Today we’re covering eth2’s traction, the eth1<>eth2 merge, eth2’s first hard fork (Altair), and the changing dynamics of Ethereum economics.
eth2 is continuing to grow! There is now:
The activation queue has been empty for a little less than two weeks now, but don’t let that mislead you. First, just because it is empty does not mean that no new validators are being added. Since the last update we provided, when the queue was nearing zero, 10k new validators have been added (representing 320k ETH)—a growth of 10%.
Second, there is roughly 13k new ETH being created each day through PoW mining. On most days, 50-100% of that ETH is deposited into the eth2 chain, creating a liquidity vortex and showing huge continued demand for deploying ETH to earn staking rewards. Third, there are still several major players gearing up to offer eth2 staking, which will likely make the queue long again soon.
There are not one, but TWO, proposals to merge eth1 and eth2 early. There has long been a desire to bring about full PoS as soon as possible, but this movement was accelerated recently as PoW miners have threatened to perform a show of force in opposition to EIP-1559.
Mikhail Kalinin of PegaSys published the first proposal based on his research published in late 2020. This proposal works by “embedding eth1 data (transactions, state root, etc) into beacon blocks and obligating beacon proposers to produce executable eth1 data. This enshrines eth1 execution and validity as a first class citizen at the core of the consensus.” James Beck expertly expands on this proposal here.
Vitalik published the second proposal as a quick-and-dirty method to get the merge done on a short timeline with minimal modifications to eth1 and eth2 clients. The primary changes required to implement the proposal are for the eth1 clients to change their fork choice rule, establish a secure communication channel with a trusted beacon node, and disable certain PoW checks (such as the difficulty update formula checks).
One important bit to note is that these are not conflicting proposals. Vitalik’s minimum viable merge could be executed first, and a subsequent hard fork could make the interaction between the beacon chain and the application state more native (which is what Mikhail’s proposal achieves).
Eth2 devs have been planning for the first eth2 hard fork practically since the day eth2 launched! Danny Ryan just pushed Stargazer, the first pre-release for the first eth2 hard fork, called Altair. Altair has a a number of improvements, but its primary features are:
Let’s dive into each of these.
Protolambda, Hsiao-Wei Wang, and Danny Ryan published the minimal light client design spec, which states: “Ethereum 2.0 is designed to be light client friendly. This allows low-resource clients such as mobile phones to access Ethereum 2.0 with reasonable safety and liveness. It also facilitates the development of ‘bridges’ to external blockchains.” Sync committees are a crucial component of supporting light clients on eth2.
The eth2 incentive accounting previously stored “pending attestations” in state, to then do accounting at the epoch boundary against these complex objects. This will be reformed by Altair so that they store a bit field in state, per validator, that is updated when attestations come in (correct-head, correct-target, etc.), simplifying accounting and reducing spec complexity. One bit to note here is that this change does not meaningfully reduce the processing currently being done at epoch boundaries, so it will not help with the occasional drops in participation we are seeing today. However, other optimizations are being developed now to address that need.
On eth2 there is currently an accidental incentivization for validators to occasionally wait a long time to broadcast an attestation to ensure correctness. This delay is caused by the way in which timing and correctness of attestations are coupled. By slightly modifying the methodology by which attestation rewards are attributed, this rare, but bothersome, delay should be eliminated.
If the inactivity leak were triggered today all validators would be penalized proportionally based on their uptime. As an example, if a validator was offline 100% of the time and lost 40% of their balance, a “good” validator with a 90% uptime would lose 4% of their balance. This is troublesome because eth2 is supposed to be very forgiving to honest, but imperfectly-run, validators (e.g., those run at home by enthusiasts).
This change will make the inactivity leak quadratic per validator. So, coming back to our previous example, a fully offline validator would still receive the maximum penalty of 40%, but a validator with a 90% uptime score would lose .4% of their balance instead of 4%. You can learn more about this feature here.
Eth2 launched with reduced slashing parameters to protect stakers in the early days of the network:
This change will roughly double the parameters from their current values, bring those values closer to their original specifications, and significantly increasing the slashing and penalty parameters for future offences. Thankfully, there hasn’t been a slashing in almost 6 weeks, after the slate we saw in the first few months of network operations.
There are fairly dramatic changes coming to Ethereum’s economics, with EIP-1559 and the eth1<>eth2 merge (that not enough folks are talking about). Cumulative Ethereum transaction fees for 2020 were $276m, nearly doubling Bitcoin’s at $146m. In 2021, usage of Ethereum has exploded, with daily fees reaching a high of $50m (⅓ of the entire previous year!) and are currently averaging about $25m per day.
If we assume that better fee estimation and a burning of the BASEFEE (see EIP) reduces transaction costs by 50% to $12.5m per day, a total of $4.6bn in transaction fee revenue will go to miners per year. However, the eth1<>eth2 merge changes that dynamic, as those fees will now go to validators instead. The impact of this change cannot be overstated.
Eth2 PoS validators have skin in the game as they are ETH token holders. This means that any transaction fees generated post-merge will go straight to the Ethereum community. Additionally, PoS validation costs are significantly cheaper than PoW mining, which will also decrease the mandatory selling pressure in PoW to cover costs like electricity and replacement hardware.
Lastly, the (relatively) low bar of 32 ETH per validator, and forgiving uptime requirements, means that being a validator is accessible to many people, while those with less ETH or minimal technical acumen can still participate by using services like RocketPool or an exchange like Coinbase.
The current reward rate on eth2 is about 8.25% annually. If $4.6bn in tx fees start accruing to the $6.4bn in currently staked ETH, it may push the reward rate to about 80%, which may act as an incentive for many more folks to begin staking on eth2, drastically increasing its security properties.
Additionally, deriving the vast majority of its security from transaction fees will put Ethereum in a truly special position amongst blockchains. The long term vision for most blockchains is to have transaction fees, not inflation, provide the economic incentive to keep the chain secure. Even Bitcoin, the oldest and most secure protocol, still has questions about whether transaction fees alone will be able to provide the required security when block rewards subside.
With the coming merge Ethereum will become the first protocol (of any consensus variety) to be kept definitively secure by transaction fees alone, as they will comprise the overwhelming majority of rewards keeping the network secure.
Enterprise participants in the Bison Trails eth2 Pioneer Program have early access to Bison Trails’ suite of eth2 products, including:
It’s not too late to be an eth2 Pioneer! Contact us to learn more about the eth2 Pioneer Program. We want you to have access to build on the Beacon Chain!
For custodial staking, use Coinbase's eth2 retail staking solution powered by Bison Trails.
—Viktor Bunin, Protocol Specialist
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