New opportunities and new narratives under ETH 2.0

The transformation of Ethereum POW to POS has introduced a new narrative to the development of the entire Web3 industry, that is, a deeper requirement for decentralization.


  • In the small cycle of about 9 months of Merge – Shanghai Upgrade, the ETH in circulation continues to decrease monotonically;
  • In the long run, Ethhash POW Tokens such as ETC will usher in several times the added value of computing power;
  • Decentralized GPU computing power network may open the next narrative of GPU mining;
  • The future Staking tracks Lido and CEX will still be the main force of Staking, but various decentralized staking protocols and other types of staking service providers will also flourish;
  • Protocols such as Obol Network are of great significance for maintaining the stability and decentralization of the validator network;
  • If the ETH pledged on the beacon chain can be withdrawn, the risk of users’ revolving loans will be greatly reduced due to the increase in the realization of stETH;
  • The separation of ETH pledge income and tip income actually provides room for rent-seeking for liquid pledge protocols such as Lido and node custodians;
  • In the future, there may be a lot of income and trading products based on ETH bills;
  • Based on its continuous expansion of business scope, DeFi protocols will have an incentive to end up staking ETH liquidity based on their instinct to squeeze the competitor’s market.

1 Changes in ETH fundamentals

ETH will generate 2 ETH for each block in the POW stage as a block reward. According to the estimation of the block time of 15s, about 4.2 million ETH will be generated in a year. However, after the Merge is completed, the ETH pledge reward will be dynamically adjusted according to the total amount of ETH pledged on the beacon chain. Currently, the annual increase in the amount of ETH is about 4% of the total amount of pledged ETH, that is, about 4% of the total amount of pledged ETH. 500,000 pieces. As the ETH pledge rate increases in the future, the proportion of additional issuance to the total pledged ETH will gradually decrease. With the ETH pledge rate of 30%, the annual additional issuance of ETH may reach 1.2-1.5 million pieces. But with the blessing of EIP-1559, ETH has a great possibility of deflation in the future. In the bull market stage of last year’s gas surge, about 20,000 ETHs could even be destroyed in one day, so the entire token economy of Ethereum will undergo qualitative changes after Merge.

If the big cycle after Merge is divided into two cycles, Merge – Shanghai Upgrade and Shanghai Upgrade – Infinite, the token structures of these two cycles are completely different. Shanghai Upgrade is also known as Post-merge Clean. The main feature is that the ETH pledged on the beacon chain can be withdrawn in an orderly manner. Before the upgrade is completed, all pledged ETH, including assets in liquid pledge protocols such as Lido, cannot be withdrawn. back. Therefore, in the small cycle of about 9 months of Merge – Shanghai Upgrade, the ETH in circulation continues to decrease monotonically.

The specific reasons come down to the following points:

  • Combustion effects of EIP 1559;
  • The amount of ETH pledged on the beacon chain keeps increasing but cannot be withdrawn;
  • The staking rewards of nodes on the beacon chain cannot be withdrawn, that is, all additional ETHs issued during the cycle are locked;
  • The MEV and various tip income obtained by the verifier from the execution client can be freely controlled by the verifier, but this part of the income is essentially the stock of ETH and does not affect the overall circulation of ETH.

After Shanghai Upgrade, as the pledged ETH and pledge income can be withdrawn, the original token structure that was completely beneficial to ETH holders will no longer exist. As the ETH pledge rate stabilizes, the ETH circulation will be determined by both EIP-1559 and additional issuance rewards.

2 Mining machine recycling and the future of mining

The computing power that the ETH mining industry can provide before Merge is 910 TH/s, which is about 20-30 times that of ETC. The POW algorithm used by both is Ethhash. Miners that can run the Ethhash algorithm can easily switch between ETC, ETH, and other tokens that support the Ethhash algorithm, such as Conflux. Mining machines are divided into GPU mining machines and ASIC mining machines. The former is universal and is suitable for different mining algorithms and can also be used for other purposes, while the latter is only suitable for specific algorithms. It is precisely because of the difference in the universality of GPU mining machines and ASIC mining machines that the efficiency of ASIC mining machines will be higher than that of GPU mining machines. There is currently a lack of detailed data on AISC miners and GPU miners, but it is estimated that about 40% of the computing power comes from ASIC miners. Since ASIC miners can only be used for Ethhash mining, when ETH is converted to POS, some of these miners will turn to ETC and other POW tokens that support Ethhash, and the other part will be forked by ETHPOW. A fork is a complicated matter that requires the joint promotion of multiple parties, including miners, trading platforms, developers, and projects within the ecosystem, and there will be a period of chaos after the fork.

In the long run, Ethhash POW Tokens such as ETC will usher in several times the added value of computing power. Although the connection between computing power and POW Token value has not yet been found, the $30 million ecological fund launched by Bitmain In essence, it is also a great benefit for ETC. The value of the ETHPOW fork chain ecology still needs the test of time.

Compared with the narrow-purpose ASIC mining machine, the GPU mining machine is more widely used, and some GPU mining pools have already found a way out for the running mining machine in advance. Hut 8 and HIVE Blockchain have acquired data centers and plan to put some miners into data centers after ETH 2.0. On the other hand, after considering the scrapping of GPU mining machines, the ratio of mining to other tokens such as BTC, and the fork of ETHPOW, there are still a large number of GPU mining machines that are idle, and these idle mining machines can be used for various types of mining machines after transformation. Networks that require GPU computing power, such as Akash Network, Flux, Render Network, Liverpeer, or ZKP’s GPU mining, etc.

Decentralized GPU computing power networks may unlock the next narrative in GPU mining. From the perspective of GPU equipment manufacturers, after ETH is converted to POS, GPU equipment manufacturers urgently need to find the next GPU-demanding industry with the scale of the ETH mining industry; from a regulatory perspective, the borderless global GPU computing power network will not It poses the same threat to national financial sovereignty as BTC and ETH. The same is to rent GPU network computing power. The way to use the decentralized network for GPU utility mining to obtain benefits is Token, and the revenue obtained from the centralized GPU computing platform is legal currency. There is no essential difference between the two. So the future of the mining industry is likely to continue in the form of GPU utility mining.

3 Staking Track

3.1 Liquid pledge

New opportunities and new narratives under ETH 2.0

Data taken from September 14

The measurement indicators of the security of the POS public chain include the pledge rate of the public chain Token and the market value of the public chain Token. According to the pledge data of other POS public chains, it can be roughly estimated that the pledge rate should be in the range of 30-70% under normal circumstances, while the current Ethereum pledge rate is only 11.8%, so for the pledge track, it will usher in at least 200% in the future growth of.

Staking is a track with a low entry barrier. Currently known players include:

  • Original mining pool: F2pool
  • DeFi leading protocols make their own staking protocols: such as Frax Finance
  • SaaS provider (hosts validators for users holding 32 ETH)
  • Liquid pledge agreement
  • Centralized institutions
  • Solo Staking

The specific pledge data is as follows:

New opportunities and new narratives under ETH 2.0

New opportunities and new narratives under ETH 2.0

At present, the liquid pledge of ETH in the market accounts for 33% of the share, of which 30% is Lido, 30.8% is in CEX, and 26.4% is Others (22.2% of which is held by giant whales).

From the above data, it can be seen that decentralized pledge currently only accounts for about 3% – 10% of the share, and the vast majority of ETH has entered the pledge agreement with a strong centralized color, such as Lido. At present, the staking track is still in an early stage. In the case of imperfect infrastructure, users will choose Lido with a higher degree of centralization based on the demands of fund security and stability. Major CEXs have also entered the Staking track based on their own ETH deposits. Lido and CEX form a monopoly based on first-mover advantage. However, Staking is a very competitive track with low barriers to entry, and entities participating in ETH pledge services such as CEX, SaaS service providers, node custodians, individuals, and Liquidity Staking protocols often have cooperative and competitive relationships. CEX and Liquidity Staking solve the problem of funds, and node custodians and SaaS service providers solve the problem of physical machines. However, CEX can also provide node hosting services, and SaaS service providers can also attract users who have large funds but lack the ability to run nodes. This complex competitive and cooperative relationship will continue to reach a state of dynamic balance as new players join. . The future Staking tracks Lido and CEX will still be the main force of Staking, but various decentralized staking protocols and other types of staking service providers will also flourish.

The transformation of Ethereum POW to POS has introduced a new narrative to the development of the entire Web3 industry, that is, a deeper requirement for decentralization. This requirement for decentralization and aesthetic future will also promote the decentralization of the application layer and the protocol layer. Based on this judgment, the decentralized liquid staking protocol will usher in high growth in the future incremental market.

The Ethereum Foundation officially provides a system for evaluating liquid pledge agreements. The system generally targets all liquid pledge agreements. The specific indicators include:

  • Security: BUG reward, whether to audit;
  • Diversity of clients;
  • Liquidity of liquid notes and stability of exchange rates;
  • Private key security: private keys are not managed by humans;
  • Can anyone participate in running a node, i.e. contributing to the decentralization of the entire Ethereum network.

For ease of understanding, here is an example comparing Lido and Rocket Pool:

  • Diversity of clients: The diversity of clients means that the proportion of various clients should be balanced;
  • Bill liquidity and exchange rate stability: Lido’s liquidity bill stETH is mainly on Curve. Although a stETH:ETH pool can be constructed in a 3:1 ratio to improve capital efficiency, it is prone to price fluctuations under special circumstances; while Rocket Pool rETH is mainly on Uni V3, and the price is more stable;
  • Private key security: Lido and Rocket pool began to develop almost at the same time, but Lido was launched earlier. Rocket Pool did not launch the pledge function until the smart contract could be used as the private key for withdrawal of ETH deposits. The institution co-hosts the user’s withdrawal private key (currently also upgraded to a smart contract). Therefore, Lido’s first-mover advantage over Rocket Pool is mainly in the time advantage;
  • Contribution to decentralization: Rocket Pool supports everyone to participate in running the client, while Lido hosts the client’s running tasks to CEX and other institutions. Rocket Pool is good for ETH 2.0 to achieve decentralization, and Lido does not play a role in decentralization.

3.2 Further efforts to stabilize and decentralize the operation of the validator network

The ETH 2.0 verifier has two private keys, the first is the withdrawal private key, and has the right to withdraw the 32 ETH pledged. The 32 ETH pledged by the user is absolutely safe, and even if the private key for withdrawal is leaked, the user will not lose ETH assets. This is because the private key for withdrawal is bound to the user’s address. If a hacker obtains the private key for withdrawal through various means, the hacker can only retrieve ETH from the pledge contract and deposit it into the address that the user originally bound to the contract. The second private key, called the validator private key, is used for consensus voting as well as signing. When participating in the consensus correctly, that is, when the signature is correct, the verifier can get rewards, but if the client goes offline or votes incorrectly, the ETH originally pledged by the verifier will be confiscated. Therefore, ensuring the stability of the validator network operation will be the attention of various pledge service providers and individual validators.

There may be some discussions about the decentralization and centralization of the staking track. The two private keys generated by ETH pledge represent asset ownership and consensus participation rights, respectively. Asset ownership can exist in a centralized form, but if the consensus participation rights, that is, the verifier’s private keys, are distributed in a decentralized manner, whether this Can the centralization problem of the pledge track be solved to a certain extent?

SSV Network and Obol Network have made efforts to solve the above two problems, both of which are achieved by redundant splitting of validator private keys. Taking Obol Network as an example, redundant partitioning refers to dividing the verifier’s private key into redundant n copies and giving them to n operators in Obol Netwrok. When the POS network requires the verifier’s private key to sign, any f of the n operators can complete the signature process online.

There are multiple benefits to doing this:

  • Eliminate the risk of validator single point of failure and reduce the probability of being slashed;
  • Pledge service providers of different scales can cooperate with each other to reduce the harm caused by excessive monopoly;
  • The centralized pledge service provider’s control over the POS network is allocated to protocols such as the decentralized Obol Network, which enhances the censorship resistance of the POS network to a certain extent;

3.3 Application expansion of ETH liquid collateral bills

When users deposit assets to the ETH liquidity pledge pool, they will receive a note as the ownership certificate for the assets deposited by the user in the pledge pool, which is similar to a large deposit in a bank. The ownership certificate of Lido is stETH, and the corresponding liquidity certificate of Rocket Pool is rETH. In the future, there is at least 200% room for growth in the liquidity staking track, which means that the existence of ETH pledged notes such as stETH will greatly enrich the asset classes available to DeFi, and thus will bring more ways to play in DeFi applications.

3.3.1 Revolving Loan

Liquid pledged bills such as stETH currently have a relatively narrow application scenario in DeFi, and are often used as collateral for lending agreements. The sharp depreciation of stETH in May this year is related to this. The strategy commonly used by institutions is to carry out ETH-stETH circular lending, and in this way, to carry out arbitrage of ETH pledge income. But this arbitrage model is based on the premise that the price of stETH is stable. The ETH-stETH revolving lending is likely to face serial liquidations when stETH suffers a liquidity crisis and the price falls.

The underlying reason for the stETH de-anchoring event is that the ETH pledged in the beacon chain cannot be taken out and stETH cannot be destroyed. The only way to monetize stETH is to use an existing DEX. Moreover, the liquidity pool of stETH and ETH is built on Curve, and it is built according to the ratio of stETH:ETH = 3:1. This leveraged trading model cannot withstand the massive stETH selling pressure, resulting in a significant depreciation of stETH. However, if the ETH pledged on the beacon chain can be withdrawn, the risk of users’ revolving loans will be greatly reduced due to the increase in the realization of stETH.

Do a simple calculation, if the ETH holder has 1 ETH, the loan agreement’s clearing line for stETH is 90%, and the ETH holder cyclically borrows according to the 80% borrowing rate, and the amount of each borrowing is 1, 0.8, 0.64 …, summed to get the total ETH pledged exposure of 5 ETH. In the case that the annualized ETH pledge is about 5% – 8%, the annualized pledge income obtained by the revolving loan is 25 – 40%. It is worth noting that in order to do revolving loans until the Shanghai upgrade of Ethereum next year, in addition to considering the possible decline of ETH, it is also necessary to pay attention to the possible serial liquidation problems of ETH bills.

3.3.2 Fundamental judgment of ETH liquid collateral bills

The income obtained by the validator participating in the validator network includes two parts: ETH pledge income and tip income (including MEV). The two parts of the income are separate, the pledge income will be sent to the ETH deposit address, and the tip income will be sent to the tip address corresponding to the execution client. This separation of revenue actually provides room for rent-seeking for liquid staking protocols such as Lido, as well as node custodians. The ETH staking proceeds will undoubtedly be returned to the holder of the ETH note. But for tipping revenue, its distribution among ETH note holders, liquidity staking protocols, and node custodians is still unclear. Therefore, another potential criterion for judging the pros and cons of liquid pledge agreements is the clear distribution of tip income.

The difference in the distribution of tip income will affect the fundamentals of different ETH liquidity pledged notes at the micro level. However, the existence of revolving loans and the future Shanghai Update will affect the value of ETH liquidity pledged notes at the macro level. At present, almost all ETH liquid collateral notes are discounted to ETH, even though the ETH note has accumulated a lot of value in the beacon chain. It is a normal situation for ETH notes to be at a discount due to the fact that ETH notes cannot be cashed and are now in a bear market with a significant liquidity premium. But when the Shanghai Update is completed and the ETH notes are available for cash, we may encounter a reversed discount on the ETH notes and a positive premium to ETH.

The shift from discount to premium ETH notes is an arbitrage opportunity that clearly exists in the market. A few months ago, Three Arrows Capital planned to launch a GBTC arbitrage fund, hoping that the SEC could approve the GBTC ETF to change the fundamentals of GBTC and make GBTC from a discount to a premium, but in the end it failed because the GBTC ETF has not been approved. , and this time it may yield a different result.

3.3.3 Development of derivatives based on ETH notes

Derivatives are a very large financial category, not just limited to options, futures and structured products. The types of derivatives in traditional finance are endless, involving all aspects of trading and asset management. In a narrow sense, derivatives can be roughly divided into two categories: primary derivatives and secondary derivatives. Primary derivatives are financial products or bills derived from native assets, and secondary derivatives are derived from primary derivatives. If the above concepts are explained in the field of blockchain, ETH is the native asset; ETH is another certificate minted after processing by a certain protocol. For example, stETH is the first-level derivative of ETH; and reprocessing stETH, The minted certificates or the products provided are secondary derivatives. At present, the first-level derivatives in the blockchain industry can be seen everywhere, including atoken, stETH minted by AAVE for LP, and LP Token minted by DEX for LP. These first-level derivatives in the narrow sense have a common feature, that is, they are all yield-bearing assets. These Yield-bearing Assets have their own risks and returns. Combining and packaging these first-level derivatives or dividing risks and returns can derive a variety of financial products. The above narrative seems to be in demand, but none of the protocols (Element Finance, Sense Protocol, etc.) on this track seem to have broken the circle.

The specific reasons may include the following three:

  • The number of DeFi users on the chain is still small and most of the users on the chain lack DeFi awareness;
  • The excessive dispersion of primary derivatives assets makes it difficult for the protocol layer to maintain the liquidity of multiple secondary derivatives;
  • The yield volatility of yield-bearing assets is too low for derivatives to play a role;

Although it is still in the early stage of the development of on-chain derivatives, and user awareness is not in place, the gradually mature leveraged trading model and the emergence of ETH bills have solved the problems of low yield volatility and poor liquidity of derivatives. Taking interest rate swaps as an example, the leveraged trading model can amplify the yield volatility of Yield-bearing Assets, amplifying the original 1% volatility to 5-10 times the original, thus generating transaction demand. In addition, from the perspective of liquidity, the yield-bearing assets being traded and their underlying assets need to have deep liquidity to be suitable for development. ETH bills such as stETH are a typical example. The liquid pledge agreement will account for about 30% of all pledged ETH in the future, that is, at least 10 million ETH bills can enter the DeFi ecosystem in the future. Since ETH notes can be instantly exchanged with ETH in the future, for a single yield-bearing asset with such a high market value and high liquidity, it is foreseeable that a large number of income and trading products based on the asset will emerge in the future.

4 Integration of DeFi Leading Applications and Liquid Staking

Finance is inherently monopolistic, which means that both horizontally and vertically, DeFi protocols have the instinct to continuously expand their business scope and squeeze out the competitor’s market. Therefore, for the staking track at the asset source side, the leading DeFi protocol will have the motivation to do a liquid staking agreement, attract users’ ETH deposits by providing ETH staking services, and use the ETH deposit notes as filling the protocol’s own TVL. source of assets. In this way, on the one hand, the utilization rate of assets can be improved, and on the other hand, expanding the business scope so that both upstream and downstream can eat together can also increase the income of the agreement and increase the value of the agreement itself. From this point of view, the future ETH Liquidity Staking track will not only be about the Liquidity Staking protocol, but some established DeFi projects may also step into the market to get a share of the pie. But no matter how the upstream Liquidity changes, the interests of SaaS service providers or node custodians will not be damaged, or even profitable. Some Liquidity Staking protocols themselves are big customers of SaaS, and the vicious competition on the upstream Liquidity side is essentially beneficial to the downstream validator node custodians. Frax is currently developing the ETH Liquidity Staking business, and intends to use fraxETH notes as collateral assets for Frax minting coins. Using ETH bills as Frax’s minting assets can also solve the problem of Frax’s over-reliance on centralized stablecoins such as USDC.

5 Public goods brought to everyone by ETH2.0: Portal Network

The light client of ETH 2.0 is also called a stateless client. It only needs to store the block header data and does not need to store the block state, so it can only perform the verification function of the transaction with the help of the full node. There is no need to pledge 32 ETH to run the light client, and it cannot participate in the ETH 2.0 consensus. In the ETH 1.0 version, Infura and Pocket Network provide light client services. All nodes open IP addresses, and light clients can connect to all nodes to obtain all block data. The Portal Network is a light client node network that Ethereum officially intends to build by means of non-economic incentives, and is committed to providing a public light client API interface. It is precisely because of the lack of economic incentives that Portal Network has not yet been launched.

The network layer of Portal Network is integrated through ClientServer, which can provide stateless clients after integration. The stateless client allows users to run a very small personal node and use it to query the data on the chain, making the ETH 2.0 stage users’ access to the data on the chain more Web3. The machine performance required to access the Portal Network is extremely low, and even mobile phones can access it, but the disadvantage is that it cannot handle large-scale JSON and RPC API data calls. Therefore, personal usage scenarios for Portal Network include: personal RPC port, low latency, and more secure connection of Dapps and wallets.

6 Conclusion

The above is actually just the tip of the iceberg of the narrative in the context of ETH 2.0. The tracks not mentioned include MEV and cross-chain interoperability protocols. MEV is a well-discussed issue at the POW stage. Both the protocol layer and the client layer provide certain solutions for MEV, and gradually normalize the disordered MEV market. However, after Ethereum was converted to POS consensus, the participants in dividing the MEV on the chain changed from the original single miner group to major Layer2, CEX, Lido, verification node custodians, etc. Multi-party participation also complicates the MEV problem for ETH 2.0. Danksharding’s PBS (Proposer-Builder Separation) can solve the MEV problem at the bottom under the assumption of perfect competition. But in the years from now to Danksharding, MEV still needs a transitional solution, starting from the application layer and the client is the common way.

In addition, cross-chain bridges and interoperability protocols will become extremely important ways of cross-shard transaction and communication after ETH 2.0 implements Danksharding. In the original idea of ​​Sharding 1.0 state sharding, transactions between different shard chains can be directly confirmed by the cross-link between the beacon chain and the shard chain. However, in the Danksharding architecture, Ethereum will implement data sharding, and the execution will be completely handed over to Layer2, then Layer2 will store the Rollup data in the data shard in Blob format, and the data shard will be connected to the beacon chain through cross-linking. If you still rely on the beacon chain as the direct medium for cross-shard communication, you will face the re-encoding and decoding of Blob data twice, which is not as efficient and convenient as the cross-shard interoperability protocol.

The advancement of the entire plan of ETH 2.0 directly promotes the development of the blockchain industry to some extent. Changes in every small mechanism may have a profound impact on the trends and patterns of different tracks, and this impact is also invisibly reshaping the entire industry.

Reference article:

Posted by:CoinYuppie,Reprinted with attribution to:
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