and it operates until today.

However, since Ethereum has become so popular across many projects in the crypto scene, its network is now struggling to handle all of the traffic. This problem has become so painful that the network becomes unstable at times. Transaction Speed is an issue because the network can handle only 15 transactions per second. The fees paid to get a transaction executed can be incredibly high at times of high demand.

In other words, Ethereum has become the victim of its own success. Since so many users were attracted to it in a short time, its popularity affected its performance. Ethereum uses proof of work (PoW) as its network consensus. The explosive mixture of heavy traffic and high demand makes blocks harder to mine. This translates into the slower pace of the entire process, making it also much more expensive.

Ethereum miners need to use more power to produce blocks and allow the network to move forward. This means that the fees they charge rise as well. As a result, the network slows down when a lot of people are trying to use it at the same time.

Ethereum 2.0

Ethereum 2.0 was designed to solve the Transaction Speed Problem.

Definition-What is Ethereum 2.0

Ethereum 2.0, also known as Eth2, ETH 2.0, or “Serenity,” is an upgraded version of the Ethereum blockchain network. This update’s main purpose is to increase the Ethereum network’s speed, efficiency, and scalability. This is done to avoid transaction bottlenecks and to allow the network to process more transactions at the same time.

Orientation Change- Ethereum 2.0 name change

In January 2022, the Ethereum Foundation announced that they would stop calling the upgrade ‘Ethereum 2.0’. The reason behind the rebranding was to show that what happened was a network upgrade, not a new network launch.

Execution clients (Eth1): Responsible for transaction bundling, execution, and state management. This layer is represented by Ethereum clients such as Geth, OpenEthereum, Hyperledger Besu, and Nethermind.

Consensus clients (Eth2): Responsible for validating blocks, also known as Beacon Chain. This layer will be operated by 155,663 validators. Stakers could earn around 4,981,046 ETH in total. The clients include Teku, Lighthouse, Nimbus, and Prysm.

Update: The Merge is slated to launch on 19 Sept 2022, which marking the end of Ethereum’s PoW consensus.

Goals for Ethereum 2.0- Three Stages of Upgrading Process

Proof of work blockchain comes with its problems, and to avoid inefficiency, Ethereum is now moving towards a proof of stake (PoS) blockchain. In this type of blockchain, a consensus is achieved in a much more efficient manner. The nodes that want to mine new blocks and claim the reward can stake their crypto for a chance of becoming a validator. It works more or less like a lottery. The more tickets you buy, the greater your chances of winning.

Validators are chosen at random to mine a new block and claim reward, which is usually a cut of all the fees paid for transactions inside that block. This method of achieving consensus means that you no longer need multiple miners using lots of power to be allowed to mine a new block.

The process of upgrading Ethereum to the 2.0 version is going to be a long one. It’s divided into three stages.

Stage I: The Beacon Chain

The first phase of Ethereum 2.0 is to implement the new Proof-of-Stake consensus layer, known as the “Beacon Chain”. On the Beacon Chain, each validator has a stake of 32 ETH. Currently, there are 222,052 validators, so the total amount is 7,105,596 ETH. In this phase, the Proof-of-Work system continues to cooperate with the new PoS chain to ensure that the data won’t be lost. The Beacon Chain stage has already been launched. The release date was on 1 December 2020.

Stage II: Shard Chains

To improve the scalability of Ethereum and allow the network to handle more transactions, the team plans to introduce additional changes known as shard chains. These chains will offload the main chain. Ultimately, Ethereum aims to have 64 shard chains running in parallel to increase the amount of traffic the network can handle.

Shard chains will be assigned validators by the Beacon Chain to further increase network security since no two validators will be able to collude to take over the shard. Spreading the network over shard chains will improve speed and security but also allow users to run clients from a laptop or smartphone to secure the network even more. Sharding is going to be released sometime this year, depending on how quickly the work progresses after the launch of the Beacon Chain. Once established, the time will come for the final stage of ETH 2.0.

* What the Eth2 development team did not expect was how quickly Layer-2 solutions like Rollups would improve in 2021. Rollups are a Layer-2 technology that solves the problems of blockchain’s computing and storage load while using enough chains to benefit from collateral. This process is safe, making Rollups now an essential part of the Ethereum 2.0 roadmap.

Stage III: The Docking

The Beacon Chain and shard chains will run separately from the main chain. The latter will continue using the proof of work consensus. The docking is then going to join the mainnet with the Beacon Chain and shard chains to finally move the entire Ethereum network to proof of state consensus. This final stage is expected to happen sometime by the end of this year or in early 2022.

Differences Between Ethereum 1.0 and 2.0

There are two main changes in Ethereum 2.0, which are Proof-of-Stake and Shard Chains.

Proof-of-Stake

In the PoS system, nodes (or “validators”) process transactions and create new blocks of data of a blockchain like the way miners do in a PoW blockchain. The difference lies in the way of gaining the right to create a block. In the PoW system, miners need to compete to be the first to solve complex mathematical problems which require a lot of computing power and electricity.

In the PoS system however, consensus is reached by using an algorithm that chooses a node to win a block of transactions, instead of the nodes having to race to win the block by spending a lot of computing power and electricity. When a node is chosen, it forges the next block of transactions in the chain.

From those who have staked a minimum amount of coins, a node is then semi-randomly chosen by an algorithm. The chosen node creates the block and other nodes validate it, it will then get rewarded for creating the new block by getting paid with the blockchain’s native coin from the transaction fees. For example, Cardano blockchain nodes get rewarded in the form of ADA. However, if the block that the node created turns out to have any fraudulent transactions, both the node who creates the block and the ones who validate it would lose part of or even all of the staked coins.

In order to determine who can be the next block creator, the PoS algorithm uses different factors such as the size of the stake. To ensure the wealthiest stake pools do not always win, other factors like the duration the coins have been staked are also being factored. Some PoS blockchains have also added a degree of randomization to the selection process, so the bigger and older stakes do not always win. Holders of the coin can then “stake” their holdings to a staking pool, when a node is selected to forge a block, the reward it receives is then distributed among the individual stakers.

Unlike the PoW system in which the miners need to be the first to solve a complex mathematical problem in order to be able to create a block, PoS requires way less computing power and electricity. It is also way less time-consuming than the PoW system. That is why Proof of Stake is chosen as the consensus mechanism of Ethereum 2.0, as it is a much more environmentally friendly and efficient choice, allowing Ethereum transactions to be a lot faster and cheaper.

Shard Chains

Sharding is a method Ethereum 2.0 plans to use in order to scale its capacity. With the Proof of Work blockchain (which is what Ethereum 1.0 is using right now), most nodes in the network have an entire copy of the history of all the transactions. Such a copy can take up a lot of space, especially for the older cryptocurrencies like Bitcoin and Ethereum which come with a long list of transaction records. The Ethereum blockchain is almost reaching 1 Terabyte which is not good for decentralization since only big computers can handle it.

Sharding is a common technique used among the newer PoS cryptocurrencies to help with scaling without sacrificing security and decentralization. It is a form of database partitioning that breaks down a large database into smaller and more manageable pieces, to boost the efficiency in a large scale. This allows transactions to be processed at the same time rather than sequentially.

Important Turning Point-Ethereum London Upgrade

The Ethereum network was upgraded at block 12,965,000, codename: London, on August 5, 2021. Ethereum Foundation Announcement can be checked here.

Introduction-London Mainnet

A network upgrade is an adjustment to the underlying protocol of Ethereum, adding new rules to improve the system. (EIP: Ethereum Improvement Proposal, the Ethereum Improvement Proposal.)

This network upgrade contains five Ethereum improvement proposals, namely: EIP-1559 12, EIP-3198, EIP-3529, EIP-3541, EIP-3554, these proposals help to improve the security and safety of the Ethereum network.

Detailed Description-EIPs included in London

EIP-1559: Fee market change for ETH 1.0 chain

One of the most anticipated changes to Ethereum, EIP-1559 is the largest change that will be introduced in London. The EIP will introduce a “base fee” in blocks on the network which will track the gas price that the network will accept from transactions based on demand for blockspace. This means that it will be easier for wallets and users to estimate what the right price for their transaction should be. Additionally, EIP-1559 adds a new transaction type where users can specify the maximum fee they are willing to pay, along with the maximum they are willing to send to the miner, and get a refund for the difference between that maximum and the base fee and miner tip. Finally, the EIP will also cause part of the transaction fees to be burnt, which is something that a large part of the community see as a critical improvement to the Ethereum network’s economics.

EIP-3198: BASEFEE Opcode

This EIP is a companion EIP to EIP-1559. It simply adds an opcode, BASEFEE, which returns the value of the base fee for the block it is executed in. This will enable smart contracts to access this value on a chain, which can help with submitting fraud proofs and creating trustless gas price derivatives.

EIP-3529: Reduction in Refunds

Another significant change introduced in London is the removal of gas refunds from SELFDESTRUCT and reduction of refunds for SSTORE. While the refunds were originally intended to incentivize developers to clear the state when possible, in practice they have led to an increased state size with the invention of Gas Tokens. Using these refunds, Gas Tokens can fill up the state when gas prices are low and then get refunds for the execution of transactions when gas prices rise.

Along with this, gas refunds contribute to variance in block execution time. Before London, up to 50% of the refunded gas could be used to execute further computation within the same block. This means that, in practice, the maximum block size could be up to 1.5x the gas limit. EIP-3529 lowers this “execution refund” from 50% to a maximum of 20%. This change will help offset some of the additional block size variance introduced by EIP-1559, which allows blocks to use up to twice the current gas limit.

EIP-3541: Reject New Contracts Starting with the 0xEF Byte

EIP-3541 is a simple change which lays the groundwork for broader EVM improvements, described in EIP-3540. This EIP will make it impossible for new contracts starting with the 0xEF byte to be deployed. Existing contracts will not be affected. Once London is live, the shortest sequence of bytes starting with 0xEF which does not match the starting sequence of existing contracts could then be reserved as a way to identify contracts which comply with EIP-3540 semantics. Note: EIP-3540 will require an additional network upgrade to be deployed. It is also worth noting that if EIP-3540 is never deployed, EIP-3541 can also be used to reserve starting bytes for use in another scheme.

EIP-3554: Difficulty Bomb Delay to December 1st 2021

EIP-3554 delays the difficulty bomb, also known as the ice age. The difficulty bomb/ice age is a mechanism that was introduced in Ethereum to “freeze” mining as the network transitions to proof of stake. Given that the proof of stake transition is not yet ready, we need to delay when the bomb will “go off”. This has already been done three times in the past: in the Metropolis (EIP-649), Constantinople (EIP-1234) and Muir Glacier (EIP-2384).

While previous delays have been quite long, this time core developers opted for a shorter delay, pushing the bomb back to December 2021. By then, either the transition to proof of stake will happen, or another network upgrade will need to take place on the network.

Please click here to view the upgrade time and other conditions.

Epilogue

In this article, BlockPower has introduced the development history of Ethereum. And in the next article, we will introduce the Powerful Ethereum Ecosystem. Don’t forget to follow us to get more information.

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