The recent ETH Shanghai Summit was successfully held. As the time of “The Merage” is getting closer, the Ethereum merger has once again attracted people’s attention. At the ETH Shanghai Summit, Buterin advocated to downplay the concept of ETH 2.0, but should pay more attention to specific technologies such as PoS. Starting from the upcoming merger, this article comprehensively sorts out the opportunities and challenges of this upgrade of ETH.
The main points of this paper are as follows:
1. The specific merger time has not yet been determined. The ETH merger is not a new ETH, but PoW’s ETH turns to PoS’s ETH. After the merger, Ethereum will use at least about 99.95% of the energy, but it will not affect ordinary users. big.
2. The merged ETH and Layer 2 complement each other, and Layer 2 will also play an important role in the development of ETH in the future. At present, the four major projects of Layer2 that deserve attention are Optimism, Arbitrum, zksync, and StarkWare.
3. Ordinary investors have a variety of ways to participate in the ETH upgrade process. Such as holding ETH for a long time, participating in the PoS pledge of ETH, participating in the interaction of key projects such as Layer2, etc.
The following is a detailed explanation of the full text, Enjoy:
1. Three stages of ETH merger and upgrade
The upgrade of ETH from the consensus layer to the execution layer is mainly divided into three stages, namely beacon chain, merger, and sharding. Currently, the second stage – the merger stage, will be ushered in. After the merger, ETH will switch from PoW mechanism to PoS mechanism. Layer 2 and ETH upgrades complement each other, and Layer 2 is an area worth looking forward to in the future.
1. Three stages of ETH merger and upgrade
1.1 Beacon Chain
ETH was launched in several stages from the execution layer to the consensus layer. The first upgrade, called the beacon chain, was launched on December 1, 2020. The Beacon Chain introduces native staking into the Ethereum blockchain, a key feature of the network’s transition to a PoS consensus mechanism, and the Beacon Chain is a separate blockchain from the Ethereum mainnet.
1.2 Merge (currently in the upcoming merge phase)
The second stage is called “merging”, and it is also the key stage that everyone is most concerned about at present.
At present, several shadow forks of ETH upgrade have been successfully tested, and the specific time of the merge is to be determined. The timing of the difficulty bomb is determined by the Ethereum development community based on the actual progress of the merger, when the beacon chain will be merged with the Ethereum mainnet.
Source ： wenmerge
After the merged ETH is converted to PoS, the process will become more environmentally friendly, and the price of the graphics card will return to normal. At the same time, the security cost of ETH will be reduced, and the entire ETH will become more sustainable due to the optimization of the mechanism.
The final stage is the shard chain, which will play a key role in scaling the Ethereum network. Instead of centralizing all operations on one blockchain, sharded chains spread those operations across multiple new chains.
It also means that running an Ethereum node will be easier from a hardware standpoint, as there will be far less data that needs to be stored on the machine. The full upgrade of Ethereum from the execution layer to the consensus layer is expected to be completed in 2023.
2. What changes have occurred after the ETH merger and upgrade
First of all, this merger is an important transition of ETH from the execution layer to the consensus layer, and PoW has completely turned to the PoS mechanism. For example, ordinary users who do not have 32 ETH in mining can also participate in staking through Lido, etc.
Secondly, the output of ETH will decrease after the merger, and the specific situation will change dynamically based on the amount of ETH pledged. Staking rewards will be priced by the market: the more stakers, the lower the individual staking rewards. If the staking reward is too low, the stakers will withdraw from the staking, and the staking reward will start to rise; the fewer the stakers, the higher the personal reward, and the continuous participants will drop the reward and pull back. So, the reward is a dynamic process determined by the market.
Finally, this merger will not immediately unlock the pledged ETH, and the free withdrawal time of the pledged ETH is carried out in the first fork after the merger, so there is a high probability that there will be no short-term selling pressure of ETH. In addition, after the merger, validators will start to receive fee rewards, and the income will be doubled. However, if the pledge is withdrawn during the process, the income will be reduced. Therefore, from the perspective of validator revenue, it is unlikely to cause a market run on ETH after the merger.
3. ETH upgrade and Layer 2
Layer 2 is an independent blockchain that extends Ethereum and inherits the security guarantees of Ethereum. The overall thinking model of Layer 2 is to achieve expansion through indirect forms to improve the efficiency of Ethereum itself. It is one of the most effective expansion methods at present. Layer 2’s plan and the time of ETH upgrade are advanced in parallel.
The official launch of Layer 2 technology is in 2021, so it is still in a very early stage.
Specifically, it can be understood that Layer 2 is called rollups. Currently, our assets are on the ETH mainnet, and on Layer 2 are “shadow tokens”. The rollups of Layer 2 carry the function of “computation”, and the ETH main network of Layer 1 assumes the role of “verification”. There is no communication between Layer 2. Layer 2 will aggregate the data and send it back to the ETH mainnet, and the real withdrawal will be done on the ETH mainnet.
Whether in the short term or in the long term, Layer 2 plays an important role in the development of ETH.
2. The Four Heavenly Kings Projects of the Layer2 Track
Layer 2 has faster throughput and cheaper transaction fees, allowing more users to enter the Ethereum ecosystem more easily. Layer 2 is also a trustless proof mechanism. For our ordinary users, participating in the Layer 2 network may gain potential retroactive incentives.
Rollups is also currently the preferred Layer 2 solution for expanding Ethereum. At the ETH Shanghai Summit, Buterin also reaffirmed the historical status of Rollups. Rollups is not a temporary measure before the expansion of Ethereum, but a long-term parallel with Ethereum. Coexist, influence and promote each other in future development.
There are currently two different approaches to Rollups, Optimistic rollups and Zero-knowledge rollups.
Optimistic rollups: is a layer 2 solution, that is, not built directly in the Ethereum base layer, but built on top of Ethereum. The benefit is that you can run smart contracts at scale, while still sharing the security of Ethereum.
Zero-knowledge rollups (ZK-Rollups for short): The essence is to compress the user state on the chain and store it in a Merkle tree, and transfer the changes of the user state to the off-chain, and at the same time, the off-chain users are guaranteed by the proof of zkSNARK The correctness of the state change process.
There are two representative projects Optimism and arbitrum in Optimistic rollups; two representative projects zksync and StarkWare in ZK-Rollups.
Optimism is currently the only EVM equivalent Layer2.
Introduction: Optimism is the first company to invent the EVM-compatible Optimistic Rollup protocol. But the delay in the mainnet launch gave Arbitrum an advantage, and the main difference between it and Arbitrum is their fraud proof system. Optimism opted for non-interactive fraud proofs, which re-execute the entire transaction order and perform the required computations on L1 to get the result. Arbitrum, on the other hand, has opted for interactive fraud proofs, which only execute specific steps that are contested on L1. Dissect and break down the disputed section until the specific steps that lead to the dispute are identified.
Investment and financing: A16z and Paradigm co-led the $150 million Series B financing, which is the largest L2 solution so far.
Token economy: Optimism’s token is OP, which has now reached the airdrop stage. OP’s airdrop is similar to HOP’s airdrop, and the witch’s attack adopts a community governance model. OP’s token economy is designed to generate income from the demand for block space, and the income is distributed to public goods, and the value of public goods drives the cycle of demand for block space. Specifically, the mechanism is realized through three ecological groups:
- Token holders, through Sequencer income to fund public goods, etc., expand the demand for block space, create the value of the ecosystem, and achieve the sustainability of the economic model.
- Contributors and builders gain value from the traceability of the ever-improving ecosystem, and participants can also benefit.
- Users and community members, financial support of the OP ecosystem, airdrops, announcements of product benefits, etc.
Team: Developed by the Optimism PBC team, Karl Floersch, Jinglan Wang and Ben Jones are the chief researcher of Plasma (the early Ethereum expansion plan proposed by Buterin Butler in his 2017 paper), and they are all rich in Ethereum expansion. experience of.
Ecological construction: The Optimism ecological construction section involves 8 sections: DeFi, NFT, Bridge, on-ramp, Wallet, Tool, Porfolio tracker, and DAO. There are currently 131 apps in the ecological pool. We can see some of the current Optimism ecology in the picture below. Key projects.
At present, Arbitrum ranks first in the value of locked funds in all Layer 2 networks, with a TVL of $1.2 billion, accounting for 74.62% of Layer 2 TVL.
Introduction: Arbitrum can compress smart contract execution data and upload it to Ethereum efficiently. It can realize high-throughput, low-cost smart contracts while maintaining a trustless and secure L2 protocol. Arbitrum not only has various popular DeFi protocols deployed on the network, but also has innovative applications bursting out on the Arbitrum network. Arbitrum also has more active addresses than Optimism. The biggest flaw of Arbitrum is that it takes about a week to transfer ETH to the account, so there is a problem that the challenge mechanism takes too long.
Investment and financing: including Coinbase Ventures, Compound VC, BlockNation, Divergence Ventures, and PANTERA Capital, which focuses on early-stage blockchain investment and has successfully invested in several star projects.
Token economy: undisclosed, not yet issued
Team: Arbitrum is developed by the OffchainLabs team, Offchain Labs founders Ed Felten, Steven Goldfeder and Harry Kalodner are top veteran technologists.
Ecological construction: The Arbitrum ecological construction sector involves 20 sectors such as Wallets, Swapping, Lending, Options, NFTs, NFT Marketplaces, Tools, Bridges, DAO Tools, etc. The ecology is very prosperous. We can see some key projects of the current Arbitrum ecology in the picture below.
Introduction: zkSync is the first general-purpose, open-source, EVM-compatible ZK Rollup solution. Buterin has said that in the short term, Optimistic Rollups may win for general-purpose EVM computing, while ZK Rollups may win for simple payments, transactions, and other application-specific use cases. At present, zksync v1 is a very stable version. The team’s focus is on zksync v2, which is the zkEVM that everyone is looking forward to. It has been launched on testnet but has not been open sourced yet. It is expected that it will be open sourced after all the work is completed.
Investment and Financing:
It closed a $2 million seed round in September 2019.
In March 2021, it completed a $6 million Series A financing, led by United Square Ventures (USV), followed by Placeholder, 1kx, Dragonfly, etc.
In November 2021, a $50 million Series B financing was completed, led by a16z, with participation from Placeholder, Dragonfly, 1kx, Blockchain.com, Crypto.com, Consensys, ByBit, OKEx, Alchemy, Covalent, etc.
Token Economy: Undisclosed, Unissued
Team: The development organization of zkSync is Matter Labs, which was born in December 2019. The team was co-founded by @gluk64, and there are no more team members to disclose at present, but the technical breakthrough brought by ZkSync 2.0 is enough to show that they act quickly and have a clear goal.
Ecological construction: According to zksync’s official statistics, the applications deployed on the zksync 2.0 testnet are growing rapidly. It is foreseeable that in the future, after the zksync 2.0 mainnet is released, its market share will surely grow rapidly.
Introduction: StarkWare was founded in 2018 by leading scientists in the field of zero knowledge. With world-class innovation, top funding, an all-star team, StarkWare is seen as the most promising infrastructure project. At present, the core products StarkEx and StarkNet have been successfully operated. The StarkWare team’s attempt to use “distributed AMMs” to solve the liquidity fragmentation of AMMs between L1 and L2 is a great technological innovation and is worth looking forward to. StarkWare is already worth $2 billion, but there are currently no plans for a fair token release.
Investment and financing: The financing scale of StarkWare can be said to be world-class, with well-known investors, Buterin and the Ethereum Foundation, etc. Up to now, four financings have been completed, and another $100 million was completed yesterday (2022.2.26). new financing, currently valued at $8 billion.
In May 2018, the $6 million seed round was completed. Institutional and individual investors included Pantera, Naval, and Buterin.
In October 2018, it completed a $30 million Series A financing, with investment institutions including Paradigm/Sequoia/Cb Ventures.
In March 2021, a $75 million Series B financing (Paradigm/3AC/Alameda) was completed, and a $50 million Series C financing (Paradigm/3AC/Alameda) was completed in November of the same year.
The $100 million financing was completed on May 25, 2022, led by investment firms Greenoaks Capital and Coatue and Tiger Global.
Token Economy: Undisclosed, Unissued
Team: StarkWare started in May 2018 with a team of world-class cryptographers and scientists. The core staff is the former Zcash chief scientist, who has been an innovation pioneer in the zk field for many years. They’re translating academic theory into real-world products through Starknet, StarkWare’s most famous team in gaming.
Ecological construction: The StarkWare ecosystem currently includes infrastructure, DeFi and other fields. From the figure below, we can see the key projects in the ecosystem.
3. ETH upgrade has some opportunities for ordinary investors
For ordinary investors, what opportunities can we pay attention to in this upgrade?
First, we can hold ETH for a long time or participate in pledges such as Lido; secondly, we can pay attention to some early innovative projects in the field of Layer 2, such as MetisDAO, etc.; finally, Layer 2 interactions that most ordinary people can participate in, etc. , through early participation, it is possible to obtain retroactive rewards such as airdrops.
In the Layer2 experience, the author believes that the most important thing is to go deep into the community of the project and keep up with the latest developments of the project. At present, this article only lists some of the projects you can try:
Optimism Ecology: The first batch of OP airdrops has been distributed, but the witch attack has been investigated. However, OP will start the second batch of airdrops. At present, from the trend of the first batch of airdrops, it is the correct way to check in to experience the optimization ecology with heart and experience the ecological products seriously.
According to Optimism’s official ecosystem (optimism.io/apps/all), we can find the projects that have not issued coins, experience and interact, and follow the latest developments of the projects in the community.
Arbitrum Ecology: In the Arbitrum Ecology, we can first experience the officially announced Bridge, and we can also try to experience the following projects:
Borrow + Deposit
zksync ecology: We can participate in Gitcoin donation activities in zkSync ecology. It is expected that zkSync 2.0 will be officially launched to promote ecological development in the field of DeFi and NFT. In addition, some key projects in the ecosystem can also be experienced, such as: transaction, cross-chain bridge, LP;
StarkWare Ecology: Prepare your Argent wallet, you can try to interact with Starkware and Starkware dapp, as follows:
StarkNET: The strategy of StarkNET Goerli-Testnet;
StarkEX: dydx for mining/trading
sorare for NFT minting and trading
The merger and upgrade of ETH can be said to be the most important event in the industry this year. It is expected that ETH of PoS can drive the further development of the industry. Like this industry, we have been in a state of savage growth. Especially in the current market winter, this kind of expectation is particularly valuable. But one day, everything will recover, and the warm spring we look forward to will come as scheduled.
All articles of Hoo Research do not constitute investment recommendations. Investment is risky, and personal risk tolerance must be considered. It is recommended to conduct in-depth research on the project and make your own investment decisions carefully.
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