Updated: Jan 20
On December 1, 2020, the Ethereum foundation opened its network's ability to move from mining to staking. Eth2 is one solution to the issue of scaling while at the same time becoming more decentralized. Understanding the limitations of BTC's blockchain, Eth2 seeks to secure the network and limit the need to specialty hardware such as ASICs and GPUs. Early on in the development of ETH, ASIC resistance was built into the coding to lower the mining barrier.
It's important to understand that ETH (eth1) and Eth2 are not two separate entities. On the contrary, they are layers of the same thing! Let's consider ETH as a brick-and-mortar business; eth1 is the customer service or the user interface. Eth2 are the persons coordinating in the back. Both eth1 and eth2 are expected to run concurrently until eth1 eventually docks into the software of eth2 in the year 2022. All decentralized applications will continue working as the gears of the mechanism are changed.
ETH secures hundreds of billions of value in the form of currency and user activity. While being a decentralized organization, ETH has the element of conservatism and shrewdness needed for business operations.
Yes, we are still talking about cryptocurrency.
This was the vision of trust being encoded and institutions becoming for the public good rather than the restricted domain of private interests.
When trust is given to crypto projects, it can be broken easily, as seen with many exit scams. Therefore to avoid a split in the network community, consensus is being sought on eth2 in real-time. If you have technical know-how in coding, game theory, and other related topics, any input you provide will be used in improving the overall ETH network.
Because of the open nature of the network, global demand will always outstrip supply. The move to staking is aimed at helping keep up the supply. But we're seeing worldwide adoption before the one breakthrough user product in addition to the intrinsic store of value.
Moving into the support network, staking changes the discussion as both the hardware supplier and the energy sectors are impacted. Unlike BTC, ETH has now become more efficient as a protocol. The price discovery can no longer be considered in terms of hashes. More importantly, network security is no longer measured by voluntary machine work. Instead, pools with the most ETH available balances become the transaction gatekeepers.
The beacon node
Just as the internet relies on three layers to give us connectivity, eth2 has a primary backbone on which the second layer is built. The beacon node has the following responsibilities to the chain:
⦁ It connects with the genesis block; then it runs and maintains the random beacon chain.
⦁ Peer-to-peer nodes are then synced with this beacon chain.
⦁ Validation of the latest version of the chain via block attestations.
⦁ There is a difference between the beacon node and the validator client. The beacon chain helps to enforce slashing rules for validator clients.
The equivalent of the miner found in eth1 is the validator clients for eth2. The move to staking separated roles means that the validators feed into a static beacon node. The role of the validators are:
⦁ Proposing new blocks on assigned shards.
⦁ Attesting to other blocks validated by other validator clients.
⦁ Attestations can be either singular or aggregated. Validator clients aggregate attestations and broadcast this information to the beacon chains.
⦁ Validators finalizing the blockchain.
The requirements for the node and clients are different. For example, to validate, you will need the following:
32 ETH to secure your right to validate. This is a one-way transaction. Once the 32 eth1 are sent, the validator is given an exchange of BETH on a 1:1 basis. Systems as simple as the Raspberry Pi can be used for validators.
Expected returns from being validator changes dynamically with the amount of eth1 being staked. The image below shows the distribution. The current rate is ~9.1%. At 10M eth1, the rate flatlines to 5% annually.
Slashing and Other Punishments
Digital asset protocols, at least the ones that have become a part of the substrate of crypto-development, all have an incentive system. It is important to understand human behavior find ways to reward good behaviors, and punish the bad in the code. For eth2, punishments come in the form of slashing. Recalling the 32 eth1 being used to validate, the reason for this stake is to punish those who either:
⦁ Attest to incorrect data in the blocks.
⦁ Try to run multiple validators from the same private key.
⦁ Go offline especially when the volume is at a peak.
Slashings can be as little as only the returns from staking during the period, or the entire staked amount. The slashings can also occur on a network-wide basis and be distributed accordingly, or a single validator can be punished for slashable behavior.
It is also vital to know that enough slashing will result in both a stake loss and being blocked from participating in the network at that time. If your stake is lost, that also means your right to be a validator client is lost.
To requalify as a validator, a new stake of 32 eth1 will be required to re-enter the pool.
Network effect and pool staking
The economy of the 22nd century will be based on digital networks operating at scale. The early evidence of this is seen in the current tech giants that have used millions of data points to create industry-wide disruptions. Facebook, Amazon, Alibaba, Google are all examples of networks that have done this. They've all gone on to become multi-billion dollar behemoths because of the sheer size of their user base.
The network effect of being a first mover and staker with eth2 is that as more persons use the network, the more valuable your stake becomes. For example, on December 1, 2020, the cost to stake was less than $24,000. Now that same stake costs more than $55,000. Why? The network effect is compounded as more persons jump into the ETH network.
The last set of upgrades for ETH was 2-3 years late. Such is the nature of developing a network. Since the current state of development is being impacted by the current bull cycle, delays are to be expected during that time. Eth1 mining can be executed and the rewards gathered there can be used to become a staker by 2022-2023.
By then, more of the bugs will have been worked out and the network will be ready for large-scale deployment of the eth2 network.