Ethereum 2.0

Eth2 is a Proof of Stake blockchain that aims to be a more secure and scalable version of today’s Ethereum mainnet without sacrificing accessibility or decentralization.

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An Introduction to Eth2

Today, Ethereum is a Proof of Work blockchain that enables developers to build and deploy decentralized applications. With eth2, the protocol is transitioning to Proof of Stake and improving its scalability and decentralization without sacrificing security. The new protocol design allows Ethereum to remain accessible for regular users to run validators and secure the network. It is optimized for hundreds of thousands of validators with low startup costs and forgiving slashing and downtime penalties.

The eth2 research team has planned a phased transition that will allow all current users to shift to the new consensus mechanism without interruption. During the early phases of the transition, Ethereum 1.x and eth2 chains will run in parallel, with their own state and inflation; eventually, Ethereum 1.x will be merged into eth2.

How Eth2 Works

eth2 Timeline

Eth2 will have a Beacon Chain in Phase 0 and 64 shard chains in Phase 1. The Beacon Chain holds the shards together and enables consensus and cross-shard communication. It has a registry of validator addresses, the state and balance of each validator, attestations, and links to shards; it is the central controller of the eth2 system.

→ For more on the phased roll-out, read our guide to eth2.

Eth2 allows participation on the network for a broader set of token holders than most PoS chains. 32 ETH represents a relatively low staking requirement and low entry point for running a validator that earns rewards. Please note: there is no delegation or stake pooling at the protocol level.

  • Generate keys: To run an eth2 validator, two keys must be generated—the validator key and the withdrawal key. The withdrawal key is the custodial key where the ETH on the Beacon Chain will be withdrawn from in Phase 2. Please note: the withdrawal key should be secured and backed up as a cold key or stored in a hardware wallet or offline device.
  • Deposit ETH: After keys are generated, a token holder can deposit ETH into a smart contract on the Ethereum 1.X mainnet. This contract is unidirectional: the deposited tokens are inaccessible on the Ethereum 1.X chain and they are unlocked on the Eth2 chain as Beacon ETH. Processing this deposit takes a minimum of 7 hours, 1,024 blocks Ethereum 1.X blocks (~4 hours) + Epochs per Eth2 Voting Period (~3.4 hours). This delay protects against chain reorganization and double spends on Ethereum 1.X.
  • Index Assignment: An index is assigned once a validator is added to the list of validators on Eth2. The index is permanently tied to the validator entered into the deposit contract and cannot change from the time of the initial deposit until the validator exits and fully withdraws. The validator immediately joins the validator registry but is inactive.
  • Validator Activation: The validator becomes active after a minimum of 4 epochs (25.6 minutes) to ensure the RANDAO is not able to be manipulated. The period may exceed 4 epochs if many validators join at the same time. The validator entrance queue and the corresponding exit queue ensure stability of the validator set and that there are no issues with finality due to a lot of validators going offline simultaneously.

Only 900 validators can be activated a day (4 per epoch) until 327,680 active validators are in the network. Once that goal is achieved, 1125 validators a day (5 per epoch) can be activated in an epoch.

The number of validators that can be activated every day increases by 225 (an additional 1 per epoch) with every additional 64k validators. The same pattern applies to validator exits. This could result in congestion—a wait of a few hours or days—if validators attempt to join or leave the network simultaneously.

Validators earn three types of rewards for participating in consensus.

  1. Proposer rewards are earned by validators when they are randomly selected as a proposer and perform the duty of producing a block on chain. The proposer’s efforts are rewarded if they include a proof from a whistleblower that results in a validator being slashed and they include attestations from other validators.
  2. Attester rewards are earned by the validators selected to vote and agree with a decision on eth2. Attestations (votes) are the basis of consensus and are rewarded in five ways: (1) getting an attestation on-chain, (2) agreeing with other validators on the history of the chain, (3) agreeing with others about the head of the chain, (4) getting their attestation on-chain quickly, and (5) pointing to the correct block in the assigned shard.
  3. Whistleblower rewards are earned by a validator that provides proof on-chain that another validator has committed a slashable offense.

The inflation rate on eth2 decreases as the staking rate increases. Because so much depends on how many people lock up ETH to support the transition to eth2, it is difficult to clearly identify a rate of inflation and reward rate. Given the risks and opportunities apparent with eth2, we assume that:

  • In the short-term, there will be about 1 million ETH staked resulting in an inflation rate of .17% and a reward rate of 18.10%
  • In the medium-term, there will be about 10 million ETH staked resulting in an inflation rate of .54% and a reward rate of 5.72%

Rewards are designed to incentivize early validators starting at a 23% rate of reward at network launch. Anyone considering participating on eth2 benefits from running their validator as early as possible.

Rewards do not compound on eth2. They are earned based on the effective balance on the validator, which is capped at 32 BETH. As long as the validator is earning rewards and not being penalized, the true balance will start at 32 BETH and increase while the effective balance will remain consistent at 32 BETH. After Phase 2 is live, validators will be able to withdraw all their rewards, combine them, and run additional validators.

On eth2, validators can experience penalties and slashing. Penalties are significantly less severe than slashing.

Penalties act like negative rewards. If a well-performing validator can make a 10% reward rate in a year, a poorly-performing validator could lose 10% in the most extreme circumstances, such as being offline regularly or voting on blocks that do not get finalized. In most circumstances, the penalty for being offline is simply not earning rewards. If a validator is online greater than 53.6% of the time, assuming no inactivity leak, it will break even.

Slashing carries a heavy punishment for validators that commit a significant offense, burning a minimum 1 BETH and a maximum of the entire stake. The validator is automatically ejected from the Beacon Chain active set.

The two slashing conditions for validators are:

  • Double voting (double signing): when a validator votes for two different blocks during the same epoch, signalling support for two different versions of reality
  • Surround voting (double attesting): when a validator attests one version of reality—i.e. chain state—and later attests to another version without reconciliation

Emitting a slashable vote is uncommon for validators that correctly follow the protocol: forming a slashable message without malicious intent only occurs as a result of some bug or accident. Because these errors are bound to happen, eth2 minimizes the slashing amount by destroying stake in proportion to the number of validators slashed around the same time. However, if a large number of validators commit an offence at a similar time, a large amount of their stake is burnt (up to their full balance) because an attack is assumed. This is called correlated slashing. All slashed validators, whether due to a mistake or a malicious act, are forcibly exited from participating in the protocol and can not return until Phase 2.

For more on the risks associated with participating, read our eth2 guide.

    A Guide to eth2 by Bison TrailsNavigate to a Section:

  1. Introduction
  2. Phased Rollout
  3. Innovations
  4. Consensus
  5. How It Works
  6. Staking
  7. Rewards
  8. Exiting
  9. Economics
  10. Penalties and Slashing
  11. Bison Trails + Eth2
  12. Why Run a Validator

→ Read our in-depth guide to eth2.

Bison Trails + Eth2

To support eth2, Bison Trails will offer a suite of enterprise products including:

Because stake and rewards are locked up for several years on eth2, choosing an infrastructure provider you trust is an important consideration. It is risky to change providers because transfering a validator requires sharing the private key, risking slashing.

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Related Posts

Bison Trails Announces Support for Eth2

Jun 29 2020 / protocols

Bison Trails Announces Support for Eth2

As Ethereum transitions to eth2 & Proof of Stake, Bison Trails will offer a suite of products to interact with the Beacon Chain and enable network participants to easily add validators and scale their infrastructure automatically.


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