Ethereum 2.0 in the Struggle for Interests and Power: The Misunderstood Wealth Effect

“At the beginning, it was still a small market (ETH in 2015), and people didn’t know what to sell or buy, but the market gradually took shape, and even small shops were born one after another. Some people did currency market business (Compound, Aave), and some did exchange business (Uniswap). But there was a goal set at the beginning (no one knew whether it was right or wrong at that time), which was to build a cathedral (ETH 2.0). People were waiting and often held gatherings to discuss.
Time passed quickly, several years passed, the delivery date approached, and the veiled cathedral could not be seen clearly by the public. So people kept asking the people who originally set up the stalls, when can we enter the cathedral.
Continuous pressure has led to the advancement of things, but also the disclosure of disputes and malpractices. So the advocates of the church once suggested gathering in the square to answer any questions from everyone, but they did not explain how the decision was changed (Call #52). People also pretended not to care (or were unable to really do so) because they were worried that their doubts would lead to attacks from others.
People in the square talked to themselves, and in a question-and-answer session they sought the possibility of glory after entering the church. Most people knew that they did not really need the church or were not sure. After all, compared to the small markets a few years ago, we have a faster infrastructure (Rollup) and we have guards (Miners) to ensure market order, but they hope that they can have some power to change the form of this church.
So the advocates say, if you want to enter this church, the infrastructure must serve it (Rollup-centered), if you want to enter this church, then governance that everyone can participate in must be its prerequisite (PoS), if you want to enter this church, the past market must prosper because of you (community confidence), if you want to enter this church, then you must cast a vote to abandon the current guards (Miner) first.
No one really expects this church, people just expect their power to be exercised, even if it is not based on justice, even if some people have warned that fair participation in assets will lead to centralization. But no one really expects this church, people just expect their power to be exercised. "
The above view comes from Uncle Meow, who has done extensive research on Ethereum. On December 1, ETH2.0 officially launched the Genesis Block, and since then it has finally stopped lying in the white paper. After leaving the white paper, it has brought high expectations for Ethereum in the market, and at the same time triggered conflicts of interest that may exist for a long time in the future.

Author: Wang Dashu

01

The misunderstood wealth effect

"Ether has broken 600. 2.0-style staking is equivalent to deflation. I think it will reach 1,000. We must make a push," said retail investor Chen Chen in a group of less than 10 people. Then group member Patrick responded, "I got on the train during the Thanksgiving callback and got off at 600. I have already made a profit. It's really good."

The reactions of Chen Chen and his friend Patrick are, to a certain extent, a true reflection of the market under the background of institutional bullishness. As ETH2.0 becomes a hot topic, these Ethereum holders outside the door instinctively understand ETH2.0 as good news that can stimulate the rise of Ethereum prices, and also dig out two investment opportunities, one is to increase the position of Ethereum in the secondary market, and the other is to pledge the Ethereum in hand in exchange for higher returns.

However, the arrival of ETH2.0 is nothing new to those who know the history of Ethereum and those experts. As early as 2013 when the Ethereum white paper came out, ETH2.0, the Serenity phase, was already planned. Serenity is also the fourth phase of Ethereum development, and its goal is to transition Ethereum's consensus mechanism from PoW to PoS.

Over the past two years, Ethereum stakeholders have discussed this route change frequently, either the technical implementation and incentive mechanism, or the impact of ETH2.0 on the stakeholders in the existing industrial chain.

In the short term, there is no conflict between ETH1.0 and ETH2.0. After all, in terms of the economic model, no new coins will be issued after ETH2.0 goes online. In terms of technical solutions, those expansion plans based on ETH1.0 have not been denied. On the contrary, to a certain extent, they are being carried out simultaneously with the solution of ETH2.0's transition from PoW to PoS. Some industry insiders even interpret the current situation as the Ethereum Foundation is using a "two-pronged" approach to solve the long-standing performance problems.

Under this interpretation, the wealth effect of ETH2.0 is weakened, but the transition from PoW to PoS means that a wave of Staking craze driven by ETH2.0 is coming.

Under the PoW mechanism, becoming a miner requires mining machines and electricity; under the PoS mechanism, becoming a validator requires staking at least 32 ETH to a storage contract and having hardware equipment, a stable Internet environment and other conditions, which is obviously not very friendly to ordinary investors.

However, this is good business for node staking service providers.

At present, exchanges such as Huobi and Binance, wallets such as TokenPocket and imtoken, blockchain infrastructure service providers such as HashQuark, InfStones, Stkr, and RocketPool all provide ETH2.0 Staking services. Although the user positioning is different, they basically belong to centralized organizations and users cannot control the private keys of the funds.

"I pledged my coins to platform A. If platform A has problems, will my coins also have problems?" asked Canghai, a member of the ETH2.0 pledge discussion group. "Don't pledge. The returns are too low. If the price drops too much, it will not be worth it." Another member, Haoran, responded while complaining.

Gaining income through participation in staking should be the most significant "wealth effect" of ETH2.0 in the physical world. Such discussions and consultants are spread across various communities in the industry: basically, it shows that speculators look down on too low returns, ordinary investors think twice, and institutions enter the market silently.

Uncle Miao told Chain Catcher that whether Ethereum ultimately chooses to quickly practice Rollup on the current chain or chooses to make more technological breakthroughs on the new chain, the process is valuable, but for individuals, currently participating in ETH2.0 Staking is a matter of high risk relative to the return and needs to be treated with caution.

At present, there are roughly three risks in participating in ETH2.0 staking: uncompensated losses after locking up, financial risks caused by network failures, and third-party service providers running away.

Of course, risk is one aspect, and misunderstanding is another.

" The price increase depends on how the mainstream tells the story. If the mainstream market wants to talk about the price increase, it can tell the story of pledged and locked positions. Why do they say this? The core reason is that the market sentiment is suitable for long positions. If we go back to the beginning of 2018, it would be suitable to tell a bearish story." Pan, the founder of TP Wallet, pointed out in an interview with Chain Catcher that although ETH2.0 has brought about an increase in the amount of locked positions, it cannot achieve deflation as understood by the outside world. Combined with the subsequent derivative pledge plan, it is actually increasing the circulating supply, and the essence is still inflation.

In addition to being misinterpreted as deflation, the income from ETH2.0 Staking does not constitute the wealth effect that Chen Chen understands. Based on the annualized return of 21.6% at the start of Phase 0, the income for every 32 ETH is about 6.91 ETH, while based on the recent annualized return of 16.9%, the income for every 32 Ethereum is about 5.43 ETH. The income will decrease as the amount of stake increases, so it is obviously not a good choice for investors with small capital and poor risk resistance.

02

The PoS story is a bit "fake"

" The three-phase roadmap is illusory, the new roadmap is tasteless, and no roadmap related to Eth2.0 is worthy of Ethereum abandoning its current operating model and switching to a PoS-based system. " This is the judgment of Ethereum enthusiast Ajian on ETH2.0.

The misunderstood wealth effect can meet the market's expectations for the price of Ethereum in the short term, but in the long run, the price of the currency will always be affected by countless factors, so when the industry discusses ETH2.0, it is more about the PoS mechanism with long-term value.

This is also the controversial part of ETH2.0. At present, some people believe that this solution has many uncertainties, the effect cannot be predicted, and the risk is too high; some people believe that "grasping both ends" is a rogue; some people believe that the losses and results of abandoning PoOW and switching to PoS are wrong.

Behind the controversy are questions about revolution and death, as well as conflicts between the vested interests of ETH2.0 and ETH1.0.

Regarding the proposition of revolution and death, Uncle Miao believes that the foundation of Ethereum is the courage to face failure. The Test in prod promotion style of the entire ecological community was created from the initial TheDao event to various subsequent events.

Similar to Uncle Miao’s view, Rudy, the marketing director of InfStones, believes that if Ethereum wants to continue to move forward, it must accept uncertainty. “I now fully understand why Vitalik talked about the “death history” of Ethereum at the Wanxiang Summit. He said that Ethereum almost died several times, but still survived tenaciously. If Ethereum wants to move forward, become the world’s computer and a platform for hosting decentralized applications, maintain the world’s second largest cryptocurrency market value, and challenge BTC’s position, it must continue to innovate itself and explore new technical solutions.” He added.

From this perspective, Ethereum is revolutionizing itself, but from the perspective of the previous effects of PoS mechanisms, it is a different understanding.

In the past, there were many projects that adopted POS consensus mechanisms, including EOS, which adopted DPoS, and Polkadot, which adopted NPOS. The former had the problem of nodes doing evil, while the latter was very complicated and difficult to implement.

Take EOS as an example. The DPoS mechanism it adopts is to increase the transaction speed and the speed of creating blocks by reducing the number of validators. Validators are voted by token holders, and new blocks are created by validators instead of token holders. The weight of each vote is determined by the total assets of the voter. Its disadvantages are that the holders are not very enthusiastic about voting and the nodes are highly monopolistic.

The risk lies in the difficulties in dealing with bad nodes: community elections cannot effectively and timely prevent the emergence of some damaging nodes, posing a security risk to the network; super nodes are vulnerable to damage: if the elected super nodes do not have strong computing power to protect themselves, they are prone to DDOS attacks, seriously affecting network stability.

Compared with DPoS, the NPoS mechanism adopted by Polkadot has always been considered to be extremely secure. NPoS refers to the nominated proof of stake mechanism, which is essentially a nominator + validator mechanism, allowing the system to select verification nodes with a larger total stake and eliminate candidates with a lower total stake. Although it has always been highly anticipated, it is currently impossible to judge since the Polkadot network has not yet been launched.

However, the basis of both is the PoS mechanism that ETH2.0 intends to adopt. It can even be said that DPoS continues the drawbacks of PoS, which ultimately leads to a significant reduction in the liquidity of DPoS coins, making the poor poorer and the rich richer.

Of course, the POS mechanism itself has its own problems. First, it is easy to cause voter apathy; second, it is easy to cause bias in voting centralization, although Vitalik attributes it to the collapse of game theory caused by public bias; and finally, there is a misalignment of incentives, as token holders and network users are two different types of people. Token holders are incentivized to push up token prices, which may usually lead to unstable price growth, but they do not have to be responsible for the system.

In addition, there is the conflict between the vested interests of ETH2.0 and ETH1.0. "The PoS mechanism is absolutely centralized." Zhang Limi (pseudonym), who has done extensive research on Ethereum, believes that although PoW will also cause an arms race and turn into a capital game, it has driven the development of an industrial chain, but POS can neither prove its decentralization nor may it impact the pie of vested interests.

Vitalik also mentioned the issues that Zhang Limi is worried about in a recent AMA. "Even if a perfect solution to merge ETH1.0 and ETH2.0 is available in March 2021, he and his team will still have to wait until the end of next year to start, because they need to spend a lot of time to convince all parties in the community to accept the new solution." He said.

In fact, in this competition, the real difficulty lies not in technology, but in persuading vested interests to abandon their own interests and balancing and coordinating the interests of all parties. At present, the stakeholders centered on ETH1.0 can be simply divided into the Ethereum Foundation, core developers, validators, miners, and various teams that provide expansion solutions based on the old chain. To a certain extent, the interests of each group are different. The most difficult group to balance is the group dominated by miners. "The interests of miners and mining pools are too great. How to achieve the greatest degree of consensus and upgrade to 2.0 peacefully instead of causing divisions by hard forks is really a difficult problem." Zhang Limi said.

At present, no one knows how much effort the Ethereum Foundation needs to push forward to accomplish this task, but I believe that most people do not want the ETH2.0 upgrade to evolve into the next permanent fork. After all, if they merge, it may not be safe for both parties, but if they split, they will definitely lose more.