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28 Mar 2022

Beacon Chain Upgrade on Ethereum: The What, Why, and How

Ananda Banerjee

Bitcoin might be the Godfather of crypto, but Ethereum is the Prodigal Son, and it’s finally going back to the cleaner ways (quite literally), resuming its former spot on the crypto table as Ethereum 2.0.

But the road to the “new” Ethereum isn’t straight or simple and was never meant to be. Ethereum 2.0 was always supposed to be an incremental feat, paving the way by several blockchain-specific enhancements—and the Beacon Chain was one of them.

True to its name, the Beacon Chain upgrade on Ethereum sets out to achieve something similar to a real-life beacon, which oversees everything around. Read on to understand its role in the Ethereum metamorphosis.

Key Takeaways

  • The Beacon Chain upgrade doesn’t aim to disrupt the existing flow of the Ethereum Mainnet.
  • Beacon Chain comprises phase 0 of Ethereum 2.0 or the Serenity Upgrade.
  • The upgrade on Ethereum aims to make it Proof-of-Stake compatible.
  • With Beacon Chain, Ethereum plans to create a committee of validators and stakers. 
  • The upgrade is followed by sharding, docking, and Merging as the key steps to ETH 2.0.

What is the Beacon Chain Upgrade

The Beacon Chain is a complex technical change made to improve the existing Ethereum mainnet. But there’s no need to get turned off by either the complexity or the technicality because this article will be making it a lot easier to understand.

So let’s start with a fun example.

Imagine heading over to the supermarket to grab that delicious 5 Star chocolate bar. On reaching the store, you find a new variant of the bar (let’s call it 5 Star Ultimate) occupying the shelves. The Ultimate version promises a higher protein count and a different kind of nougat, and it comes at a slightly lower price.

Well, the older 5 star is akin to Ethereum, whereas the new, hypothetical chocolate bar is like Ethereum 2.0. The Beacon Chain is one of the few upgrades made to the older variant while retaining its essence— so say by adding a different variety of nougat but everything else stays unchanged.

The Beacon Chain upgrade is thus a way of bringing in a consensus mechanism (through which ecosystem participants verify transactions) that is more eco-friendly—preparing it progressively for the ultimate makeover.

Ethereum Merge phases

Why did Ethereum need an upgrade?

To understand the Beacon Chain upgrade, it is important to revisit the reasons why Ethereum needed an upgrade in the first place.

  • Need for scalability

Ethereum is rather crowded. With more than 100 decentralized apps using Ethereum’s resources, the transaction per second count is now languishing at 20. And if Ethereum wants to stay relevant in the fast-developing crypto space, the speed of transactions will have to improve. ETH 2.0 is expected to scale the current ecosystem by leaps and bounds, with the ultimate target of 1,00,000 transactions per second.

  • To make it eco-friendly

ETH 2.0 introduces the Proof-of-Stake (PoS) consensus mechanism in order to verify transactions on the blockchain. PoS was brought in to make Ethereum less energy-intensive. In the new scheme of things, the crypto’s energy needs will drop by almost 99%, putting ETH on the list of eco-friendly (crypto) assets and helping it gain wider acceptance globally.

Even though it will still be a while before we see ETH 2.0, the Beacon Chain upgrade has already stepped in to address the energy issue. It helps introduce some of the aforementioned functionalities to the existing Ethereum ecosystem, without any drastic or abrupt changes to the blockchain.

  • Security issues

Because Ethereum is still a Proof-of-Work crypto project, despite a crowded ecosystem, users still need to keep an eye on the possibility of a 51% attack. However, ETH 2.0 will bring Proof-of-Stake into the mix, making it harder for malicious parties to breach into the ecosystem.

Phases of the upgrade

Ethereum’s transformation into ETH 2.0 was always supposed to be a phased one. As per the technical roadmap, the upgrade was to be segregated into four phases:

  • Phase 0: Beacon chain upgrade
  • Phase 1: Staking
  • Phase 1.5: Docking
  • Phase 2: Merge and support for transactions
  • Phase 2.5: Improved Ethereum Virtual Machine support (After ETH 2.0 comes into existence)

As we can see, the Beacon Chain lays the very foundation of the ETH 2.0, helping Ethereum adopt the envisioned changes gradually and without restraint. More on the other phases later.

Why is the Beacon Chain Upgrade Important?

The Beacon Chain is the ecosystem entity that will coordinate the entire Ethereum blockchain—new and old included. Imagine it as the ETH 2.0 starter pack running parallel with the existing Ethereum main-net, to introduce users to the concept before the final upgrade.

Originally launched on 1 December 2020, Beacon Chain was meant to offer a taste of Proof-of-Stake in preparation for Ethereum’s subsequent growth leading to the ETH 2.0.

To put it in technical terms, the primary role of the Beacon Chain would be to make Ethereum Validator-specific (stakers) from Miner-specific (problem-solvers).

How the Upgrade Works

Let us circle back to why Ethereum needed an upgrade in the first place. Remember scalability, security, and eco-friendliness?

To adopt the last two elements and facilitate the first, Ethereum would have to turn PoS from PoW to become more secure and eco-friendly, but the implementation wasn’t possible overnight. Here is what the transition plan involves:

  • Beacon Chain was introduced to the Ethereum mainnet to help introduce the PoS mechanism, with a view to arriving at a full-blown ETH 2.0 organically and gradually.
  • With the Beacon Chain upgrade initiated on Ethereum, users started staking ETH to become validators.
  • Each validator had to stake 32 ETH to get a receipt, also known as Merkel Hash, generated using an Ethereum-based smart contract.
  • As per the ecosystem protocol, staked ETH cannot be withdrawn until ETH 2.0 comes into existence.
  • Over time, the Beacon Chain is expected to merge with the Ethereum mainnet, thereby opening it up for the subsequent phases like sharding, wherein the ecosystem will be divided into smaller blockchains to make it faster and for scaling. Every shard in ETH 2.0 will follow the PoS consensus mechanism for validating transactions. And the Beacon Chain will be responsible for assigning the stakers and validators to the concerned shard chain. 
  • With the Beacon Chain already active on Ethereum, shards can be introduced to the mainnet safely.

And that is how the Beacon Chain works—making the subsequent phases of the Ethereum upgrade possible. The Beacon Chain Upgrade is a stepping stone to ETH 2.0.

Note: Beacon Chain doesn’t support smart contracts. It is simply a coordination platform for now that acts as a base for the grand merge.

The Role of the Beacon Chain

Now that you know how the Beacon Chain works, let us revisit its highly specific role in relation to the larger Ethereum ecosystem. It includes:

  1. Managing ETH stakes and validators while assigning them to shards whenever they are active;
  2. Creating a validator committee with a minimum of 128 validators for overseeing the ecosystem developments;
  3. Managing staking rewards and penalties related to inactivity and slashing; and
  4. Enforcing specific PoS rules that might be exclusively followed by every shard residing on the ETH 2.0 network.

Why is the Beacon Chain Upgrade Important for Buyers?

While some of the concepts associated with the Beacon Chain are technical, learning about them can be rewarding as they come with several growth-specific insights. Here’s how a concept as technical as the Beacon Chain can make sense to buyers:

  • Beacon Chain introduces PoS—an easier consensus mechanism to implement and follow as compared to PoW.
  • With PoS, ETH will not have to reward miners so aggressively, which would then help the ecosystem cut down the token creation rate from over 4%, bringing it down to a mere 0.4%.
  • And the 0.4% inflation, clubbed with ETH 1559 token burning protocol, will make it close to a fixed supply token, supposedly impacting its price-action positively.

What Happens After the Beacon Chain: Other Phases of ETH Upgrade

Even though the Beacon Chain is a fairly technical concept on its own, it is only relevant when looked at in unison with other elements of the ETH 2.0 upgrade. Here are some of the technologies at play, along with simple explanations to help:

  1. Sharding: Phase 1 of the upgrade will introduce sharding or shard chains to the Ethereum ecosystem. Consider shards as multiple highway lanes leading to the same destination. The ETH 2.0 ecosystem is expected to bring in 63 new shards and treat the original Ethereum mainnet as the 64th.
  2. Docking: Phase 1.5 involves bringing all these shards together to form a functional ecosystem. The shards working together are known as “Docking.”
  3. Merge: The ETH 2.0 isn’t an entirely new entity. It is a standard yet celebrated merge of the Ethereum mainnet, Beacon Chain, and all 64 functional shards. 
  4. EVM upgrade: Post merge, Ethereum’s computational engine or EVM will undergo a makeover to accommodate the PoS objectives and resources.

A Beacon of Hope: Wrap-Up

Imagine the Beacon Chain as a scrutinizer who quietly takes a stroll across the ecosystem, checking for security and scalability challenges. In the case of Ethereum, you wouldn’t even know that it exists as it works in parallel to the mainnet, currently building a workforce of stakers and future validators to make the merge a grand success.

And if you are still unsure as to what this upgrade is—consider it as a beacon of hope, or rather a proactive move, to set the stage as Ethereum tries to lower chances of attacks, improve transaction efficiency, and minimize power requirements.

Interested in learning more about the Beacon Chain Upgrade and the Ethereum merge. Learn and read more with CoinSwitch by your side.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

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