Before reading, please note: According to the article, posted by the ethereum.org team on January 24, 2022, Ethereum has moved away from ‘Eth1’ and ‘Eth2’ terminology. As of late 2021, core developers stopped using the terminology, preferring ‘execution layer’ and ‘consensus layer’, respectively.
Eth1 → execution layer
Eth2 → consensus layer
Execution layer + consensus layer = Ethereum
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Ethereum and Tezos have a lot in common, the main similarity being that both can be used as platforms for decentralized applications through smart contracts. After the long-awaited Ethereum 2.0 update, Serenity, Ethereum (the second most popular cryptocurrency) will switch to the Proof of Stake consensus algorithm, making it even more similar to Tezos. Let’s take a look at their relative pros and cons, the similarities and differences between these two cryptocurrencies, and platforms for DApps.
What Is Ethereum 2.0?
The Ethereum 2.0 update aims to bring the platform’s scalability, speed, and availability to as many users as possible. By introducing several major changes to the Ethereum blockchain, the developers plan to solve the protocol’s main problems.
The Ethereum 2.0 update is being released in several stages. The first stage was the Beacon Chain fork that implemented token staking, a key feature of the future PoS consensus protocol. The Beacon Chain currently operates separately from the main network.
The Merge fork, which integrates the Beacon Chain with the Ethereum mainnet, is expected in the first half of 2022.
The final stage of the transition will be the Shard Chains fork, which should play a key role in scalability. The update will split the main chain into segments, distributing all operations across 64 parallel chains, significantly speeding up the network.
How It Differs From Ethereum 1.0
Let’s take a look at the key differences between the current Ethereum version and the upcoming major update.
One of the main and most noticeable differences is the change of the network’s consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS). Following this are several changes that take Ethereum 2.0 a step above its previous version.
In the current Ethereum blockchain, miners use the computing power of their hardware to find complex mathematical solutions to gain the right to join the block to the network, claiming a reward for “mining” it. This requires significant energy consumption.
The Ethereum network currently consumes more electricity than some small states. The energy required to conduct a typical Ethereum transaction is comparable to the amount of electricity the average American family uses in a day.
Upgrading Ethereum to the ETH 2.0 protocol version will help reduce electricity consumption by approximately 99.9%, according to the Ethereum Foundation. The proof-of-stake consensus algorithm is based on the idea that users who lock a certain amount of assets in a contract address become network validators.
This approach requires hundreds of times less energy and computing power, allowing the network to scale in width. The current Ethereum network handles around 30 transactions per second. Consequently, as the load on the network grows and the number of transactions increases, the latency will also increase.
It is expected that, due to the implementation of shard chains technology, Ethereum 2.0 will support about 100,000 transactions per second. The essence of shard chains is the simultaneous functioning of 64 parallel chains, which will be coordinated by the Ethereum 2.0 Beacon Chain. The first validators will be randomly distributed among the chains.
Overall, Ethereum 2.0 should become fast, energy-efficient, and scalable, but at the same time also act as a decentralized and secure blockchain, based on the PoS consensus algorithm, providing an almost ideal platform for dApps.
What Is Tezos?
Tezos is an open-source blockchain protocol whose network initially operated according to the principles of the proof-of-stake consensus algorithm. The Tezos blockchain now uses a modernized PoS model called Liquid Proof-of-Stake (LPoS). This allows holders of the TEZ cryptocurrency to delegate their assets to the validators, thus receiving a portion of the backers’ rewards.
The validators themselves are also interested in using user funds since the more assets they stake as a validator, the higher their chance of getting a reward for a new block. This is comparable to a Bitcoin or Ethereum mining pool where users join forces to increase the chances of success, thereby providing themselves with more regular rewards.
Tezos is an alternative platform for building and running dApps. Dozens of applications are already running on the Tezos network, and although the total aggregate value of this sector is significantly lower than that of Ethereum, it has continued to grow over the past few years, attracting the attention of the crypto community.
Ethereum 2.0 vs Tezos: Key Points
After Ethereum’s “Serenity” upgrade and the transition to Ethereum 2.0, these blockchains will actually have a lot in common, from their consensus mechanisms to the main purposes of their platforms. Let’s explore the main parameters and features of these two blockchain platforms, compare them, and try to determine which is best.
Current State
Ethereum 2.0 is currently in development. This is the planned update that should take place on the Ethereum mainnet in several stages. The Shard Chains update is expected to be rolled out to the mainnet before the end of 2022, completing the Ethereum update process. It is unknown if the developers and the community will be able to implement their plans. However, their intentions are serious, work is underway, and there is a high probability that the update will be successful.
Tezos was created by Arthur Breitman (“L.M. Goodman”) in 2014, and the mainnet started in 2018. The Tezos Foundation is working to develop the ecosystem by supporting startups and young development teams.
Consensus Algorithm
Ethereum 2.0 will use classic proof-of-stake. Many crypto community members believe that it was Ethereum that first introduced the real PoS during their presentation on the future Serenity update in 2015.
Participants will have to stake 32 ETH (about $120,000 as of October 2021) to activate the validator software, confirm transactions, and generate blocks for ETH rewards. It’s possible to provide fewer assets by pooling with other participants to form a full node. To begin the staking process, you’ll need to use the Eth2 launchpad. Although you can stake your coins right now (after the Beacon Chain update), you will not be able to withdraw them until after the Merge update.
Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized and hence secure.
Tezos LPoS works on similar principles to proof-of-stake in Ethereum 2.0. Liquid proof-of-stake (LPoS) was developed by Daniel Larimer in 2014 to get around the problem of only the “rich” (those with a lot of coins) having the ability to keep the network running, receiving rewards as they get richer. LPoS in Tezos allows regular users to use their XTZ to maintain network consensus and earn rewards.
To create a new blockchain node on the Tezos network, a minimum of 8,000 XTZ is required (about $56,000 as of October 2021). Each pack of 8,000 XTZ is called a “roll”. The more rolls a validator has, the greater their chance to form and add a block. At the same time, the backer (validator) can accept assets from ordinary users, increasing their pool. In return, the backer rewards the participants for the delegation. Delegators do not lock their assets and do not move them to contract addresses to take part in the delegation. They are free to use their funds at any time.
Currently, there are over 380 active backers and over 120,000 delegators on the Tezos network. Validators use about 75% of the XTZ issued.
Just like in Ethereum 2.0 and other networks based on the proof-of-stake algorithm, validators in Tezos are only interested in processing correct transactions since they risk losing their locked assets.
On-Chain Governance And Upgrades
Ethereum is now being supported and developed by the Ethereum Foundation, a non-profit organization dedicated to supporting Ethereum and related technologies. Every update on the network requires a fork, which must be accepted by all network participants who plan to continue the validation process.
The Ethereum Improvement Proposal (EIP) can be used to improve and change the rules of the network. Anyone in the Ethereum community can create an EIP by writing technical specifications, principles, proposed changes, and goals. The community will make decisions about the need for a fork in the network.
This mechanism will remain unchanged after the Ethereum 2.0 update.
Tezos also supports Improvement Proposals called TZIP. Community members can create and offer their improvement proposals to the network. However, these seamless updates are not forks. The self-amendment process is split into 5 periods: the Proposal Period, the Exploration Vote Period, the Cooldown Period, the Promotion Vote Period, and the Adoption Period.
Bakers may submit up to 20 proposals in each Proposal Period. By submitting a proposal, the baker is also submitting a vote for that proposal. This vote is equivalent to the number of rolls in its staking balance at the start of the period. Other bakers can then vote on proposals by submitting proposal operations of their own.
Proposals accepted through the community vote are finalized and implemented into the main network without hard forks, thus ensuring the smooth operation of the Tezos network.
Scalability
Ethereum 2.0 will run on Shard Chains – 64 parallel chains coordinated by beacons. Thus, the load on each individual chain will be significantly reduced. This should facilitate faster transaction processing, comparable to that of centralized networks and payment systems such as VISA, MasterCard, etc. Ethereum 2.0 promises to complete up to 100,000 transactions per second, which is thousands of times faster than current rates.
Tezos’ current rate is 40 transactions per second, but it still has great potential for scalability. Several recent updates to the network have shown that the community can respond quickly to growing transaction costs and speeds by implementing protocol updates.
Currently, the waiting time for transaction processing on the Tezos network is lower than on Ethereum.
Programming Languages, Technical Differences
Ethereum works like a virtual machine – the EVM (Ethereum virtual machine) is the aggregate power of each of the nodes. The EVM stores and compiles the smart contract codes which are called by users when they interact with the blockchain via transactions. It has a low-level architecture similar to that of machine code or Assembler. This results in some difficulties with the formal verification of the code.
Ethereum smart contracts are developed using the high-level programming languages Solidity and Viper. Thanks to a large and developed ecosystem, programmers can choose from a huge variety of ready-made solutions and tools when creating Ethereum dApps.
Tezos was built on the functional programming language Michelson. Michelson is a low-level, stack-based programming language that boosts security. Functional languages allow the mathematical validation of all smart contracts on the blockchain, unlike imperative programming languages where the developer writes specific step-by-step instructions. Tezos was originally designed to facilitate formal verification.
The languages Ligo and SmartPy are used to write smart contracts for Tezos. However, because its ecosystem is not very well-developed, programmers are forced to create most of the solutions from scratch.
Use Cases
Ethereum represents the largest ecosystem of applications and projects among all blockchains. This is primarily because the Ethereum network was the first to offer convenient tools for developers of dApps and smart contracts. It retained its leadership for many years due to the lack of worthy alternatives.
Today, the number of dApps on the Ethereum blockchain exceeds 3000, a significant number of which have a capitalization of over $1,000,000. The total capitalization of the DeFi sector has reached $80 billion. Projects such as Uniswap, OpenSea, Maker DAO, Aave, Compound, and others generate a daily transaction volume on the Ethereum blockchain worth billions of dollars, despite high fees.
However, a significant portion of the liquidity has migrated to other networks with the emergence and development of blockchains such as Solana, Binance Smart Chain, Tezos, Cosmos, and many others. The reasons for this are their significantly lower fees and higher transaction processing speeds.
The Tezos ecosystem is not nearly as big as that of Ethereum. The DeFi capitalization of the Tezos sector is slightly larger than $120 million, and the number of smart contracts has reached 20,000.
But it must be kept in mind that decentralized applications on the Tezos blockchain only began developing two years ago, and the potential of this direction is still very far from full implementation. These conclusions can be drawn from the experience of other blockchains, where several successful and new products were able to draw attention to the whole ecosystem.
Famous dApps on Tezos include Plenty, Quipuswap, Wrap Protocol, Crunchy Network, Kolibri, and others.
Conclusions
Ethereum 2.0 and Tezos look similar but have a number of fundamental differences. Common features include a consensus algorithm, the focus on ecosystem development, low transaction costs, and a good level of decentralization.
However, when choosing the “winner” of this race, it is worth noting that Ethereum 2.0 has not been fully implemented yet, not even by 50%, and the final result may differ from what was expected. At the same time, Tezos, thanks to its seamless upgrade mechanism, can be updated easily and may undergo significant changes by the time Ethereum 2.0 is released.
The current picture is exactly as described in this material. Finally, let’s summarize some of the main characteristics of Ethereum 1.0 / 2.0 and Tezos:
| Feature / Blockchain | Ethereum 2.0 | Tezos |
|---|---|---|
| Ecosystem volume | $88B | $120M |
| Active funded wallets | 60.7M | 1.6M |
| Validators | at least 16,384 | 381, and more than 120,000 delegators |
| EVM support | + | + |
| Consensus | Proof-of-stake | Liquid proof-of-stake |
| dApps and smart contracts | + | + |
| Transaction speed | 100,000 tps promised | 40 tps with improvement ability |
| Governance | On-chain | On-chain |
| Upgrade mechanism | Forks | |
| Decentralization level | High | High |
* In the comparison table, we assumed that Ethereum’s ecosystem will not decline before the release of Ethereum 2.0. Therefore, some of the given values (active addresses and ecosystem volume) correspond to the current indicators of the Ethereum network.
