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First off, what is Ethereum? Ethereum is open access to digital money and data-friendly services for everyone – no matter your background or location. It's a community-built technology behind the cryptocurrency ether (ETH) and thousands of applications you can use today. Ethereum is a technology that lets you send cryptocurrency to anyone for a small fee. It also powers applications that everyone can use and no one can take down.
It's the world's programmable blockchain.
Ethereum builds on Bitcoin's innovation, with some big differences. Both let you use digital money without payment providers or banks. But Ethereum is programmable, so you can also use it for lots of different digital assets – even Bitcoin. This also means Ethereum is for more than payments. It's a marketplace of financial services, games and apps.
What’s Changing With ETH 2.0?
Sharding: Sharding will upgrade the existing Ethereum blockchain (which you can imagine as a one lane road) to a blockchain made of 64 parallel parts, known as shards. Think of these 64 shards as a 64 lane highway, each lane has the same capacity as the original single lane road which is Ethereum 1.0.
Proof of Stake: Ethereum 2.0 will move Ethereum from proof of work to proof of stake. In a nutshell, proof of work is a system where people exchange their electricity for coins, proving they have done work and put effort/money into securing the blockchain. This makes it hard for one person to overtake the network because it would be extremely expensive to burn all that power. Proof of stake requires people who secure the network or "validators" to put up ETH as collateral as a "stake" in the network. If they help secure the network, they will earn ETH but if they act maliciously they can be penalized in the form of losing some of their staked ETH (known as slashing). Much like proof of work, proof of stake makes it hard for one person to overtake the network because they would need to buy a very large number of ETH, making the attack unrealistically expensive.
There are many pros and cons to proof of stake vs proof of work but Ethereum's implementation of proof of stake will make Ethereum more secure and more efficient, which will result in less inflation since the people securing the network don't need to be compensated monetarily for the electricity they used to secure the network.
ETH 2.0 Phases
ETH 2.0 is rolling out in multiple phases:
Phase 0: This is the introduction of Proof of Stake and the creation of the ETH 2.0 blockchain. This is the backbone of the ETH 2.0 system. Imagine it like the foundation upon which the 64 lane road is being built. It is a wide flat foundation of rock and it is not connected to the existing Ethereum 1 road. While there are no cars driving on this chain yet (there are no transactions on this chain), people are able to move from the Ethereum 1 road and onto this new road. The people moving over are security guards making sure that the foundation of the road remains secure and ready for upgrading once the developers are ready to build out the rest of the road.
This is what the deposit contract and staking talk right now is about, you can move your 32 ETH in the deposit contract which will move your 32 ETH to the foundation of the ETH 2.0 road (known as the beacon chain) where you can stake your ETH and keep the road secure and ready for a future upgrade. In return these people get paid out a variable % interest on their 32 ETH for their service.
Phase 1: This is construction of 63 of the lanes on the new road. However, these lanes aren't open to the public yet. They are only to be used by public transport so most people are still using the Ethereum 1 road, but if people decide to use public transport (a certain layer 2 solution known as a roll-ups), we can decrease the congestion on the Ethereum 1 road.
In technical terms, this is where 63 new shards which are connected to the beacon chain are created. These shards aren't available for transactions yet but they do hold data on the state of the Ethereum blockchain. This data can be used by transactions which use the layer 2 scaling solution known as roll-ups, reducing load on ETH 1.
Phase 1.5: This is when we say goodbye to having two separate roads. The Ethereum 1 lane is merged with the ETH 2.0 road, creating a 64 lane highway. However, the other 63 lanes are still closed to certain traffic (specifically which traffic is still to be determined). Now that cars are moving on the new road, the security guards (ETH 2.0 validators) are now free to get back in their cars if they want to (or they can keep staking) and new ETH is no longer created to pay for the security of the old road.
This phase sees the Ethereum 1 chain become a shard on ETH 2, moving it over to proof of stake and connecting it to the other 63 shards. The other shards are not yet able to take all types of transactions yet such as complex transactions which interact with smart contracts (these are the type of transactions you send when using DeFi apps like creating a Maker Vault). Now that the Ethereum 1 chain has moved into its own ETH 2 shard, it is secured by proof of stake and we no longer need to mint new ETH to pay miners to secure the network which happens under proof of work. As a result, the inflation rate of ETH will drop from around 5% annually to around 1% annually (or possibly even going negative thanks to the proposed fee burn and fee market upgrade EIP-1559).
Phase 2: This is the grand opening of all 64 lanes of the highway. All or almost all traffic will be able to use any lane (the specifics have not yet been determined, certain transactions may have to use certain lanes). The maximum capacity of the Ethereum highway will increase approximately 64x over its current capacity - and that’s not including the effect of public transport (layer 2 scaling solutions) in increasing the number of people who can use this highway in their daily lives! Also, there is no theoretical limit to the number of lanes the highway has. If certain parameters are tweaked and as technology advances, we may be able to add more lanes to the highway if it is deemed necessary.
This phase is the last phase for a feature complete ETH 2.0. All or many of the 64 shards will allow for smart contract execution and transactions (it is possible that not all shard will be used for all types of transactions. This is yet to be determined). Another big feature which will ship with this phase is the introduction of eWASM which will replace the Ethereum Virtual Machine (EVM). This will allow developers to code smart contracts in languages other than Solidity, thus greatly increasing the number of people who can build on Ethereum. Finally, phase 2 will also introduce execution environments. Unfortunately this goes beyond my level of knowledge and expertise but basically it allows for more customisations and possibilities for developers.
The All Important Question: When?
There are no timelines listed because the Ethereum Foundation has not released any official timelines. However, it is important to keep in mind that development of the different phases is happening in parallel, meaning that just because phase 1 hasn’t shipped yet doesn’t mean that phase 2 isn’t already under development. Each phase is currently being worked on. This also means that a delay in phase 0 or phase 1 may not delay the release of phase 2. It has been said that phase 0 is the most complex and it has already launched. It is important to emphasize that Ethereum is not entirely reliant on ETH 2.0 for scaling as many other scaling solutions are live now or releasing soon, some of which will benefit from the early phases of ETH 2.0 as mentioned above.
In short, Ethereum is yet another example of the innovation occurring in the decentralized internet space. This arena encompasses many technologies that will shape the future. Cryptographic money is now at the forefront of not only finance, but social media, and art. The space is quickly evolving and has much potential. If you have time, I suggest you spend a weekend researching not only crypto currencies, but the vast amount of innovations happening around the decentralized ethos. It will prove to be a fruitful endeavor.