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Tuesday, October 4, 2022

Ethereum 2.0: Beacon Chain, Staking, & Sharding (A Simple Explanation!)

Hello, I’m Crypto Casey. In this video we will be talking about Ethereum 2.0,  the next and final upgrade to the Ethereum network. We will break down this massive upgrade into simple concepts together,  so by the end of this video, you will know what’s in store  for the future of this exciting blockchain technology project. If you have no idea what Ethereum is, please check out my video guide that explains what Ethereum is  first, and then watch this video if you’re interested in seeing what’s on the horizon. I’ve broken this guide into 5 easy chapters. So feel free to use the timestamps and table  of contents into the description area below, top around this video. Before we get started, please take note of all my official  Crypto Casey accounts listed here on the screen. Many scammers are making impersonation accounts pretending to be me,  as well as other crypto content creators. So it’s crucial to double and triple check the URLs and account names you  are accessing to ensure it’s the correct one.

Also, please note that the best way to contact me is via email at Casey@CryptoCasey.com. I do not use Gmail, Outlook, or any other email handle to communicate about cryptocurrency. I also do not engage in direct messaging on Instagram,  as there are a lot of impersonators and I don’t want to cause any confusion. You can visit my website CryptoCasey.com/Help to  fill out a contact request form or you can email me directly at Casey@CryptoCasey.com. Also, I conduct a weekly AMA or an “Ask Me Anything” every  Wednesday on my Instagram.com/CryptoCasey account. So please use the link to my Instagram account listed in the  description area to follow me and ask me anything you want, every Wednesday. Awesome. Now that we’ve got that covered, let’s learn about Ethereum 2.0. Chapter 1: What is Ethereum 2.0 Ethereum 2.0, also known as ETH2 or Serenity, is the long-awaited,  final upgrade to the Ethereum blockchain network. This upgrade will be rolled out in several phases over the next few years. And the initial phase, called Phase 0,  begins sometime in late 2020 if everything stays on track.

So why does Ethereum need a massive update and how will  this update change the existing Ethereum network? The overall goal of the ETH2 update is to increase the performance of the network. As realization of blockchain technology’s ability to revolutionize our society continues  to unfold, demand for blockchain-based technology will increase substantially. Questions like “what is blockchain” and “why we would want to use it,” will eventually transform  into questions like, “why isn’t blockchain being used in this case or that case?” Currently, the Ethereum 1.0 network is not robust  enough to handle the future demand for blockchain-based technology. Problems with scalability and usability prevent Ethereum from being a completely  viable alternative to traditional centralized systems at this time because, unfortunately,  not many successful applications built on its current foundation would likely survive long term. This is because, although transaction fees on the network may be low right now,  if a large application gained popularity and became a wild success, there is a  risk that it could inadvertently drive the network fees up so high,  that it would become too expensive for people to continue using the app.

In fact, we have actually already seen this play  out back in December of 2017 with the CryptoKitties app. CryptoKitties was an experimental app built on the Ethereum network  that allows users to create and trade unique digital kittens. And unexpectedly, within its first week after launching,  CryptoKitties went viral and clogged the Ethereum network with a huge influx of transactions. Transaction fees to send some cryptokitties hit a whopping 6 figures in cost during the fiasco. Can you imagine spending hundreds of thousands of dollars just to  transfer a digital cat on a computer network? That’s just insane. However, even if transaction fees were manageable in a situation like this, only about 15  transactions per second are being processed on the current network, which is not nearly  enough to power parts of the global economy like the Ethereum foundation envisions in the future. So, with the Ethereum 2.0 update,  Ethereum could potentially process tens of thousands of transactions per second. Going from a mere 15 transactions per second to tens of thousands is a huge milestone.

However, even then, some argue that those numbers are still a bit low for large,  global-scale systems to operate. So with further improvements and through combining the Ethereum network with other technology in the  future, sufficient transaction processing power can hopefully be achieved in the next few years. Awesome. So now that we know why Ethereum 2.0 is going to be rolled out,  let’s go through the phases of the ETH2 upgrade together, starting with the initial phase. Chapter 2: Phase 0 – Proof of Stake & the Beacon Chain Phase 0 is the initial phase of the Ethereum 2.0 upgrade. Ethereum 2.0 is being built on a new blockchain network called the Beacon chain. And the beacon chain has a connection to the existing Ethereum 1.0 blockchain network.

So, although the beacon chain is an entirely new and separate chain, it still operates  within the same ethereum ecosystem: it’s just sort of an extension of the original network. It will run parallel with the existing network until  the upgrade is complete in a few years from now. So the beacon chain acts as a bridge that will allow transfers of ether,  and other digital assets, from the 1.0 network, to the 2.0 network. And on the Beacon chain, a new way of validating blocks of data will be implemented. The main goal of Phase 0 is to test the new block validation functionality,  allow time for the system to stabilize, and to determine if any changes need to  be made before building out ETH2 on this new foundation. Currently, the plan to solve the scalability  issue we discussed earlier involves switching the Ethereum network from  using a proof-of-work protocol to process transactions, to a proof-of-stake protocol.

So first, let’s talk about what proof-of-work and proof-of-stake protocols are: Proof-of-work, or PoW, and proof-of-stake, or PoS, are what’s known as “consensus mechanisms.” And a consensus mechanism is simply a way that all computers within a network  can come to an agreement on things, like, the validity of transaction data. You can see how consensus mechanisms are a key aspect of blockchain technology’s foundation. Because, if multiple computers all around the world are maintaining a global network,  then a consensus mechanism that keeps them all in agreement is extremely crucial. Next, let’s talk about the key differences between  how transactions are validated using proof-of-work versus proof-of-stake. Proof-of-work, which is commonly referred to as mining, involves using computing power  to perform guesswork to ultimately validate blocks of transaction data,  and publish the data to a network of computers around the world.

At the time of this video, proof-of-work is currently  how both bitcoin and Ethereum 1.0 transaction data is processed. The problem with using proof-of-work to process transactions on Ethereum is essentially threefold: One, proof-of-work consumes a lot of time and a lot of energy due to the  amount of electricity these computers use from constantly performing mathematical  algorithms to compete with each other to validate transactions. Two, it can potentially lead to more centralization of the network,  as big mining operations become the only miners  that can compete and actually make a profit from performing proof-of-work. And three, proof-of-work takes a long time to confirm transactions, so it does not allow  for instantaneous transactions, which hinders Ethereum’s potential use-cases dramatically.

Nice. Now let’s talk about how proof-of-stake works. So instead of computers competing with each other to be the first to validate a block,  proof of stake uses an algorithm that selects which computers will validate the next block. Computers that participate in the proof of stake consensus are known as validators. And proof of stake requires validators to  stake cryptocurrency on the network basically as a form of collateral. Staking with regard to cryptocurrency, simply means holding cryptocurrency in a wallet or  smart contract for an extended period of time in exchange for interest, rewards, or similar. So the proof of stake algorithm that selects which validators will verify the next block,  can consider variables like the amount of cryptocurrency the validator has  staked on the network, the amount of time the cryptocurrency has been staked on the network,  and it can randomly select validators to ensure decentralization of the validation process. So, in most cases, the more cryptocurrency a particular validator has staked,  and the longer the cryptocurrency has been staked,  the more likely that validator will be selected by the algorithm to validate blocks.

And if the block the validator verifies is approved by the rest of the network,  and ultimately added to the blockchain, then the validator earns a reward for verifying the block. In proof of stake, people describe a newly verified block being added to the blockchain,  as having been forged by the validator, as opposed to mined by the miner. However, if the block proposed to the network had some inconsistencies or fraudulent transactions,  the validator is penalized by losing some of their staked cryptocurrency. So, you can start to see how proof of stake’s virtual verification process is  much more energy efficient than proof of work, where computers use a lot of  electricity to compete with each other to be the first to verify a block of data.

And it’s important to note that each blockchain project that uses proof  of stake protocols has their own unique algorithm,  with different rules and methods, that dictate their particular network’s functionality. So in the case of Ethereum 2.0, their unique proof of stake protocol is  called the Casper Protocol, which brings us to the next chapter. Chapter 3: Casper Proof of Stake Protocol Let’s walk through Casper’s proof of stake block verification process together in more detail. So, in staking, an algorithm assigns each newly  formed block of transaction data to different validators. When a validator is chosen to verify a block,  the validator checks to make sure all of the transactions in the block are valid. And if everything checks out, the validator signs  off on the block and then proposes to add the block to the blockchain.

If the network agrees with the validator’s proposal that the newly forged block is valid,  then the validator that signed off on it receives a reward. And these rewards are typically from the transaction fees collected from  the transactions within the validated block. However, if the network detects an inconsistency with the newly forged block,  the validator that signed off on it and proposed it will lose some of its staked cryptocurrency. So an important security feature of the Casper proof of stake protocol  is that if fraudulent blocks are proposed by a validator,  the network will detect the inconsistency, and the validator will be penalized by: One, losing some of their staked cryptocurrency;  and two, by having their rights to participate in the network limited or revoked completely.

So, when considering the word “stake” in proof of stake, you can see how,  in order to become a validator, a validator must put their cryptocurrency at stake, so to speak. Because if a validator makes a mistake, does something wrong, or deliberately tries to  forge fraudulent data, they will be penalized and lose some of their staked cryptocurrency. There are also penalties if a validator experiences any down time. This is to ensure Ethereum’s fleet of validators maintaining the network are stable and reliable. So, if you have an unreliable internet connection, running a validator is probably not a good idea,  as being offline will cost you some of the cryptocurrency you have staked in the network,  decrease the amount of fees you’re able to earn when forging blocks,  and/or decrease your chances of being selected to validate blocks in the future. So, if a validator ever wants to discontinue validating blocks and un-stake their funds,  a certain amount of time from the last block they validated needs  to elapse before their staked cryptocurrency is released.

This is to ensure that the last block the validator forged was not fraudulent and  that the validator was attempting to unstake to avoid the penalty. These built-in penalties function to deter people from trying to hack or spam the network,  as the cost of executing an attack would outweigh the potential reward. And the only way someone could overtake the network and successfully forge  fraudulent blocks, is by having over a 51% stake in the entire network. In the case of Ethereum, you would need to acquire over half of the ether in circulation,  which at the time of this video, is worth over $12.9 billion. Cool. So all of this information about all of the proof of stake validators’ activity  will be on the Beacon chain we discussed earlier. The Beacon chain will also manage and ensure consensus  between all of the validators on the network. And here’s a general overview of the requirements to become a validator on the Ethereum 2.0 network: To be a validator on ETH2, you will need a computer capable of  running the Beacon chain client software, a near-constant connection to the internet,  and at least 32 ether to stake on the network.

Note that validators that register during Phase 0 will be locking up this minimum of 32 ether  until Phase 1 of the Ethereum 2.0 upgrade is rolled out, which will likely be a few years. So if you’re interested in becoming a validator, you need to be in it for the long haul. And if you’ve got your 32 ether ready to stake,  you can make a one-way transfer to a smart contract that creates a unique cryptographic  hash for you to include on the Beacon chain to prove your ether has been staked. This is basically the registration process for becoming one of the proof of stake validators,  or participants, in Ethereum 2.0’s consensus. If you are interested in becoming a validator on Ethereum 2.0,  stay tuned for my release of a step-by-step video guide on YouTube for beginners once  Phase 0 has been officially rolled out in late 2020, if everything stays on track. So, as a registered validator, you are agreeing to maintain the security of the Ethereum 2.0 network  by running a piece of software connected to the ETH2 network on your computer.

This software has a cryptographic key inside of it that allows you to sign  off on blocks believed to be valid and that should be added to the blockchain. So, basically single validators verify transaction data within  a single block to then propose to a larger group of validators  that determine final approval of the block being added to the beacon chain. And the goal is for the network to be able to rapidly propose  and agree on new blocks being added to the beacon chain much more quickly and  efficiently than the current proof of work protocol on Ethereum 1.0. So as you can see, the advantages proof of stake has over proof of  work is energy efficiency, increased security, increased network speed,  and there’s no significant barrier to becoming a validator,  (unlike the high costs associated with mining rigs,) as it’s relatively easy and affordable.

And the costs of running a validator will be  proportional to the amount of ether you stake on the network. Ethereum 2.0 validators are predicted to earn a range between approximately 2 to  18% of the staked value of their ether every year, more or less. And the more people that opt to become validators, the more decentralized the network becomes. So, in summary, Phase 0 will introduce the new beacon chain  on which the Casper proof of stake consensus will operate,  and where validators can register and stake ether to help maintain the network. In this initial phase, the beacon chain will not  have much functionality outside allowing validators to register and stake ether. This is a deliberate move by the Ethereum foundation, so once the chain is launched,  people are able to try it out, allow the blockchain to slowly and steadily start operating,  giving the network and staking mechanism time to stabilize, and ultimately prove itself. Awesome. Now that we have a good idea about what to expect in the Phase 0 launch in late 2020,  let’s go over what we can expect from the other phases of the Ethereum 2.0 upgrade.

Chapter 4: Phase 1 – Shard Chains So in all blockchain systems there is a problem that people often refer to as the trilemma. And the trilemma is simply the problem of completely achieving these three  aspects on the base layer of a blockchain system without any inhibiting tradeoffs: Decentralization Consistency And Scalability So, in Phase 1 of the ETH2 upgrade, the trilemma problem will attempt to  be solved by implementing shard chains, which is also referred to as sharding.

And sharding is a database management technique that involves simply partitioning  large databases into smaller and faster databases. Currently, all of the nodes or computers maintaining blockchain networks,  store the entire blockchain database on them. While this makes the database and network more secure, it severely  limits the blockchain network from scaling and being able to operate robust global systems. And this is what is currently limiting the  Ethereum 1.0 network to around 15 transactions per second. So, with sharding, instead of all of the computers  on the blockchain network validating and storing all of the data being processed,  all of the data being processed is split up into different partitions, which will be called shards. And each shard, simply represents a fraction of the entire Ethereum 2.0 database.

For instance, an example of how data could be stored on different shards,  or smaller databases on Ethereum, would be any addresses starting with 0x00 stored on one shard,  versus addresses starting with 0x01 stored on another shard. And all of these separate shards, or fractions of the main database, will be connected to the  Beacon chain that will ensure consensus between all of the shards connected to it. So, in Phase 1, 64 shards will be deployed and connected to the Beacon chain. And the goal of Phase 1, is to test the shard chain architecture and  ensure consensus between all of the shards is maintained successfully by the Beacon chain. It will be more of a simple trial run of the sharded structure to  see if scalability can be achieved using random bits of data that have no meaning. So, no real data or applications will operate on the beacon chain or shards in Phase 1 of ETH2. Nice. So as you can see, Phase 1 is pretty simple and straightforward. Let’s move on to the next phase. Chapter 5: Phase 2 & Beyond – eWASM Phase 2 is when real data and applications start to operate on the Ethereum 2.0 network.

Currently, Ethereum 1.0 uses the EVM, or Ethereum Virtual Machine,  essentially as the network’s engine built on top of its blockchain foundation. It is responsible for executing ERC-20 tokens, deploying decentralized applications, or dApps,  running smart contracts, and a myriad of other integral tasks for the Ethereum ecosystem. And in Phase 2, the EVM will be replaced by a new virtual machine called eWASM,  which will be Ethereum’s version of WebAssembly code, or WASM.

WebAssembly code is an open standard instruction set for  building applications on the web or internet. eWASM is a subset of WASM modified specifically to run the Ethereum 2.0 ecosystem. It was designed to be fast, secure, efficient, and portable. So the eWASM framework will give Ethereum 2.0 massive performance enhancements and  a ton of new features, while making it widely available and easy to use for web developers. It will support a myriad of new programming languages, and as WASM is already used by a  large number of projects outside of Ethereum, it will open up Ethereum 2.0 to a larger,  more active community of developers than the EVM that currently manages Ethereum 1.0. In this phase, the shards will start to house and manage real data and smart contracts. Each shard will manage a virtual machine based on eWASM. And it is in this phase that full functionality of Ethereum 2.0 is finally available. So you can see how the transition from the EVM to  eWASM will bring about massive performance upgrades, more development opportunities,  and finally breathe life into this long awaited Serenity upgrade.

Phase 3 and beyond will involve upgrades to consensus,  upgrades to scaling,and basically any further technical upgrades that need  to be implemented to maintain the Ethereum 2.0 ecosystem. Cool. So in light of this exciting update, if Ethereum seems like something you would like to invest in,  feel free to check out my ultimate beginner’s guide on YouTube about how to buy ethereum. In this guide, we walk through the process together step-by-step, making it  as easy and simple as possible and ensuring everything is set up safely and correctly.

Or, if you would like to start buying now, you can go to the description  area and click on the links to safely access my list of recommended exchanges  you may like to use and that support your specific country of residence. Note that you will receive $10 worth of free bitcoin when you invest over  $100 in cryptocurrency by using the Coinbase link in the description area. Also, remember, it’s important to double and triple check the  URL’s you are accessing to ensure you arrive at the correct, official website. There are many fake websites set up, designed to look like an official site,  just try to steal your login credentials and funds. So you can click on the links in the description area and  then bookmark the sites to ensure you always access the right one.

Another important thing you should do is invest in a hardware wallet  like the Ledger Backup Pack or BC Vault for storing your cryptocurrency safely offline. You can also access those websites by using the links in the description area. Awesome. Thank you for taking the time to watch my video. If you enjoyed the content and would like to see more crypto videos in the future,  please make sure to like this video and click to subscribe button to support the channel. Also, make sure you head over to my Instagram account at Instagram.com/CryptoCasey for 1 minute  daily videos and to ask me anything every week on my Wednesday AMA’s. So what do you guys think of Ethereum 2.0? Is Ethereum something you would consider investing in? What other questions do you have about the Serenity update? Lots of things to think about. Be safe out there..

Read More: Stellar vs Ripple: Stellar lumens XLM 2021 price prediction (also is Ripple XRP dead?)

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