Ethereum 2.0, a double or quits bet? Focus on the update that could change everything

The proof of stake coming soon – Launched since 2015, the network consensus Ethereum (ETH) is ensured by the mechanism of proof of work. However, as soon as the network was launched, Ethereum developers expressed their desire to change the consensus mode from proof of work to proof of stake. As we approach this major transition, let’s take a look back at the developments to come as well as compromise inherent in these changes.

Ethereum and the quest for scalability

The network Ethereumlike many other blockchains, is facing a important scalability problem. As it stands, the network is unable to handle the growing mass of transactions taking place on the network. To overcome this problem, the developers have devised a series of updates, aimed at considerably improving network performance.

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The Merge: the transition to proof of stake

Among these updates, we find the long-awaited transition from proof of work to proof of stake. Indeed, as we saw in the introduction, this transition has been on the minds of developers since the launch of the network in 2015.

However, given the complexity of its implementation, this transition was repeatedly postponed over the years. Finally, this will take the form of an update called “The Merge”aiming to link the proof of stake consensus layer of the beacon chain with the execution layer of Ethereum, namely the existing decentralized application ecosystem.

Currently there is no no official date for the deployment of The Merge. Nevertheless, the developers hope for a deployment of this one in the second half of the year 2022.

However, let us note an important point: The Merge will not improve Ethereum performance. Indeed, the transition to proof of stake will have almost no impact on the scalability of the network. However, this will be a cornerstone for the deployment of other updates which will have an impact on performance.

Sharding: the multiplicity of blockchains

In the world of blockchains, there are 2 main methods to improve the performance of a network:

  • the vertical scalingwhich aims to increase the individual capacity of network computers;
  • the horizontal scalingwhich aims to increase the capacity of the network by increasing the number of computers that compose it.

So the update sharding is a technique of horizontal scaling. In practice, this aims to to separate the network into many sub-blockchains called shards, as the CoinShares report explains:

“Sharding makes it possible to increase the total throughput of the protocol, without increasing the computational demand of the individual computers working on it. In other words, Ethereum will be able to process a lot more information, while still expecting to be able to rely on relatively casual users, providing distributed processing power through ordinary consumer computers. »

The trade-offs of these updates

Obviously, like all solutions, proof of stake and sharding involve certain compromise. Let’s take a closer look at these trade-offs, based on the analysis carried out by CoinShares.

Sharding Tradeoffs

One of the main trade-offs of sharding is in the field of decentralization. Indeed, the technique of horizontal scalability has a propensity to reduce the decentralization of the network.

Indeed, one of the major characteristics of a decentralized blockchain lies in the possibility for a network participant to recheck all the transactions that have taken place on the network. Thus, the participant can take advantage of the network without have to trust the other attendees.

As we have seen, sharding aims to divide the blockchain into a multitude of other blockchains. Therefore, the power as well as the bandwidth needed to verify all the data increases dramatically with the number of shards.

“The result is the reintroduction of trust, as all users who are now unable to verify all shards (or a single huge blockchain) must trust other users to tell them the truth about what happened on the shards. other shards (or on the huge blockchain that they can no longer afford to self-verify). »

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The compromises of proof of stake

The minimization of trust

The introduction of proof of stake involves the need to trust again other network participants.

In the case of proof of work, miners spend electricity to secure the network. Simply put, this expense assures other participants that the minor will not have no economic incentive to act maliciously, because it would lose the electricity cost.

In the case of proof of stake, validators deposit 32 ETH in staking. However, staking is dependent on an internal value to the Ethereum network, unlike electricity which is an external value to blockchains.

“It is a problem if a new or returning user is faced with a choice between multiple conflicting blockchains presented to them by a malicious actor. Since it costs nothing to create a PoS blockchain, otherwise valid false histories can be created and presented externally en masse by dishonest participants. »

Centralization

Networks in proof of stake also make a compromise on resistance to censorship.

For a blockchain based on proof of work, a malicious actor must seize 51% grid power to be able to censor transactions. In the case of PoW, miners must deploy machinery as well as electricity to carry out their attack.

“In a PoW system, miners need to consume a resource external to the system and also need external capital (hardware). This can be achieved without the majority miner knowing about it, which means there is a mechanism by which a censor can lose their place as majority miner. »

In the case of proof of stake, this return to equilibrium by the entry of an actor who fights the majority validator does not exist. Thus, when a validator manages to hold a majority position by having more ETH in stake than the others, it is protocolarily impossible to dislodge. Indeed, as time passes, its stake only increases and establishes its majority position.

The only solution to this type of attack lies in the social consensus. Therefore, the community should agree to deploy a hard fork aimed at thwarting the attacker.

“Which is just another way of saying centralized management by a select committee, which is by definition the opposite of decentralized. »

CoinShares Report

Conclusion

As you will have understood, the blockchain ecosystem and the trilemma of blockchains is, in the end, only a story of compromise.

Blockchain trilemma.
Blockchain trilemma.

On the one hand, Ethereum goes wide gain in performance and solve part of the trilemma by improving scalability. On the other hand, this improvement will come at the expense of security and decentralization.

Obviously, the propensity to risk differs between individuals and between networks. This means that proof of stake limits can be exacerbated or minimized depending on various parameters inherent to each blockchain. For example, to carry out a censorship attack on Ethereum, a validator or group of validators must own more than 34% of the network.

Currently, the beacon chain counts 380,000 validatorsfor more than 12 million ETH staked. These malicious users should then hold 4 million ETH, or 8.5 billion dollarss. However, once the attack is carried out, it is highly likely that the price of ETH will collapse. This would result in a deadweight loss for the attackers.

As always, for an attack to occur, the result must be more profitable than the means deployed to carry it out.

Moreover, the developers of the Ethereum network continue to work at a reduction of these compromises through various mechanisms.

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