ETH 2.0 Explained: Staking, Sharding, and Scaling Ethereum

[JH-Interdax]

The shift to PoS significantly alters the crypto-economics of Ethereum, changing the incentives for validating the blockchain and participating in the network. Ethereum 2.0’s first phase is technically due to commence at the end of July 2020 — coinciding with Ethereum’s fifth birthday — with the launch of the Beacon chain (currently in testing).

How Ethereum Currently Works

At present, Ethereum uses a Proof of Work (PoW) system that is found in most blockchain networks (such as Bitcoin and Litecoin) where miners run nodes and try to guess a value below a specified target and build valid blocks with transactions by expending energy and resources, competing with other miners to build the next block.

Miners are compensated for their time and resources through block rewards. Each time a miner successfully submits a valid block to be added to the blockchain, they receive a block reward. Ethereum miners get a 2 ETH block reward, plus a variable reward from transaction fees paid to the network.

The main advantage of PoW blockchains is that they have the potential to be extremely secure. For an adversary to rewrite a block, they would be required to rewrite all previous blocks up until that point, so it is computationally expensive to attack PoW chains. Due to the cost of the energy expended to rewrite the blockchain, it would take a massive amount of resources and deters such attacks.
Ethereum’s PoW blockchain. Miners organise transactions into blocks. The hash of the previous block is used to create the next block.

PoW chains trade off scalability and accessibility for security. Only a finite amount of data can be included in an Ethereum block at the moment, since each block is mined sequentially. If the number of pending transactions exceeds the available block space, then the remaining transactions have to wait for the following block. Consequently, Ethereum can only process 7–15 transactions per second — any ‘killer app’ that gains adoption can bring the network to a halt and push transaction fees higher.

Another concern with PoW is the centralisation of mining. The barriers to entry are high, making the industry less competitive, and some coins are more susceptible to certain attacks — such as the 51% attack and selfish mining. Entrants to the mining industry need to buy hardware, have access to low-cost electricity and be able to operate at scale to achieve efficiency.

As a result, the mining of PoW coins is mostly an oligopolistic market which prevents smaller players and individuals from earning block rewards. As the chart below shows, just three mining pools control more than 51% of Ethereum’s hash rate.

Note: Hash rate distribution is a convenient proxy, but miners and pools are not synonymous, therefore it is not an 100% accurate representation of the true distribution of hash power. Also, hash power distribution is just one consideration of the degree of decentralisation of the mining industry.

Ethereum’s Vision for Proof of Stake

In Ethereum 2.0 (or Eth2/Serenity), one goal is for PoS to level the playing field for more individual validators to take part, where they can earn a shared return on maintaining the truth of the network.

Unlike miners (which expend physical energy by using electricity to build/validate blocks) validators in Eth2’s PoS system will commit 32 ETH as ‘skin in the game’, i.e., the stake. The fixed block reward shifts to a variable issuance model (which is determined by the amount of ETH staked).

It is important to get the economic incentives right for PoS networks. If the incentive to stake is too low, the network will not get the minimum amount of validators needed to secure the chain. If the incentive is too high, the network overpays for security and inflating at a rate that may be detrimental to the economics of the network as a whole.

To participate in PoW blockchains, miners are faced with capital expenditure/CapEx (the purchase of ASICs and other equipment) and operating expenditure/OpEx (such as electricity and real estate costs). Regardless of whether miners are successful in producing valid blocks, these costs must be borne by participants of any PoW network.

While the potential loss of economic value secures PoS networks, i.e., the validator does not incur realised costs. In the case of a fork, PoW miners will allocate resources to what they believe to be the correct branch of the fork. However, in PoS there is no intrinsic cost to securing the network (such as electricity) so there’s no downside for the validator to stake on both forks.

Since there’s no opportunity cost to stake on a particular chain, the validators have ‘nothing at stake’. So rational validators should simply vote on every competing branch they see, so as to maximise their returns. PoS cryptocurrencies have addressed the ‘nothing at stake’ problem in different ways. Ethereum’s PoS and sharding related research began prior to January 2014, with co-founder Vitalik Buterin proposing the following solution to the ‘nothing at stake’ problem at the time:

    “Make the chain aware of other chains. Then, if a miner is caught mining on two chains at the same time, that miner can be penalised.”

What Buterin described above eventually evolved into Casper, an algorithm designed to punish any validators who validate more than one fork or who otherwise harm to the network, getting around the ‘nothing at stake’ problem.

The design of Eth2 supposes individuals are more averse to risking money in the form of staked cryptocurrency when attacking the network compared to the cost of electricity. A failed PoW attack, results in a loss of electricity costs, while slashing a validator’s stake is equivalent to a miner burning down their entire PoW server farm in the failed attack. The cost to launch an attack on Eth2 is equal to the amount of staked ETH (and so is the penalty). Because Eth2 incentivises honest validators and discourages malicious validators, the network’s defense from malicious actors should be stronger.


Read the rest of the article on Interdax's Medium blog.

[aiviaa485]

If Ethereum was made to be able to staking I think it would have a price reduction later.
Because the logic is that if it is made for staking, Ethereum is like being silent to be another EThereum child and this seems less effective.

My Ethereum 2.0 doesn't need to be a Staking coin because in my opinion it can reduce prices and reduce interest for Ehereum. Cmiiw