Following the Bitcoin halving, ETH 2.0 is the most anticipated event in the crypto market this year. Although the release of its Phase 0 beacon chain has been delayed several times, the successful launch on December 1 marks that Ethereum has officially entered a new era of 2.0. In this process, the number of ETH staking (staking) on ETH 2.0 has continued to grow and has now exceeded the 1 million mark. What exactly is ETH 2.0 and what are the potential risks and benefits of staking? This article hopes to give everyone a more systematic understanding of ETH 2.0 through a simple review.
ETH 2.0 new era
From PoW to PoS, Ethereum can be described as the pioneer of all blockchain networks. In the past few years, its network and ecological construction have developed in full swing, but it has faced many shackles in terms of ease of use, sustainability, efficiency, and security. Based on these, Vitalik had the inspiration to create ETH 2.0 to achieve the ultimate goal of “world-class computer”.
Achieving this goal does not happen overnight, but takes at least 2 to 3 years. From the latest plan, the entire conversion process will be divided into four main stages:
Ethereum 2.0 stage drawing: Cointelegraph Chinese
The stage 0 beacon chain is considered to be the backbone and core of ETH 2.0. The goal is to introduce a basic PoS mechanism to make Ethereum switch from PoW (Proof of Work) to a new proof-of-stake model, and fundamentally change the economic foundation of the network. The special thing is that during this period ETH 1 (PoW network) and ETH 2 (beacon chain) will exist at the same time and operate in parallel according to their respective mechanisms.
The start of Phase 0 is triggered by an ETH 2.0 deposit contract. The contract address was previously announced on November 4 this year, stipulating that when the amount of pledged ETH received reaches a threshold of 524,288, the genesis block of ETH 2.0 will be officially opened on December 1. The figure below shows the amount of ETH received since the contract was opened. It can be seen that a large amount of ETH was pledged to this address on November 23, marking that ETH 2.0 has also successfully reached the release threshold. As of December 10, the total number of ETH in the contract has reached 1.31 million, which is about 1.2% of the ETH circulation, and it is still growing.
The amount of ETH in the ETH 2.0 deposit contract Source: Dune Analytics
After the beacon chain, Ethereum will successively start the next three phases to implement functions such as sharding, integration and state execution, and smart contracts in turn.
In fact, it has been a long time since the Ethereum 2.0 plan was first released in 2020. The explosion of DeFi on Ethereum this year poses real challenges to network scalability, cost and efficiency, and it is particularly urgent to accelerate the ETH 2.0 upgrade.
ETH 2.0 Staking
The stage 0 beacon chain of ETH 2.0 will run the POS protocol Casper as planned, setting the tone for the new consensus of the entire system. By staking a certain amount of ETH, users can become validators to participate in the operation and maintenance of the network, and obtain relatively stable staking income. The details that require special attention include:
1. Minimum pledge threshold: 32 ETH
Users pledge ETH to become a beacon chain verifier. The minimum threshold is 32 ETH, which is approximately US$19,200 at a price of US$600/ETH. The rights and status of each verifier are equal, and users must run two verification nodes to pledge 64 ETH, and so on.
2. Currently only one-way conversion, reverse operation is not supported
After the user pledges ETH on ETH 1 (PoW network) into the beacon chain, the user converts 1:1 to BETH, which cannot be reversely restored to ETH.
3. Phase 0 does not support withdrawals and transfers
Phase 0 does not support the transfer of accounts and assets. The verifier’s BETH will be locked at the protocol layer and cannot be withdrawn and transferred. If the verifier wants to withdraw the coin, it must wait until stage 2, that is, at least 2 to 3 years. This means that users sacrifice a lot of liquidity as a price.
From a profit-making perspective, ordinary users must consider the benefits and costs of staking before deciding whether to become a validator of ETH 2.0. To simplify, the formula for calculating the net income of the validator is as follows:
Net validator issuance
= Validator rewards + network transfer fees (-Costs to run validators) [Note: the stage 0 network does not support transfers, so the network transfer fees are zero by default]
In terms of influencing variables, the total ETH staked of the network (Total ETH staked), the average online rate of the network (Avg.Network Online), the online rate of validating nodes (Validator Uptime), the basic reward factor (Base Reward), and the validating node The operating mode (hardware/cloud) and the price of ETH will affect the final net yield.
Based on the basic reward factor=64 and the online rate of a verification node=98%, the annualized net return rate of the verifier has the following distribution. Among them, the hardware and cloud model takes into account the node operating cost, assuming that the price of ETH = $600. Based on the current total pledge of 1.31 million ETH, the annualized rate of return for validators is about 8% to 10%. Other conditions remain unchanged. In the future, as the number of pledges increases, the rate of return will decrease.
ETH 2.0 Phase 0 verification node annualized income
Source: ConsenSys Codefi Drawing: Cointelegraph Chinese
From a revenue perspective, compared to some DeFi projects, the staking yield of ETH 2.0 does not appear to be very attractive, and it also faces certain operational thresholds and liquidity costs. Talking about the core factors that drive market participation, Lu Guoning, co-founder and COO of Nervos Foundation, said:
“The Ethereum community has a group of very firm supporters, and these supporters are very willing to support Ethereum for a long time. In fact, there are many uncertainties in the development of Ethereum 2.0, and there are certain thresholds for participation. What is most needed is Competent supporters make a long term commitment. I think this is a very successful place in Ethereum, and it has cultivated a group of firm supporters. Secondly, some professional agency operating agencies have lowered the threshold for ordinary long-term investors. , To help long-term investors participate in Staking 2.0.”
Any opportunity brings benefits but also potential risks. In addition to the above-mentioned stage 0 that the author does not support reverse operations, transfers and withdrawals, Lu Guoning also pointed out about the risks:
“In ETH 2.0 staking, maintaining the availability of validator nodes and avoiding various non-subjective slash penalties due to the immaturity of early technology are all things that must be faced when participating in staking to become a validator.”
ETH 2.0 future outlook
The opening of the new era of ETH 2.0 has a profound impact on both Ethereum itself and the crypto market. From the perspective of technology upgrades, ETH 2.0 will hopefully improve the usability, sustainability, efficiency and security of the network. In this regard, Wang Dong, the founder and CEO of Loopring Protocol, expressed his expectations:
“Ethereum 2.0 will increase the throughput of Ethereum by about two orders of magnitude, but there are also new challenges to contracts that cross sharding. I think in the long run, the impact of sharding and PoS is far-reaching.”
In addition, the following potential changes cannot be ignored:
1) ETH value support logic: Over the years, the factors that stimulate the value of ETH have undergone some changes. From the early ICO drive to being the underlying asset of DeFi, to the future staking of ETH 2.0 and possible fee destruction, the value of ETH is constantly being enriched. The recent continuous increase in the number of pledges will directly reduce the supply of ETH in circulation.
2) Staking services and derivatives: The most direct business opportunities brought by ETH 2.0 staking may be staking-related service providers and derivatives. The high operational threshold faced by ordinary users in staking can be resolved by entrusting professional staking service providers, and the liquidity cost during the pledge period may be hedged or protected by derivative products.
3) Ethereum ecology: With the upgrade of the underlying network’s functions and efficiency, both decentralized applications and users will reap benefits. In the long run, the Ethereum ecosystem can get a healthier and positive development.
ETH 2.0 has kicked off, and what will actually happen in this new era is worth waiting for.
Cointelegraph Chinese is a blockchain news information platform. The information provided only represents the author’s personal views, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. If you need to reprint, please contact the relevant staff of Cointelegraph in Chinese.
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