Ethereum 2.0: Why the Transition is Painful and Risky?

Ethereum 2.0 is an update to the Ethereum network, which is expected to take place during 2020. Analysts from BitMEX Research, a research division of the BitMEX crypto derivatives market, have published a detailed review of Ethereum 2.0, which is scheduled for launch in July 2020.

Once launched, Ethereum 2.0 will be primarily a testnet to test the Proof-of-Stake consensus algorithm system. Most of the economic activity and smart contracts will continue to function in the original Ethereum network, which will remain as a system parallel to Ethereum 2.0. Developers realize the possibility of switching Eth1 to Eth2, but the opposite will not be possible.

Ethereum 2.0 and Current Blockchain

A new study showed that in the absence of further delays, the long-awaited Ethereum update could begin as early as July of this year.

According to the investigation, the launch may not be such an important event, as economic activity will be carried out on the original blockchain, which will work in parallel with the new platform.

The transition is quite risky, complex, and protracted. According to BitMEX analysts, the main motive for this transition was scalability. The Ethereum network has managed to become popular and today processes relatively large volumes of transactions. As for the speed, because of a hard-coded limit on computation per block, the ethereum blockchain currently supports roughly 15 transactions per second compared to, say, the 45,000 processed by Visa. However, the speed also depends on the exchange you use to swap Ethereum. One of the fastest exchanges at the moment is provided by FreeWallet, its swap speed takes up to two minutes. More about FreeWallet exchange features you can read here.

In order to continue Ethereum growth, node operators will be forced to work on large computers, which can lead to increased centralization, and this, in turn, can adversely affect the censorship of the system and, ultimately, support for such a network will become meaningless.

Existing smart contracts cannot simply be moved to another network. A new network must be created, and on its basis, smart contracts must be created again. The transition will be a painful long-term process. At the initial stages, Ethereum 2.0 will exist as a parallel system along with Ethereum 1.0, and at some point in the future, the two systems will be merged into one.

3 Phases of Transition to Ethereum 2.0

Phase 0. Beacon chain: This phase will be launched in July 2020. This stage will only be aimed at testing the Proof-of-Stake system, so this network can be considered more like a test network, although it will use real ETH.

There are various aspects of the Proof-of-Stake system that must function properly, for example:

  • Management of a set of stakers;
  • Management of funds at stakers;
  • A random number generator that helps to choose block manufacturers;
  • Voting of the stakers for the block;
  • Remuneration and fines for staking.

Phase 1. Shards: Initially, a network with 64 shards will be deployed. At this point, the network will still be largely experimental. While the zero phase is aimed at testing Proof-of-Stake without any other economic activity, the first phase is aimed at testing the underlying sharding model. During this stage, 65 “mini-blockchains” will work in parallel — the Beacon chain from the zero phase and 64 new shards. There will be two-way communication between the Beacon chain and 64 shards.

Phase 2. State execution: It is expected that at this stage the network will have significant economic activity and smart contracts. Shards will no longer be basic data containers and will serve as Ethereum 1.0. The specifications for this stage are not yet completed, and, according to BitMEX analysts, much work needs to be done to get the network ready for this phase.

After the launch of Ethereum 2.0, two networks will operate in parallel — Eth1 and Eth2. Initially, it will be possible to convert Eth1 coins to Eth2 coins, but not vice versa, therefore, theoretically, Eth2 coins should be traded at a price less than or equal to the value of Eth1 coins. However, it is unlikely that in the early stages of the transition, Eth2 coins will generally be priced or supported by exchanges, as their only use will be staking. Even basic transactions will not be possible.

To transfer Eth1 to Eth2 it will be necessary to use a deposit agreement on Eth1. This agreement destroys the coins on Eth1, and then the destruction can be used as confirmation to issue new Eth2 coins. Coins are burned completely, although coin recovery can be realized by changing the protocol as a result of a hard fork.

Coins transferred to Eth2 automatically fall into the validator pool.

Blockchain Association

According to BitMEX analysts, combining Eth1 and Eth2 back into one system can take several years. In the future, Eth1 should become one of the shards inside Eth2. Then it will be possible to move the ether between shards in both directions, and then two coins will merge into one. It is planned that most of the economic activity in Eth1 will continue inside the shard Eth2.

Exchange Changes

In the Ethereum cryptocurrency exchange system, there are no strong changes except the exchange speed against the background of the blockchain workload. One of the fastest exchanges between coins has a FreeWallet wallet.

Freewallet is a digital currency wallet that supports iOS and Android. It is designed to store, manage, and exchange various cryptocurrency assets. The multi-currency wallet supports more than 100 digital currencies that can be stored, transferred, and exchanged. Users can make almost instant and fee-free transactions within the Freewallet ecosystem.

Recently Freewallet team has introduced new exchange technology for a list of 54 coins and ERC20 tokens, including BTC, ETH, USDT, XMR, DOGE, and LTC. This type of exchange is executed in 2–3 minutes and characterized by better rates and enhanced anonymity.

Freewallet also has its own Token wallet, specially created for the tokens of the Ethereum blockchain ecosystem. The wallet supports more than 400 ERC20 tokens.

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