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 
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I do not use Gmail, Outlook, or any other email 
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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..

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