Turn Your Head and Cough: A Routine Health Check on Eth 2
Eth 2
Eth 2 is the manifestation of the original Ethereum whitepaper combined with 4+ years of technical research and game theory design. It is designed, ultimately, for a simpler, more robust, stable, and secure base layer protocol with full lite client verifiability. After the full Eth 2 implementation is complete, the base layer can then “ossify” while leaving the flexibility for innovation on higher protocol levels like Layer 2. The Beacon Chain serves as the epicenter of Eth 2 architecture and has limited functionality beyond implementing Proof of Stake (PoS). PoS aims to lower the cost of participating in securing the network by allowing anyone with some ETH to stake rather than needing a giant million-dollar mining farm as is the case in most PoW networks. With PoS and staking rewards, ETH becomes a productive capital asset with yield as well as a utility coin used for sending transactions and executing smart contracts.
Ethereum 2.0 introduces Casper FFG (Friendly Finality Gadget) Proof of Stake Consensus, which has its own trade-offs, considerations, and risks including a minimum staking requirement of 32 ETH per validator, an indefinite lock-up period of staked ETH, downtime penalties, and slashing of funds if your validator attempts to defraud the blockchain.
The Eth 2 phase 0 slashing conditions dictate that a validator cannot forget past signed messages without a penalty. Essentially, validators cannot sign the same message twice but with different parameters (double voting) or try to change the transactional history by signing a message and “deleting” a previous one.
Beacon Chain
Key takeaways from the Phase 0 — Beacon Chain are:
- Introducing the ETH 2.0 Proof of Stake consensus layer
- Tracks ETH 2.0 validators and balances
- One-way ETH deposit to stake on the Beacon Chain
- No state management (transactions, smart contracts)
Phase 0, which introduces the Beacon Chain, is the center of Ethereum’s new consensus mechanism. As the focal point of the Ethereum 2.0 network, it is responsible for the liveness, veracity, and consensus on the new Eth 2 chain. Future sharded layers (shards) will all connect back to the Beacon Chain with many validators across all 64 shards. The Beacon Chain will provide the foundation for hundreds of thousands of validators, distributed across thousands of nodes globally. It will organize validators into committees and apply the consensus rules that dictate the network.
A slot is when a block is added to the Beacon chain. Every 12 seconds there is a slot and 32 slots (6.4 min) are grouped into an epoch. Casper FFG decides on which blocks become part of the chain, finalizing an epoch. Every epoch, one validator is pseudorandomly assigned by a random beacon to a slot and shard. At least one committee, a group of validators (minimum of 128) is also chosen to attest the epoch.
The other Eth 2 phases will look to implement the following:
Phase 1 — Introduce Shard Chains:
- Eth 2 sharding infrastructure which adds, stores, and retrieves shard data
- Validators will begin validating randomly selected shards as opposed to validating the full chain
- However, there will still be no actual state management (transactions, smart contracts)
Phase 1.5 — Migration of Eth1 to Eth 2
- Migration from Eth1 to a shard on Eth 2
- ETH 1.x will “roll into” and become an Eth 2 shard which will live on but PoW will be removed
Phase 2 — State Execution:
- Fully operational sharded Eth 2 chain with accounts, smart contracts, state across all shards
- Adds execution to the remaining Eth 2 shards
Staking on Eth 2
As of Tuesday, December 1st, 2020, the first step towards the multi-year Eth 2.0 implementation went live. Long-awaited Phase 0 finally launched and with it, the Beacon Chain and Ethereum’s new Proof of Stake (PoS) consensus layer. This marks an enormous milestone that has been on the roadmap from the early stages of the project in 2015. Phase 0 is the first of a three-part rollout of Eth 2.0 which is expected to officially conclude in 2022–23. Eth 2.0 already marks the largest, most decentralized PoS blockchain with over 70,000 validators with more staking options to become available in the coming months. The distribution of stakers by deposit amount (image below) also shows a nice distribution among stakers of all sizes (small to whale to institutional).
Notable entities that have been identified in the staking pool include Vitalik (6,976 ETH or 0.8%), Staked (104,224 ETH or 12.0%), Stake Fish (65,664 ETH or 7.6%), Cream Finance (16,000 ETH or 1.8%), Bitcoin Suisse (reported to deposit a total of 71,891 ETH), and CanETH (reported to deposit a total of 21,984 ETH).
Staking yields from ETH 2.0 began at ~25% and trends down as more validators participate. In these early stages, over $4B in ETH has already been deposited for staking and yields ~9.7%. With PoS, ETH becomes more institutionally friendly given it’s robust infrastructure.
Over $4B worth of ETH has now been staked.
Some stats on network progress:
- ETH deposited to deposit contract: 2,900,000+ (~2.7% of all ETH)
- Current staking yield: 9.7%
- Active validators: 75,801
- Pending validators: ~15,000
- Network participation rate: 99.2%
The daily average of rewards earned per validator dipped to 0.007235 ETH this month. However, due to the price increase of ether, the USD value of rewards earned on the network increased ~80% over the same time period. Ethereum’s price increase looks to be supported by a steady increase in active addresses.
ETH staking diversification/decentralization is critically important to the network security just like miners in PoW. If one group, company, or pool gains too much influence over the stake, it could create issues for the network. So far, ETH distribution is fairly evenly spread out among big holders (companies) and smaller validators (individuals). Several projects and services are rolling out staking solutions for holders with less than 32 ETH, which should help further decentralize the staking pool makeup. According to Etherscan, roughly 50% of all ETH deposits are coming from cryptocurrency exchanges and staking pools (image below). This suggests an equal split between individuals choosing to stake using their own hardware and users choosing to rely on a third-party service provider to stake. It will be important to monitor shifts in this distribution over time as too much ether in the hands of a small number of companies could lead to centralization issues.
- This content has been pulled from a much more comprehensive Fundamental Analysis report on Ethereum. If you are interested in learning about the other aspects of Ethereum technology, economics, security, Eth 2, etc., feel free to check it out here. *