Ethereum 2.0 is launched. Learn about the Staking mechanism and how to participate

On November 24, the WeChat Moments were flooded with messages saying “double”. The number of ETH in the Eth2 staking contract exceeded the minimum requirement of 524,288, and the Eth2 genesis block will be officially launched on December 1.

In fact, we have already talked about Eth2 in the last issue. From the development history of Ethereum, we can see the significance of Eth2 and the old plan of Eth2. However, due to time constraints, we did not talk about Eth2 Staking and EF AMA. So what is ETH2 Staking all about? Will it bring a new wave of enthusiasm? What did the EF Reddit AMA say? Has the ETH2 plan changed? Let's talk about it together with me and Yue Ge in this issue of LightPaper.

The following content has been compiled and organized and is suitable for written reading.

What is ETH2 Staking? Why Staking?

We have talked about the two main differences between Eth2 and Eth1: sharding and consensus mechanism (PoW to PoS). This means that the main force in maintaining network security will no longer be miners, but validators. If you want to become a validator, you need to stake ETH into the Eth2 staking contract, which is called Eth2 Staking.

Eth2 Staking is different from other PoS chains. First of all, users need 32 ETH to become a validator node (not considering the group order service of the Staking service provider). It does not require any authorization, nor does it require users to vote to choose to pass. Compared with some PoS projects, Eth2 Staking lowers the entry threshold while also reducing the inherent advantages of first movers.

It is worth noting that the current staking of Eth2 is one-way, that is, after staking from Eth1 to Eth2, the ETH in the Eth2 staking contract cannot be returned to Eth1. Even if Eth2 opens the transfer function after two years, your current staked tokens are still circulating in Eth2 and cannot be circulated in the current Ethereum network. Therefore, participating in Eth2 Staking will lose a certain opportunity cost, and the long and uncertain lock-up period has become the main obstacle to participation. So in the last episode, I talked about the two reasons why Eth2 is difficult to start:

1. The opportunity cost of staking is lost, especially as ETH has fluctuated greatly recently. If you operate reasonably, the rate of return will be much greater than 20%.

2. 32 ETH (≈ 120,000 RMB) is a very high threshold for the general public, and retail investors cannot participate, and this is without considering the technical threshold.

However, Eth2 was launched as scheduled. Now, with the benefit of hindsight, the AMA on the 19th already had the answer. If Eth2 could not be launched as scheduled, it would have dealt a huge blow to the team and the community. Moreover, a few hundred thousand ETH is not a big problem for the organization, the team, or even Vitalik himself (speculation).

Reddit AMA

Therefore, I believe that the launch of Eth2 was not voted for by the public and did not have such a high community consensus. Later, through address analysis [1], my inference was also proved to be correct. As of November 28:

• Total validators participating in staking: 2,411

• The top ten staking accounts contributed 218,528 ETH, accounting for 41.68% of the total

• The top 34 validators have more than 51% of the total stake (1.6% of validators have more than 51% of the stake)

Since staking will result in loss of opportunity cost and is full of uncertainty, why does Eth2 PoS still require everyone to stake ETH?

First of all, it is to protect the network security. The protection of the PoS network requires the participation of a certain number of validators. If no one participates in Staking, the Eth2 network will become insecure or weakly centralized (validators are in the hands of a few people), and everyone will suffer. Secondly, participating in the staking of Eth2 will currently obtain an annualized return of about 5%-20%, which is still considerable. For those who hold ETH for a long time, it is also a way of financial management. However, the income is dynamically adjusted. If there are too many validators, network resources will also be consumed, so the rate of return will change with the total amount of Staking.

According to ETH 2 Spec [5], 32 (2⁵) ETH was chosen because if the deposit size is too large, the number of participants will be relatively small, which poses a risk of centralization. However, if the deposit size is too small, there will be many participants, and the cost of chain verification will become higher. Vitalik analyzed in his blog "Parameterizing Casper: Decentralization/Final Time/Overhead Tradeoffs" that if the final time remains unchanged, the number of nodes is proportional to the number of messages verified by each node. This is another form of sacrificing decentralization. According to economic evaluation, 32 ETH is the most inclusive deposit size.

The reason why 524,288 ETH is used as the minimum condition for the launch of Eth2 is that this value is sufficient to make the cost of attack beyond the tolerance of malicious persons.

Staking service "Bai Xiang", how can users participate in Staking?

Currently, there are roughly three ways for users to participate in Eth2 Staking:

1. Pledge 32 ETH and run a node. This is the safest way at present, but it has technical requirements. For specific tutorials, see the reference [2] at the end of the article. It should be noted that if you run a node as a validator yourself, you need to do a good job of node operation and maintenance. If you encounter poor performance, such as the node is offline for a long time or encounters a bug, the pledged ETH will be fined or even all funds will be lost. Therefore, this method is not suitable for the general public.

2. Providing your ETH to a Staking node service provider and handing over your money to a third party may have certain security risks, but it saves you the worry.

3. Directly purchasing Eth2 Staking derivatives provided by Staking service providers on exchanges, such as rETH, aETH, etc., further lowers the threshold for participating in Staking. However, I think this method has a low sense of participation.

Here I will focus on "Method 2", which is to provide your own ETH to the Staking node service provider. There are dozens of Staking service providers on the market now, and there will be more and more in the future. The more well-known ones are HashQuark, InfStones, Stkr, RocketPool, StakedUs, etc. Staking services can be divided into centralized and decentralized. The difference between the two is whether the private key (withdraw key) for withdrawing funds is in the hands of the user after the pledge is unlocked. Unfortunately, in addition to running the node yourself, there is currently no mature decentralized Staking solution on the market. For example, although RocketPool and Stkr's solutions allow users to keep funds in the contract, the withdraw key is not in the hands of the user. However, they all plan to launch DAO governance in the future to achieve greater decentralization.

As mentioned earlier in the article, 32 ETH is still a relatively high capital threshold for most people, so some service providers also provide group buying services, such as Rocketpool and Stkr. You can do your own research on this.

So what should you pay attention to when choosing a staking service provider?

1. Choose a reliable service provider to avoid running away.

In this regard, you can choose some established Staking service providers, some of which have provided EOS Staking, Cosmos Staking and other services before, and have been operating steadily for two to three years, so they are more trustworthy. Or you can look for Staking service providers invested by some well-known investment institutions.

2. The technical strength and risk control capabilities of the service provider.

If the service provider makes a mistake during the staking process, such as a network outage or software failure, resulting in the confiscation of the staked ETH, then the user will also suffer asset losses. This is a consideration of the team's technical strength.

In addition, if there is a penalty, whether the loss is borne by the user himself or by the service provider, or whether the risk is shared, is also a factor we need to consider when choosing a staking service. For example, infStones, HashQuark, and Stkr all have the service provider bear the risk, while RocketPool chooses to share the risk with the user.

3. Whether the pledged assets can obtain liquidity.

After ETH is deposited into the Eth2 staking contract, it will temporarily lose liquidity, just like making a fixed deposit in a bank. In response to this problem, some service providers have proposed their own solutions. For example, Stkr will issue aETH to circulate in the market at a 1:1 ratio based on the ETH deposited by the user. aETH represents the user's collateral certificate in the Eth2 network and can be circulated and traded. RocketPool also has a similar solution.

Summary of EF Reddit AMA on November 19, 2020

In fact, there have been some articles recently that have detailed the content of the AMA that night. The original English version can be found in reference [3], and the Chinese version can be found in reference [4]. So I will not go into details here, and I will mainly give a summary:

1. Vitalik clarified the Eth2 blueprint centered on Rollup, and Phase 1 was simplified to data sharding for Rollup. Although Rollup does not belong to the Eth2 technology category, it is an important part of the Eth2 ecosystem and is not that difficult to implement. This shows that the original sharding execution plan encountered great resistance.

2. The solution for merging Eth1 and Eth2 has been simplified, and Eth1 transfers can be performed directly on the beacon chain, which will have execution capabilities.

3. Light client support, data sharding, and the merger of Eth1 and Eth2 are being promoted in parallel, and any module can be launched as soon as it is ready. The three modules are well decoupled, and there is no need to consider the development progress of each other.

4. Eth2 New Roadmap:

1. Phase 0: PoS beacon chain, the current startup phase.

2. Phase 0.5: A light client for Eth2. The team has shown strong confidence and is expected to be launched in early 2021.

3. Phase 1: Data Sharding

4. Phase 1.5: Eth1 and Eth2 merge. This is a challenging task. The team said that the research has been completed, but there are still some engineering problems to be solved. After all, Eth1 carries too many assets, like an aircraft carrier. It is bound to be a huge project to integrate it into Eth2.

5. Phase 2: Virtual Machine. It seems that the team has not reached a consensus on eWASM. However, this phase is still far away from us. I estimate that there will be changes in the future, so I have not done in-depth research here.

The last thought

No matter how many twists and turns the Eth2 launch process has, or what controversial voices there are in the community, Ethereum is still the overlord of the blockchain public chain project. It carries the hopes and dreams of too many people. I am very excited to witness the launch of Eth2. I believe that Eth2 can move forward step by step according to its plan, and the expanded Ethereum can soar to 90,000 miles.

References:

【1】https://www.duneanalytics.com/hagaetc/eth2-0-deposits

【2】Ethereum 2.0 deposit contract is here, please keep this verification node setup guide

【3】[AMA] We are the EF's Eth 2.0 Research Team (Pt. 5: 18 November, 2020)

【4】Ethereum Foundation’s Fifth Reddit AMA

【5】ethereum/annotated-spec