Ethereum 2.0 is dead, long live the consensus layer! The project to upgrade Ethereum, the world’s best-known but most complicated computation blockchain, has transformed into organizing a “consensus layer” and “execution layer” as ETH edges toward its goal of becoming a useful, scalable, network based on proof of stake (PoS) block confirmations.
Actually Ethereum 2.0 is not really dead… at least not yet. According to developers at the Ethereum Foundation, it’s basically a change of terminology to refer to aspects of the “upgrade” efforts. The name changes aim to make it clearer to “explain this evolution, reduce confusion and prevent FUD within the community.”
A brief background to the upgrade
Ethereum has followed a “roadmap” for several years in its attempts to achieve scalability on a global scale. Its own founder, Vitalik Buterin, has admitted that the network has always faced difficulty scaling in its current form, and the Ethereum Foundation’s name-change announcement reiterates that a major upgrade has always been part of the plan.
That plan is both ambitious and confusing in its complexity and Ethereum has had years of delays, postponements, and shifts in direction. Switching from Proof of Work (PoW) to Proof of Stake (PoS) involves substantial changes to the protocol and Ethereum’s economic model—especially when there are thousands of contracts, DeFi structures and DApps actively running on the network that must stay in consensus and continue operating throughout the switch. It’s a bit like trying to change the rail gauge on a large train network… while the trains are still running.
Ethereum developers are also figuring out on the fly just how to manage all this, too. The latest plan is to have a PoS “consensus layer” (aka Eth2) running alongside the current PoW “execution layer” (Eth1) until the two can be merged. Ethereum will at some stage remove all PoW miners from its network with a “difficulty bomb” (at “the merge” point) that makes it instantly unprofitable to continue mining, leaving only the PoS confirmation algorithm in place. This event is now scheduled to happen sometime in 2022.
That process was described under the umbrella term “Ethereum 2.0” until this week, but developers felt it added confusion and led to a belief that Eth1 and Eth2 were stages rather than components. There have also been a number of reported scams as bad actors exploited the confusion to sell or list “ETH2” assets.
Other than the name change, all aspects of the upgrade roadmap remain the same and in place, developers said.
Will a name change and protocol change solve Ethereum’s problems?
Ethereum is popular but has struggled to cope with network traffic in recent years. As with BTC, transaction fees have been prohibitively high as miners struggle to handle the demand. This has left a lot of funds “stuck” in wallets (it would cost more than the total value of the transaction to send them anywhere) and high-transaction-volume DeFi apps stalled.
There’s also the issue of whether ETH could even be classified as an illegal security by large regulators like the SEC at some point. This recently impacted Ripple’s XRP network, which has fallen from its position as one of the industry’s most popular assets. Unlike Bitcoin, Ethereum began with a “pre-mine” of ETH assets divided among its initial founders—and could see leading developer Buterin’s position defined as an “issuer,” leading to legal problems. Vitalik was also the chief fundraiser during the pre-ICO road show that is well documented in videos all over the internet.
Then there’s Proof of Stake itself
“Proof of Stake”, or PoS, has become a trendy buzzword in the blockchain world, but it comes with several problems. Ostensibly its backers try to position it as a more efficient and environmentally-friendly way to process and record data blocks on a blockchain, it awards block confirmations (and the block reward/subsidy) to those “staking” a portion of their ETH assets. The more you stake, the better your chance of confirming the block—and making more ETH.
The concept has recently gained some traction outside the blockchain-savvy world, where one only has to say “excessive energy consumption” to induce horror among audiences seeking a more “sustainable” economy. It appears to be an instant solution to all those mainstream media reports about BTC mining using more electricity than some countries, or of miners using up power that some nations need for more essential purposes.
PoS also assists scaling, its proponents say, by making processing faster, more “decentralized,” and less prone to the kind of network-clogging and high fees that have plagued Ethereum in the past few years.
The energy consumption claims do have some merit. Yes, PoW can consume a lot of energy. However, this is why it’s necessary to process as much data as possible in transaction blocks (as BSV does) and extend the usefulness of the blockchain to secure much of the world’s information. Using all that energy to confirm a handful of payment transactions (around 4-5 per second, like BTC) is wasteful. Using it to secure data on a better version of the internet is worthy. Since BSV has already proven it can scale unboundedly using Proof of Work confirmations, then it becomes more energy-efficient the more data it processes. (If you want to learn more about this, check out the report from major accounting firm MNP that found BSV to be the most energy-efficient blockchain when compared to BTC and BCH.)
So what’s wrong with Proof of Stake? A lot. For starters, when all you need to become a major transaction processor is a large supply of coins, the network itself becomes less trustworthy. Coins can be transferred between addresses instantly, borrowed temporarily, and/or hidden behind pseudonyms, DAOs, or other fronts. This means you can never know for sure just who is confirming all those transactions—or driving the policies behind protocol rules.
Bitcoin creator Dr. Craig S. Wright has said PoS is a poor way to attempt scaling, and called it both “a complete con job” and “purely a scam to mislead regulators into believing that it’s decentralized.” He likens it to voting shares in a corporation that can be shuffled around, pooled and used to conceal who holds the most voting power:
“Proof-of-Stake is simply a way of trying to hide from the government. If there are 100 shares and now sixty of those around by the Ethereum foundation, you can have a variety of pseudo-companies all controlled as a DAO.”
He explained, “For instance, you have thirty companies with one share each. Ten companies with two shares each. One company with four shares in two companies of three shares. All of these are controlled by the same people that you set them up as shell companies acting as a DAO, and now rather than having control of the network, you appear to be decentralized.”
Ethereum may change terminology, plans and schedules as it attempts to find a scaling solution that actually works, but in the end, it still faces an uphill battle to regain developers’ confidence. Meanwhile, BSV continues to function and scale exactly in the manner Satoshi Nakamoto intended when it first launched (without a value or pre-mine) on a protocol that promises never to change — or leave functioning apps floundering.
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