The Ethereum blockchain has undergone significant updates in preparation to a new version. The following software updates have been made since the project first started:

Frontier (July 2015)
Homestead (March 2016)
Metropolis (Byzantium in October 2017 and Constantinople in February 2019)
Istanbul (December 2019)

The next iteration is Eth2 or Ethereum 2.0 which will introduce the Serenity update. It is set to begin in late 2020 and deploy in phases. (Learn more at Ethereum.org)

It will change the Ethereum protocol, moving away from the Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). It will launch in multiple phases, as developers begin deploying the necessary changes to the Ethereum blockchain. The main purpose for this transition is to bring more efficiency and scalability to the network, to process more transactions and operate with more efficiency and stability. Scaling has long been a problem of blockchain-based networks, because they have to rely on decentralization which doesn’t process transactions as efficiently at the rate of commercial business applications. That is part of a tradeoff with scalability, since blockchains are more decentralized and secure.

Eth2 will still be decentralized, but improve their consensus mechanism from mining to staking. This will allow validators to contribute based on their proportion of ETH (ether) on the network rather than providing compute resources. There is no more need to solve random puzzles using hash power. Instead the staking method allows validators of blocks to commit a portion or all of their ETH to validate transactions. Their incentive will be based on the amount they staked. It is more energy efficient as well, not requiring expending large amounts of energy to produce one block. Eth2 randomly selects validators in a fair and decentralized manner.

At present, the Ethereum network can process between 15 to 30 tps (Transactions Per Second). With Eth2 it will increase the transaction velocity up to 100,000 tps. This would be possible (in theory) with the implementation of the Ethereum 2.0 upgrades. Even if in the real world it isn’t exactly 100,000 tps, a higher transaction velocity is still the best outcome. The underlying element to increase the number of transactions involves the use of shard chains (sharding will be explained later).

Among other changes to the network, the beacon chain and sharding will also be deployed as part of the EIP (Ethereum Improvement Proposals). Beacon chain is a feature that coordinates the PoS implementation on the Ethereum blockchain. Sharding aims to improve the storage of data on the network, to scale to higher capacity and faster access to data. Rather than to have all nodes on the network storing the blockchain state, shards are created to store system state in a distributed and decentralized manner for more efficient operations. If all nodes had to keep store of the world state of the blockchain, it certainly slows down the network since each node has to perform updates whenever there are changes. That can take plenty of time when you have many nodes.

The idea is to keep the network open to all who want to stake without barriers in order to maintain a decentralized network. Ethereum 2.0 will require 16,384 validators, which means a more decentralized and secure network. The more nodes there are, the more security to the network through coordinated participation of each node. This is because those who have staked their ETH face losing what they staked if they do not cooperate with other nodes or if they attempt to attack the network. It is a coordinated game theory example of contributing resources for the greater good. However, there are also consequences and not just incentives.

Despite all the efforts by developers, the project has been facing delays. This is not a major setback, but has been expected due to the complex nature of the system. It has been in development for years and it could still take longer to deploy and implement. It does keep the momentum for driving the value of ETH higher, along with the surge in the DeFi (Decentralized Finance) space which is based on Ethereum’s ERC20 token standard. As transaction volume increases and ETH gas costs decrease, the value of ETH would show a likely bullish trend. The market is so volatile though, nothing is certain. The transition to Ethereum 2.0 will be undergoing phases, so they won’t happen over night. It is best to keep an eye out on the developments, because any progress would surely be a good signal to the rest of the market.