In-depth | ETH2.0: PoS staking has a profound impact on ETH

With the release of Ethereum storage contracts, people are becoming more and more interested in ETH2.0. ETH2.0 is an upgrade to the current Ethereum, which aims to solve problems such as Ethereum's scalability and fees. In the past few months, almost all crypto users have felt deeply that Ethereum is too congested and too expensive. ETH2.0 will change the mechanism for achieving consensus, perform sharding, alleviate Ethereum's congestion problem, and build a better infrastructure for the DeFi ecosystem. So, what is the difference between ETH2.0 and today's Ethereum? First of all, there were two different chains at the beginning. ETH2.0 is a PoS chain, which is different from the current Ethereum PoW chain. In the future, the two will eventually merge.

ETH2.0 is not a one-time implementation, it is a huge system project. According to Ethereum's plan, ETH2.0 has three main phases:

*Phase 0 (Phase 0) *Phase 1 (Phase 1) *Phase 2 (Phase 2) However, these three phases are advanced in parallel, not linearly as people imagine. Overall, ETH2.0 will bring PoS consensus, sharding, a new virtual machine (eWASM), etc.

(The ETH2.0 development path that people imagine is different from the actual one, Meeseeking)

Among them, Phase 0 is mainly based on the beacon chain. Phase 0 has been tested for more than 4 months since July 2020. Now the ETH storage contract has been released, which means that the ETH2.0 beacon chain will be officially launched. Once the staked ETH reaches 524,288 ETH (that is, 16,384 validators) a week before December 1, the mainnet can be officially launched.

Beacon Chain is a PoS chain and also prepares for future shard chain management. It involves the management of pledgers and pledge funds; random number generator; random selection of block producers; formation of a validator committee to vote on proposed blocks; rewards and penalties for pledgers, etc.

After Phase 0 is launched, the Ethereum network will have two chains, one is the PoW chain with the token ETH1, and the other is the PoS chain with the token ETH2. Users can transfer ETH1 to ETH2 and become validators, but it is currently a one-way move. Users cannot redeem ETH2 back to ETH1.

Phase 1 is mainly sharding. Phase 1 plans to deploy 64 shards, plus the beacon chain, a total of 65 chains. The beacon chain is the hub chain, which communicates with the other 64 shards in a two-way manner. Phase 1 mainly involves writing data to the shard chain and achieving validity and consensus at the same time.

Phase 2 is the beginning of system integration. The new virtual machine supports the execution of accounts, contracts, and states, and the familiar tools can be ported over. In short, ETH2.0 is a huge project that will take at least a few years to complete.

(The relationship between ETH1x, ETH2 and Rollup, Trent Van Epps)

So, what is there for ordinary users to pay attention to with the launch of ETH2.0?

ETH2.0’s PoS staking will lock up a large amount of ETH

There are currently 7.8 million ETH locked in the DeFi market, with a current value of over $3.7 billion.

(ETH locked in DeFi, DEFI PULSE)

However, with the launch of ETH's storage contract, the final locked amount of ETH will far exceed this level in the future. It is estimated that more than 5 million ETH will be deposited in the short term, and in the medium and long term, at least 10 million ETH will enter the pledge contract.

With the entry of wallets, exchanges, DeFi protocols and ETH staking service networks, it is even possible to reach 20-30 million ETH staking deposits. On the one hand, it is because the entry threshold is lowered, and the most important thing is based on the current ETH2.0 staking return rate.

(The relationship between the amount of ETH pledged and the income, ethereum.org)

As can be seen from the figure, staking 10 million ETH can generate an annualized return of 5.72%, which exceeds the current storage return of ETH in the market. Even if 30 million ETH is deposited, the yield can reach 3.3%, and the return is denominated in ETH. If the price of ETH rises, the return will be even higher.

At the same time, if we consider that a considerable proportion of ETH has been lying in the wallet for a year without being moved, it means that the actual circulation of ETH will continue to decline in the future. As PoS matures, ETH will gradually become a low-inflation asset, and even with the implementation of the EIP-1559 proposal, it may become a deflationary asset. For the EIP-1559 proposal, please refer to the previous article "Ethereum EIP-1559 and ETH's Value Capture" by Blue Fox Notes. It will also be mentioned below.

At present, many people are worried about whether ETH2.0 can be launched as scheduled, and are even more worried about how many people are willing to deposit their ETH into the storage contract. Currently, the number has just exceeded 100,000, which is still far from the minimum requirement of 524,288 ETH.

There are several issues that need to be resolved. With the resolution of these issues, first, the launch will not be a problem, it is just a matter of time, and it is likely to be completed within this year; second, as more and more ETH2.0 staking service networks emerge, ordinary users can also participate in the ETH2.0 staking. These staking service networks will solve the following problems:

*The problem of not being able to participate with a small amount of ETH. According to the plan of staking service networks like Rocket Pool, only 0.01 ETH is needed to participate in staking and earn profits;

*The technical threshold of verifying nodes. Although setting up nodes is not too complicated, it is still quite troublesome for most ordinary users, and the staking service network can help users solve this problem;

* Liquidity issues of pledged tokens. Currently, many people do not participate in staking because they are worried that after ETH is transferred to the storage contract, it will be temporarily unable to transfer or withdraw. However, after users deposit ETH, the staking network can give users corresponding equity tokens. For example, in Rocket Pool, users will get rETH, which can be traded, pledged, etc., without worrying about liquidity issues.

*Penalty risk. Many users are worried about being punished for participating in staking. With the staking network, this pressure can be alleviated through distributed deposits.

At present, at least a dozen projects such as Rocket Pool, Ankr, Stafi, Lido, liquidsatke, stakewise, codeFi, etc. are doing this. On the one hand, these projects can solve the problem of ordinary users participating in staking, and on the other hand, these projects themselves are also worth paying attention to. At present, there are many players in this track, and there is no real leader. You can pay attention to the subsequent user experience and reputation of these projects to find related opportunities.

If ETH2.0 locks up more than 10 million ETH, it will greatly reduce the ETH in circulation in the market. At the same time, with the development of DeFi, it is possible that the demand for ETH will exceed the supply of ETH. In this case, if the overall market sentiment warms up, it means that ETH also has the opportunity to follow the halving effect of BTC and form upward momentum.

If this happens, it will be a two-wheel drive, showing an upward trend different from that in 2017.

In addition, ETH plans to launch EIP-1559 in the future. The so-called EIP-1559 is to change the pricing mechanism of Ethereum network transactions from the original auction mechanism to a basic fee + tip charging mechanism. The original auction mechanism is that users bid, and miners select transactions with high bids and package them into blocks first. This mechanism leads to low bidding efficiency, and it is difficult to estimate the appropriate bid. It is also easy to cause delays, selfish mining and other problems.

The most important point about the EIP-1559 payment structure is that its basic fees are destroyed, and this part of the fees is paid through ETH, which means that if the scale of economic activities on Ethereum is large enough, it is possible to cause a large amount of ETH to be destroyed, although ETH is an inflation mechanism. However, if its transaction volume is large enough, it is possible that the ETH destroyed will exceed the ETH issued, which may cause ETH to enter deflation. Of course, this scenario is unlikely to be realized in the short term.

Regardless of whether or not deflation can occur, the destruction of ETH can reduce its circulation. If this happens, miners will pay more attention to ETH's block rewards; and holders will no longer regard ETH as a tool for value circulation, but will gradually regard it as a token for value storage. In this case, ETH has two values: one is value circulation; the other is value storage. Because ETH itself is not only based on consensus, but also on income, this allows ETH to capture a truly solid underlying value.

Currently, Ethereum’s annualized fee income is US$580 million, which has reached a certain scale.

(ETH annualized fee income, Tokenterminal)

The above is a superficial view of the staking effect of ETH2.0, but if we analyze it further, we will find that ETH's PoS staking mechanism not only allows stakers to earn income, but also causes significant changes in ETH's properties, which will have a significant and far-reaching impact on the long-term value of ETH.

Changes in ETH properties under PoS staking

Considering the PoS staking mechanism of ETH2.0, ETH itself has also become a productive asset that can generate income through staking, which allows it to capture the value of system growth.

PoW and PoS are both mechanisms that help blockchains achieve consensus, and there are many differences between the two. From the perspective of system operation, one of the differences is that one is "externalized" and the other is "internalized." Over time, the two chains will exude increasingly different temperaments.

In the PoW mechanism, miners invest energy and hardware assets, and they prefer to sell them to make a profit, which is "externalized". At the same time, BTC is generated through external means of production. BTC itself is not a means of production. BTC is more like a commodity, produced by energy and machines. ETH under PoW is like BTC, both are more like virtual commodities, and are generated through mining.

The PoS mechanism is "internalized", and ETH itself becomes a tool for earning income and a means of production. The more tokens you stake, the more income you get. In PoW, the means of production are energy and hardware, and in PoS, ETH itself is the means of production. This gives ETH under PoS a completely different attribute from BTC and ETH under PoW.

In addition, another feature of generating income through ETH staking is that it does not have counterparty risk, and its risk is the inherent risk of the protocol system. If BTC is tokenized and then put into Ethereum DeFi for lending, although it can also generate income, it has counterparty risk. The income generated in this way is still exogenous.

This new property of ETH as a means of production will make it more scarce in the future and more integrated into the system, thereby capturing greater value and obtaining a greater premium.

Finally, it is important to emphasize that the crypto market is extremely volatile and risky, and the market is always unpredictable. Any logic and reasoning pales in the face of black swans. At any time, you must do your own research, do your own risk control, and make your own decisions.