1. The Ethereum merger is to prepare for sharding, followed by a more friendly environment, higher security and decentralization.
2. The complexity of the mainnet merger is far greater than that of the testnet. We are pessimistic about whether the merger can be completed as scheduled on September 19.
3. After the merger is completed, ETH production will be reduced by 90%, the ETH released by pledge cannot cover the gas burning, and Ethereum is very likely to enter the era of deflation.
4. Compliance will be the sword of Damocles for the PoS Ethereum network.
5. In the short term, the merger of Ethereum will bring development dividends to the staking track. In the long run, the development of STaaS mainly depends on the ecological prosperity of the public chain and the innovation of the track itself.
The Merge is just around the corner.
According to the developer conference call, according to the developer conference call, among the three testnets, Ropsten and Sepolia have been successfully merged, and the merger of the last testnet, Goerli, is expected to take place in the second week of August. The Bellatrix update will be deployed in early September. Then there’s a 2-week merge deployment. If all goes well, the mainnet merger is expected to take place around September 19.
The merger is the most important upgrade in Ethereum history. As the largest and most complex blockchain in the ecosystem, it will complete the conversion of the consensus mechanism from PoW to PoS for the first time. This should be unprecedented in the history of blockchain. If successful, the Ethereum merger will provide an important paradigm for other blockchains.
By Ethereum merger we mean the merger of the Ethereum mainnet and the Beacon Chain. The entire Ethereum network will inherit the transaction status of the original main network, and the beacon chain will be incorporated as a consensus layer. The most intuitive change after the merger is that the consensus mechanism of Ethereum has changed from PoW to PoS.
Before the merger was a PoW (Proof of Work) mechanism. Nodes calculate violently, compete for the right to produce blocks, and gain profits. In this process, in order to ensure network security, a high proportion of nodes need to store all (or most) data, and each node must participate in transaction verification. Nodes are treated indiscriminately, and all transactions are treated indiscriminately.
After the merger is a PoS (Proof of Stake) mechanism. Block producing nodes (Proposer, Proposer) and validating nodes (Validation Committee, Committee) are randomly selected. After the next stage of merging, “data sharding” is realized, and different nodes can only store part of the data, and the verification is only carried out by the selected Committee.
This actually lowers the node threshold and also reduces the data storage pressure on Ethereum (it is not necessary to permanently store all data), and it is expanded by optimizing the operating rules of the main network. It should be noted that PoS does not bring expansion, and expansion depends on the implementation of sharding.
Prepare for sharding
The Ethereum network transitioned to PoS in preparation for sharding. Actually the combination of PoS and sharding is recognized in official documents. “The Beacon Chain (PoS) will handle/coordinate the sharding and staker network,” reads the Ethereum official website.
The author believes that the ultimate goal of the merger is to expand, and the expansion must be achieved through sharding + Rollup. For sharding, the Ethereum network needs to be converted into PoS first, because PoS and sharding are more logically consistent. PoW considers globality, while PoS and sharding both use the element of “random number”, and they both pursue “minimum sufficiency and necessity” to reduce storage/verification redundancy.
The second is a more friendly environment, which is praised by everyone, and a higher degree of security and decentralization.
PoS is more environmentally friendly
PoW network block generation is a competition for computing power, which puts higher and higher requirements on machines and electricity. Take Bitcoin, the most typical PoW network, as an example. According to previous data from Cambridge University, the annual power consumption of the Bitcoin network is about 121.36 billion kWh, which exceeds the annual power consumption of Argentina, the Netherlands, and the United Arab Emirates.
Although Ethereum consumes far less electricity than Bitcoin, as a representative of an emerging technology field, it is also seeking to become more environmentally friendly.
It is understood that after the merger, the power consumption of the Ethereum network will be reduced by more than 99%. 100,000 Visa transactions consume about 149 kWh, compared to 0.667 kWh for 100,000 transactions on the combined PoS Ethereum network.
Compare power consumption to height, data and pictures are quoted from: overseas unicorns
Security and Decentralization
As for network security and decentralization, Vitalik has discussed why he believes PoS has advantages over PoW.
Overall, the participation threshold for PoS nodes is lower. The competition between Bitcoin PoW nodes has “evolved” to ASIC. In addition to funds, there are also barriers to machine construction and operation and maintenance, and ordinary people cannot participate.
A PoS network cannot deny anyone to be a node (or part of a node). Although 32 ETH now means a high capital threshold of around $45,000, more and more service providers support small ETH pledges, and PoS has a lower threshold for machines and operations.
In addition, according to some data given by Vitalik, the attack cost of PoS network is higher than that of PoW network. PoS is also more resilient than PoW networks after being attacked. (will be introduced later)
On the widely controversial issue of PoS making the rich richer, because PoS supports a wider group of participants, the node’s pledge + Gas income will be shared (equivalent to slowing down the growth of giant whale wealth with the advantage of the number of small nodes). Vitalik believes that after Ethereum is converted to PoS, it may take a century for the doubling of wealth concentration. During this process, the redistribution of ETH, such as consumption and charitable donations, will also slow down the trend of wealth concentration.
At present, the security and decentralization of PoW and PoS have not yet been determined.
The beacon chain before and after the merger
Based on the above reasons, Ethereum has determined the future development path of sharding + Rollups + PoS.
As the first step in the development path, the merger of the beacon chain and the current Ethereum mainnet has been put on the agenda. The merger is expected to take place around September 19.
Before the merger
Just like the space station (Ethereum mainnet) is going to add a new module (beacon chain), the spacecraft (beacon chain) must be prepared for docking (merging) in advance, and the preparation of the beacon chain will start at least on December 1, 2020 .
On December 1, 2020, Ethereum launched the Beacon Chain. Since its launch, the Beacon Chain has been running in parallel with the Ethereum main network and independent of each other.
The Beacon Chain is a PoS chain in which the Proposers responsible for producing blocks and the Committee for validating transactions are randomly selected from the validators who staked ETH.
So from the first day of launch, the beacon chain has supported the ETH pledge/storage function. By staking 32 or more ETH, you can become a validator and get pledge interest. At present, the deposit of ETH is still a one-way process, and the withdrawal of ETH and interest will wait until the merged Shanghai upgrade.
At present, the beacon chain has no other functions except staking ETH, randomly selecting nodes to produce blocks and verifying, rewarding and punishing nodes, and maintaining the normal operation of the network. At present, it does not support accounts and smart contracts.
In contrast, the current Ethereum mainnet is a PoW chain carrying thousands of applications, hundreds of billions of dollars in on-chain funds, and three functions of consensus, data availability, and transaction execution at the same time.
After the merger
When the beacon chain is merged into the Ethereum main network, the PoW consensus layer of Ethereum will be replaced by the beacon chain (PoS), and the transaction status will be inherited from the original Ethereum main network.
Source: Danny Ryan
The beacon chain will coordinate the pledge network, similar to a central ledger, record the list of verifiers, reward and punish the verifiers. After the merger, the beacon chain will become an integral part of Ethereum, and it should also undertake transaction execution and data at the same time. Available responsibilities. After sharding is implemented, the beacon chain will also coordinate the sharding network.
From the current planning point of view, the future development path of Ethereum is to improve the performance of the main network by optimizing the main network consensus (PoS) and optimizing the data storage/verification efficiency. Rollup extension.
Therefore, the whole process can be seen as a transition to Rollup to undertake the Ethereum transaction execution layer, and Ethereum Layer 1 as a more efficient data effective layer and consensus layer. Future development does not rule out this situation: Ethereum Layer 1 takes a backseat, Rollup becomes a highly scalable machine for transaction execution, and Ethereum Layer 1 provides guarantees for Rollup data validity and consensus.
In order to push the consensus mechanism from PoW to PoS, Ethereum also set up a “difficulty bomb”. The “difficulty bomb” will increase the PoW calculation difficulty index, thereby persuading miners to repel and ensuring that Ethereum becomes a “pure” PoS chain after the merger. For the miner group, some people have predicted the possibility of Ethereum fork.
The merger of Ethereum needs to be implemented by code changes. Although the merger is based on the principle of “minimal disruption”, the process must be cautious because of the large number of applications and funds involved. Node and DApp developers can follow the tips at https://ethereum.org/en/upgrades/merge/.
Before the mainnet merge, Ethereum conducted merge tests on Kiln, Ropsten, Sepoli, and Goerli testnets respectively. At present, Kiln, Ropsten, and Sepoli have successfully transitioned to PoS. The Goerli merger is expected to take place on August 11.
Since Goerli is the closest testnet to the Ethereum mainnet, the Goerli merge test is important. Before this, shadow fork tests will be conducted on Goerli and the mainnet respectively. Shadow forks are trial runs of merges, and previous shadow forks were not without problems.
Also consider that a testnet merger is not a true Ethereum mainnet merger. There are thousands of nodes, more than 550,000 token smart contracts, and tens of thousands of DeFi and NFT applications running on the Ethereum mainnet. In contrast, the applications and funds in the testnet are much lighter. The integration of the Ethereum mainnet The complexity far exceeds the testnet.
Plus the Ethereum merger has already experienced multiple delays. Jiang Zhuoer also said that there are still a large number of applications that have not yet begun to test the merger. Therefore, we are not optimistic about the merger on September 19 as scheduled.
In terms of the beacon chain, the number of validators currently exceeds 410,000, and the number of ETH pledges exceeds 13.1 million, accounting for about 11% of the total supply. Since its launch, the beacon chain has been running stably, and the beacon chain is ready for the merger.
Status of the beacon chain, source: beaconcha.in
Comparison of 5 dimensions of data before and after the merger
Before and after the merger, there will be some changes in the Ethereum network. Beep News will compare and explain the five dimensions of decentralization, security, node income, token supply, and compliance risk.
degree of decentralization
Before the merger, the number of Ethereum active nodes remained in the thousands, with a peak of 12,569 (currently active nodes are at a low of hundreds). These nodes are distributed all over the world. Whether in terms of quantity or geographical distribution, the degree of decentralization of the Ethereum network of PoW is already high.
Ethereum PoW node distribution, source: etherscan.io/nodetracker
In contrast, there are more beacon chain validators who will take over PoW in the future. There are currently more than 410,000 Beacon Chain validators (clients who pledge 32 ETH).
It should be noted that the nodes in the PoW network are different in size, and different nodes have different computing power levels, and each validator in the beacon chain has pledged 32 ETH behind it, with the same share and no difference. There may be situations where a large number of validators are controlled by the same whale. Therefore, the comparison from the number of nodes alone cannot fully explain the problem.
When we compare the degree of decentralization, we should also consider the participation threshold of the network. Although the competition of Ethereum PoW is still mainly at the GPU stage, the threshold for participation is expected to be lowered after the merger.
In the PoW era, to participate in the Ethereum network, you need a special machine, and the machine cost is not low, and the machine is still undergoing continuous iteration. In the PoS era, the requirements of the Ethereum network for machines, machine operation and maintenance have been reduced. Users can also directly participate in the pledge with a small amount of ETH through the pledge service provider, which can further eliminate the trouble of machine configuration and operation and maintenance.
Therefore, the participation group supported by Ethereum after the merger will be wider than PoW, and you can participate as long as you have ETH.
PoS may bring about wealth concentration issues, which is a big reason why many people are skeptical about the Ethereum merger. In fact, no system can prevent the concentration of resources and wealth.
Considering that Ethereum has a wider group of participants, and the pledged tokens can be recovered with interest, participants are more willing to invest in pledges than machine depreciation and elimination. The number of “small nodes” and continuous participation can slow down the growth rate of the giant whale’s wealth. Vitalik believes that doubling the concentration of wealth on the Ethereum network could take a century.
But it is undeniable that the PoS Ethereum network does not have a threshold for giant whales, and their wealth advantages will be maximized.
In terms of security, Vitalik has published a document arguing that the merged Ethereum network is more secure. The argument is explained in terms of attack cost and recovery difficulty after attack.
1) Attack cost
Assuming the network has a block reward of $1 per day, what is the cost of attacking this network?
GPU-based PoW network
You can rent cheap GPUs, so the cost of attacking the network is simply renting enough GPU power to outpace existing miners. For every $1 block reward generated, the cost of existing miners will be close to $1 (if the cost is higher than $1, miners will quit as unprofitable, otherwise new miners will join). Therefore, the cost of attacking the network only needs to be higher than $1/day, and it may only take a few hours.
Total attack cost: ~$0.26 (assuming a 6-hour attack, the attack cost is >$1/24*6), and since the attacker can receive block rewards, this number may be reduced to zero.
ASIC-based PoW network
ASICs are really a cost of capital: when you buy an ASIC, you expect it to last about two years as it wears out or is replaced by better performing hardware. If a chain is 51% attacked, the community may change the PoW algorithm to respond, and your ASIC will lose its value. On average, PoW nodes cost about 1/3 the recurring cost and 2/3 the capital cost.
Therefore, for every $1 block reward, PoW nodes will spend ~$0.33 per day on power and maintenance and ~$0.67 on ASICs. Assuming ASICs last about 2 years, miners would need to spend $486.67 per unit of ASIC hardware. ($486.67= 365 days x 2 x $0.67)
Total Attack Cost: $486.67 (ASIC) + $0.08 (Power & Maintenance, 0.33/24*6) = $486.75
The cost of Proof of Stake is almost 100% of the cost of capital (the staked coins). The only operational cost is the cost of running the node. Unlike ASIC, the pledged coins will not depreciate in value, and you can get back the pledged deposit within a short period of time when you do not want to pledge. Therefore, participants should be willing to pay a higher capital cost than in the case of ASIC for the same level of reward.
Let’s assume ~15% staking rate is enough to attract people to staking (this is the expected APR after ETH merge). So a block reward of $1 per day would attract the equivalent of 6.667 years of funding ($1 / (15%/year) in collateral, which translates to an amount of $2,433 ($1/day x 365 x 6.667).
The hardware and power costs consumed by nodes are very small. Thousands of assets can be mortgaged for every thousand yuan of computers, and the monthly electricity and network fees of ~$100 are enough. But conservatively, we assume these recurring costs are ~10% of the total cost of staking. So we only have a block reward of $0.90 per day corresponding to the cost of capital, so we have to reduce the above number by ~10%.
Total attack cost: 90% * $2,433 (capital cost) + $0.10/24*6 (electricity) = $2,189
The author adds: To achieve an attack in a PoW network, it is necessary to satisfy >50% of the computing power. In the PoS network after the merger of Ethereum, according to some analysis, 1/3 of the pledge share is a relatively important security threshold. In this case, 0.26/2 < 486.75/2 < 2189/3.
From the calculation results, the attack cost of the PoS Ethereum network is higher than that of the PoW Ethereum network. This antifragility comes from the market’s confidence in Ethereum (which is unlikely to become worthless).
Compared with the depreciation and elimination of machines, the pledged coins will not be depleted, but will generate interest, especially when the pledged assets are expected to appreciate. This incentivizes more regular users to participate. The more decentralized the market is, the more funds are pledged, and the more expensive it is to leverage the Ethereum network.
2) Easier to recover from an attack
In terms of attack recovery, Vitalik believes that the resilience of PoS networks is stronger than that of PoW networks.
For the PoW network maintained by GPU, once it is breached, the network has almost no resistance and recovery ability.
For ASIC-maintained PoW networks, the community can respond to the first wave of attacks by changing the PoW algorithm through hard forks. But at the same time, all machines (including the ASICs of attackers and honest nodes) will be rendered worthless. Because there is not enough time to create new ASICs for new algorithms, the attack and resistance situation will return to the GPU situation (author’s note: Since the attacker and the honest node return to the same starting line, the situation will be better than the attacker in the prepared situation It is better to attack the GPU network below). An attacker can attack and attack again, rendering the network unrecoverable.
In contrast, in the PoS network, for some 51% attacks (especially those that want to overturn the finalized block), the PoS network has a built-in slashing mechanism, and the attacker will attack at the same time. hit hard. For more difficult-to-detect attacks (specifically, those in which 51% conspire to intercept someone else’s information), there are also ways to weaken the attacker. However, as mentioned above, ensuring that the attacker’s stake is less than 1/3 is an important security threshold.
ETH supply and node income
The most exciting narrative in the market right now for the Ethereum merger is “cutting production.” After the merger, the output of ETH will be reduced; EIP-1559 will burn the Base Gas fee; users are encouraged to pledge ETH, which reduces the circulation of ETH. These factors have a relatively large possibility to make Ethereum enter the era of deflation.
The inflation/deflation of ETH depends on two factors, namely the annual output of ETH (new increment) and the annual burning amount of ETH as Base Gas (burning amount).
The output of ETH comes from two parts, namely the block reward and the staking reward of ETH on the beacon chain. Before the merger, the block reward is owned by the miners, with an average output of 2.08 ETH every 13.3 seconds, so the block reward in one year is about 4.93 million ETH. After the merger, the block reward will be cancelled.
As for ETH pledge rewards, a total of about 13 million ETHs are currently pledged, and about 584,000 ETHs are released as pledge rewards in one year. Before and after the merger, staking rewards are distributed to validators on the beacon chain.
Staking reward depends on total staking amount and APR, APR gradually decreases Source: Ultrasound.money
Now the total supply of ETH is 119.7 million, so before the merger, the annual output of Ethereum accounted for (493+58.4)/11970=4.6% of the total supply. After the merger, this data becomes 58.4/11970=0.49%. The merger resulted in an 89.4% reduction in ETH production.
In terms of ETH destruction, according to Watchtheburn.com data, the base gas fee for daily destruction continues to fluctuate. In less than a year since EIP-1559 took effect (September 27, 2021), more than 2.55 million ETH have been destroyed.
2.55 million ETH > 584,000 ETH, it can be seen that after the merger, unless the amount of ETH pledged increases sharply, the ETH reward released by the pledge is far from enough to cover the gas burning and burning. Ethereum is very likely to enter the era of deflation after the merger.
Coupled with the pledge incentive (some people have already called ETH “on-chain treasury bonds”, because the income is stable and users are willing to participate, 11% of the ETH has been pledged to the beacon chain), the market circulation of ETH should be relatively low. Low levels, these are price boosters.
But at the same time, the author also believes that for an “applied currency”, the deflationary model is not sustainable in the long run because it is not enough to meet the slowly growing usage demand. (Not as investment advice)
Base Gas burning, average daily burning >3000 ETH, source: watchtheburn.com
Source: Beep News
ETH supply curve simulation source: Ultrasound.money
Before and after the merger, due to the adjustment of ETH release and distribution, validators will take over part of the original miners’ income, and the annual rate of return of validators will increase from 4.6% to 9.2%.
Ethereum is the closest virtual asset to the concept of a “commodity” after Bitcoin, but a merger could change that image. Heath P. Tarbert, the former chairman of the CFTC, once hinted that “on the blockchain with PoS as the consensus mechanism, those tokens used as collateral will likely be regarded as securities commodities”.
Stake.fish also analyzed in the “2021 Staking Ecosystem Report” that “since staking looks like fixed income in a sense, this may lead regulators to believe that validators are closer to financial entities than miners. If this happens In this case, then the validator will have no way to remain compliant.”
So overall, the merger is likely to bring optimizations to Ethereum in terms of decentralization, security, node revenue, and ETH supply, but compliance is the potential sword of Damocles.
Staking becomes a new bonus track
With the countdown to the Ethereum merger, the staking track has gained unprecedented attention.
There are three problems in directly staking ETH. First, the amount threshold must reach 32 ETH or more. Second, the pledge deposit and interest cannot be withdrawn immediately, resulting in a high opportunity cost. Third, there is a node operation threshold. Staking as a Service (STaaS) is the link between ordinary users and the beacon chain, so that ordinary users can also participate.
STaaS solves the above three core problems: capital threshold, capital liquidity, and node operation. STaaS pools user funds and joins the network as an operator for every 32 ETH collected.
When STaaS receives user funds, it issues a corresponding amount of xETH derivatives to users as certificates for ETH redemption and interest-earning. These xETHs can be circulated in the secondary market, thereby releasing the liquidity of users’ “deposits” and reducing opportunity costs. down to 0. xETH can also participate in DeFi Lego to improve capital efficiency.
Some STaaS runs their own nodes, while others match the user’s ETH pledge requirements with the node operator’s node operation capabilities, so that ordinary users can save the trouble of node configuration, operation and maintenance.
Source: Beep News
Overall, the market head effect is obvious.
From the perspective of the number of users and the amount of ETH staked, Lido is the absolute leader. CEXs such as Kraken and Binance also occupy a lot of shares because they are closest to users and are easy to operate. Followed by professional staking service providers like Stakefish and Figment. In terms of decentralized staking liquidity pools, Rocket Pool’s data is also ahead.
Due to the serious homogeneity of operations and functions, the competition among STaaS is fierce. Most of these platforms lower the capital threshold to 0.1 ETH (some even have no capital limit), and the corresponding service fee ratio is basically stable at 10-15%. On these platforms, the user’s operation is similar.
Lido became the head mainly due to two points, one is the brand effect, and the other is the trading depth of the derivative stETH. DeFi applications such as Lido and Curve have developed deep relationships. The ETH/stETH pool on Curve now has $1.2 billion in liquidity, providing ample trading depth for users to trade stETH.
But these can’t serve as an absolute moat for Lido. For example, stETH has experienced price de-anchoring in the recent black swan event. Lido has also been questioned as a centralization risk for Ethereum. At present, no STaaS has an absolute differentiation advantage. Users can still abandon one STaaS and choose another, with little resistance.
From the perspective of fundamental needs, the competition among STaaS will focus on comprehensive dimensions such as user experience (operation convenience), capital threshold, service charges, decentralization (security), and xETH transaction depth.
Source: Guosheng Securities
In the short term, the Ethereum merger event brings development dividends to the staking circuit. In the long run, the main reason for the development of STaaS is the ecological prosperity of the public chain and the innovation of the track itself.
The innovation of the track itself may come from two aspects, one is xETH derivatives, which will contain both de-anchoring risk and DeFi combinable potential; the other is the innovation of STaaS mechanism.
Rocket Pool and SSVNetwork are STaaS that Bibi News has seen relatively innovative mechanisms.
The Rocket Pool platform provides services by “matching” node operators and users. Unlike Lido, which screens node operators through a DAO, any node operator can create a mini-pool on Rocket Pool.
They only need to stake 16 ETH and the platform token RPL worth 1.6 ETH. The remaining 16 ETH will be “collected” from the client by Rocket Pool. When the node has slashing, the ETH of the node operator will be deducted first. RPL will be sold for ETH to supplement the node operator’s ETH.
For each node operator, their aggregated user funds are capped at 16 ETH. Although this brings scalability limitations, it can bring a good decentralization effect.
SSV Network adopts Decentralized Validator Technology (DVT). User pledge involves two types of private keys, namely the withdrawal private key and the verifier’s signature private key. The verifier’s signature private key needs to be signed continuously. Offline or malicious behavior will result in fines, so when the user entrusts the node operator or the mobile When the sex service provider pledges ETH, it needs to give the verifier’s signature private key to the other party.
Through DVT, users can encrypt the verifier’s signature private key and divide it into multiple copies, which are distributed to different node operators. In this case, when a small number of node operators are offline or have malicious behavior, the entire verification result will not be affected, and ETH will not be confiscated. This will also lead to a more decentralized Ethereum network. This idea can also be applied to other PoS networks with Slashing mechanism.
“Ethereum founder Vitalik explained: POS security is better than POW three key factors” by ChainDD
What potential centralization risks will Ethereum face after the merger? 》by TJ Keel
“Ethereum to PoS is imminent: In-depth analysis of the Staking track and representative projects” by Mint Ventures
“The Great Transformation of the Blockchain Industry – The Merger of Ethereum, Starting from the Price Fall of Graphics Cards” by Guosheng Securities
Note: This article is not intended as investment advice
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/analyze-the-changes-before-and-after-the-merger-of-ethereum-from-the-five-dimensional-data/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.