Ethereum

The current Ethereum (aka. Eth1) and Eth2 will run in parallel for a while, Eth1 will eventually become a part of Eth2 (Phase 1.5). Ethereum 2.0 is an upgraded version of Eth1. The main objective behind this upgrade is to enable Ethereum to scale while maintaining a high level of security, and decentralization. This is mainly achieve through two changes to the structure and design choices in Eth2 compared to Eth1. The two biggest ones being “Proof-of-Stake” as well as “Sharding”.

Proof-of-Stake (PoS): In a PoS system, validators take the role of miners (known from Eth1). Validators provide computing power, storage, and bandwidth to validate transactions, and they propose new blocks. For doing so, they receive periodic payouts denominated in ETH. Validators need to lock 32 ETH into a deposit contract, which functions as a sort of security deposit, that gets (fully or partially) forfeit in case of malpractice. This way of incentivizing honest behavior requires far less energy than the current Proof-of-Work mechanism, in which miners are incentivized through sunk costs in the form of hardware and electricity.

Sharding: Sharding is the process of splitting up a blockchain into multiple blockchains called shards. It is a way of partitioning the computational and storage workload across different nodes. Hence, the transactional load of the entire network does not have to be processed by each validator, but instead, they can focus on maintaining information related to “their” shard. In order to avoid collusion, the validators are shuffled between shards on a regular basis. In Ethereum 2.0, the shards communicate and coordinate through the Beacon Chain. They are linked through crosslinks, a reference in a beacon block to a shard block. The plan is to have 64 shards that compose the Eth2 network

Once you have staked ETH, you are contributing to the network's security. In return, you will receive rewards in the form of newly minted ETH. Conversely, if you do not participate in staking, your assets will get diluted over time.

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In Eth2, validators are subject to punishment in case of malpractice. This is referred to as "slashing" and can occur in the wake of three events:

• 'double sign': proposing two different blocks in the same epoch
• 'surround vote': voting for multiple versions of the chain at the same time
• 'non-malicious slashing': due to a bug or mistake in the validator setup; low severity if small number of validators is affected (amount slashed increased the more validators are affected)

If you are using the services of a third party provider or a staking pool, you can be subject to a slash. Therefore, we advice you to carefully choose your validator. Please note, that the costs for running a secure and professional validator need to be covered by the commission rate. Hence, it is worthwhile to accept a certain amount of commission in order to secure your profits and minimize the risk of punishment. In addition, we have our own capital on the line in order to fully align our own interest with that of our customers.

Rewards automatically accrue on your account. However, they remain locked and illiquid until token transfers and withdrawals are enabled. This will be the case in Phase 1.5 of Eth2s' rollout. No specific dates have been announced for the start of Phase 1.5. Unfortunately, compounding your rewards is currently not possible on a protocol level.