Understanding the impact of the initial launch of ETH2.0 on the market in one article

Reposted from: Blue Fox Notes

With the release of the ETH2.0 storage contract, market interest in ETH is gradually increasing.

ETH2.0 storage contract released, etherscan

The Beacon Chain mainnet of ETH2.0 is scheduled to be launched on December 1. In order to start, the storage contract needs to deposit a minimum of 524,288 ETH (16,384 validators). As of the time of writing this article, 39,973 ETH has been pledged, including 3,200 ETH deposited by Ethereum founder Vitalik. The current market value is close to US$1.5 million, and the overall minimum ETH required to be deposited is approximately US$250 million.

Vitalik deposited 3200ETH into the storage contract, etherscan

Minimum staking requirements for ETH2.0 mainnet launch, ethereum.org

Why would people participate in the launch of the ETH2.0 beacon chain mainnet?

One of the most important reasons is that it is expected to obtain relatively low-risk and stable returns. If there is only 524,288 ETH deposited, then the APR income can reach 21.6%; if the ETH involved in the pledge reaches 2,450,000, the rate of return can reach 10%; even if the locked ETH is as high as 10,000,000, the APR income can reach 4.9%, which is much higher than the ETH storage income of other DeFi protocols.

The relationship between the amount of ETH staked and expected returns, ethereum.org

Aave’s ETH lending market APY, Aave

APY of ETH aggregate mining on YFI, Yearn

APY of ETH lending market on Compound, Compound

Currently, about 13% of Ethereum addresses hold more than 32 ETH. Seven days before the launch on December 1, a total of 524,288 ETH needs to be deposited. If the launch requirements are not met, it will be launched seven days after the requirements are met. In the next two weeks, we can see the development of ETH deposits.

In addition, it is also important to note that the annualized rate of return for ETH staking is calculated in ETH, not USD, which means that as the price of ETH increases, its actual APY may be higher than the current rate of return, which will encourage more people to stake ETH and earn more ETH.

Of course, there will be some liquidity issues here. After ETH is deposited into the storage contract, ETH cannot be withdrawn, which will lead to liquidity problems. Of course, there are also some projects dedicated to helping ordinary users solve this problem, such as RPL (Rocket Pool).

Does the launch of the ETH2.0 beacon chain have any impact on the current Ethereum PoW chain?

According to Ethereum's past iteration history, it may take several years to fully transition from PoW to PoS, so the two chains will coexist for a long time. So, what does this mean for ETH holders? Is there any work that needs to be done?

If the current Ethereum chain token is called ETH1, and the token on ETH2.0 is called ETH2, what is the relationship between the two? (Blue Fox Note: Some people also call ETH2 BETH, which means ETH on the Beach Chain)

First, when the PoW chain transitions to the PoS chain, both ETH1 and ETH2 will run on the ETH2.0 network. In the end, there is only one ETH.

However, for now, ETH1 and ETH2 are tokens of two different chains. After the launch of the beacon chain, there will be a transition period between the two Ethereum chains. Users deposit ETH into the storage contract and can obtain ETH2 token incentives through the ETH2.0 network. As the ETH2.0 network stabilizes, ETH1.0 will gradually become a shard of ETH2.0.

That is to say, ETH2.0 is not a hard fork of Ethereum, so there will be no forked tokens, and current ETH (ETH1) holders will not get two assets. For example, when Bitcoin had a hard fork of BCH, users who owned BTC at the time would get an equal amount of BCH. Since ETH2.0 is not a hard fork, there is no free candy.

ETH1 tokens come from the current Ethereum PoW chain, while ETH2 tokens are generated through the PoS mechanism after the launch of the ETH2.0 Beacon Chain network (no transfers or smart contracts, etc.). When ETH2 tokens are launched, ordinary users can choose to keep ETH1 tokens or convert their ETH1 tokens to ETH2 tokens. However, from the current point of view, due to liquidity reasons and one-way conversion, most users may not choose to convert their ETH1 to ETH2 for the time being. If conversion is really necessary, subsequent exchanges or wallets can help users complete the conversion.

In short, for ordinary users, after ETH2.0 is launched, they don’t have to worry about their ETH assets, nor do they have to worry about the future exchange of ETH1 and ETH2.

The impact of the launch of ETH2.0 on DeFi

The launch of ETH2.0 is not only beneficial to the long-term development of ETH, but also to the development of its DeFi ecosystem. The launch of Ethereum 2.0 has brought certain expectations for the scalability of Ethereum in the future. Of course, if ETH2.0 does not progress smoothly, it will also have an adverse impact on ETH and the DeFi ecosystem.

The compound effect of the two drivers

Currently, the demand for Bitcoin exceeds the output by at least one times, as shown below:

Bitcoin demand exceeds supply, says TheBlock

The halving effect of Bitcoin is gradually emerging. At the same time, the launch of the ETH2.0 storage contract will also lock a large amount of ETH in the future. Assuming that at least 2.5 million ETH are deposited in the Ethereum pledge contract, and the APY is around 10%, then this will lock at least more than $1 billion worth of ETH.

The halving effect of Bitcoin and the staking effect of ETH will gradually show up in the next few months to a year. For this, you can also refer to the article "The Halving Effect of Bitcoin and the Staking Effect of ETH2.0" written by Blue Fox Notes a few days ago.

When Bitcoin and Ethereum start to move, the market characteristics may be different from those in early 2017. Not only Bitcoin will become the protagonist, but ETH and mainstream DeFi may also have their shining moments. As for how it will evolve, it will gradually blossom in the next few months to a year. Of course, ups and downs during this period are also indispensable, which is also the norm of the market.