Ethereum 2.0 : What should miners expect from new Ethereum’s roll out?
Expected to launch in 2020, Ethereum 2.0 marks a long-anticipated upgrade to the Ethereum public main net.
What is Ethereum 2.0?
Ethereum 2.0 (Eth2) is a major upgrade to the current Ethereum public main net, designed to accelerate Ethereum’s usage and adoption by improving its performance.
Alongside the ultimate scalability and security for the Ethereum network, the upcoming Ethereum 2.0 upgrade to a proof-of-stake model promises to bring additional, new benefits to its users, too. One of the main attractions, which encourages buying Ether (ETH), is a staking model that allows receiving passive income for the validation of transactions. And here, the users are able to choose between two different options: The first implies depositing 32 ETH and running a validator node software, and the second allows for staking without having to deposit or run nodes by joining third-parties’ pools.
The numbers speak for themselves, as 66% of the Ethereum community are proponents of staking with the remaining still unsure of their choice. With promising benefits, however, the new upgrade can bring some risks, too. How will the new staking model affect those who choose to stake, hold or trade, and what can the negative scenarios be for those who decide to keep mining with the old network?
In with the benefits :
Most experts believe that the upgrade to Ethereum 2.0 will have a positive impact on the price of ETH and its trading volumes. Staking can indeed open up wide investment prospects for those who prefer the buy-and-hold strategy instead of trading ETH futures. According to Changpeng Zhao, the CEO of Binance, staking will help stabilize cryptocurrency prices, as it encourages users to make market purchases and set limit sell orders.
Another expected benefit is that the launch of the update will reduce costs and speed up network transactions at the expense of a drop in the cost of gas. Speaking about positive changes that Ethereum 2.0 can bring to the market, Praneeth Srikanti, the investment principal at ConsenSys Ventures, told Cointelegraph:
“Proof-of-stake comes with a number of improvements, including energy efficiency, lower barriers to entry, stronger crypto-economic incentives and greater reward-generating capabilities for a broader set of users. We also believe that there would be increased demand for ETH, as users would start to main opportunities to find new staking reward-based-yields and contribute to the security of the chain and will present some interesting dynamics with the current utilization via locking up ETH assets in DeFi protocols.”
However, despite a number of advantages, the Ethereum 2.0 upgrade potentially carries the risk of significant negative consequences for the network’s users and stakeholders.
The History of Ethereum 2.0
Ethereum 2.0 is not a new idea in the Ethereum community. A shift in Ethereum’s underlying consensus mechanism to address the restrictions of a Proof of Work block chain has existed since the block chain’s genesis. Ethereum 2.0 arrives on the heels of many planned upgrades to the Ethereum mainnet following the mainnet Frontier launch in July 2015, namely:
Ø Homestead, March 2016
Ø Metropolis: Byzantium, October 2017
Ø Metropolis: Constantinople, February 2019
Ø Istanbul, December 2019
The launch of Ethereum 2.0 is especially significant compared to past upgrades because of the implementation of a Proof of Stake consensus mechanism, moving the network away from its existing Proof of Work architecture.
Getting a detailed idea about the whole situation, we come to the stakes. So what’s at stake?
Proof of Stake
Proof of Stake (PoS) is the most significant change in Ethereum 2.0, because it reforms the crypto-economic incentive structure for validating the block chain. Ethereum’s current architecture is maintained by a Proof of Work (PoW) consensus mechanism. The components of Proof of Work are well-known to the blockchain community: it is the architecture used for the most utilized blockchains to date, including Bitcoin, Ethereum, Litecoin, and more. In Proof of Work, miners run nodes and expend computational energy to solve complex mathematical problems in a competition to mine the next block.
The time and money that miners need to run hardware and expend electricity on PoW chains is validated by block rewards, which are distributed to miners who successfully mine a block into existence. PoW chains are extremely secure; the combined computational power required for an individual to compromise a well-established PoW blockchain like Bitcoin or Ethereum would cost an extraordinary amount of money, and may not even exist.
Although extremely secure, PoW blockchains suffer from scalability and accessibility issues.
Scalability:
Because each block is mined sequentially, and there is a finite amount of data that can be recorded in each block (a measurement known as block size), Ethereum can only process a limited amount of information in a given amount of time. If the number of pending transactions surpasses what a block can fit, then the remaining transactions have to wait for the following block, and so on. This scalability issue will be fixed by the implementation of sharing on the PoS network.
Accessibility:
PoW miners have been fundamental to the creation and maintenance of the surge in decentralized technologies we have witnessed in the past decade. Though PoW blockchains are functional, the barriers to entry to be a miner are quite high. An individual must purchase and set up all the necessary hardware. To earn considerable returns from block rewards, that individual also likely must live in a region with lower electricity costs. Another level deeper, electricity costs are often reduced for businesses and corporations, meaning a miner looking for maximum profitability would also need to form a company and purchase enough mining hardware to justify their effort.
Also taking the other points into consideration :
Several of the largest mining conglomerates outcompete the majority of regular blockchain users from actually participating in the maintenance of the network, leading to centralization of miners. In Ethereum 2.0, one of the goals is for PoS to level the playing field for more individual validators to participate, earning a shared return on maintaining the truth of the network.
Proof of Stake replaces the two primary components of PoW (miners & electricity) with validators and stake on Ethereum 2.0. Broadly speaking, validators replace miners as the individuals who maintain the agreed-upon state of the network and receive rewards for randomly selecting the next block of data. Unlike in PoW, in which miners expend physical energy (called hash power) by burning electricity to confirm blocks, validators in a PoS system commit 32 ETH as ‘skin in the game.’
On Ethereum 2.0, if a validator fails to stay online and execute their share of computational responsibilities, their block reward will moderately decrease in order to incentivize validators to stay online as consistently as possible. Should a validator maliciously attempt to compromise the network (i.e. validate incorrect data history), all or some of their 32 staked ETH will be slashed. The crypto-economic incentives against malicious actors are stronger on a PoS network. Whereas in PoW, the economic risk of a failed attack is equal to the cost of electricity to achieve the required hash power, in PoS the cost to launch an attack is equal to the amount of staked ETH, and therefore so is the penalty. The chances are higher that an individual is warier of directly risking money in the form of staked crypto to launch an attack compared to the more abstract cost of electricity. Whereas a failed PoW attack results in the loss of electricity costs, slashing a validator’s stake is the PoS equivalent of a miner burning down an entire PoW server farm in a failed attack. In short, the economic incentive to act in the network’s best interest is stronger.
Though becoming a validator has a lower barrier to entry than becoming a miner just by virtue of the elimination of hardware costs, the fact is that not many people own 32 ETH or are willing to risk staking nearly $6,000. Moreover, the number of interested individuals technically literate enough to run and manage a client without risking downtime and potential fund slashing is not widely-known. There are two solutions to the barriers to entry that are currently anticipated on Eth2. To overcome the technical knowledge of running one’s own client, companies are beginning to offer staking services through which they will manage the client operation for an individual who stakes 32 ETH in exchange for a small fee. Should an ETH holder only wish or be able to stake less than 32 ETH, she may join a staking pool, where her funds are pooled with others’ to reach the required 32 ETH. Her rewards, then, would be proportional to her total contribution.
Proof of Stake will be launched in the first stage of Ethereum 2.0’s upgrade, known as Phase 0.
Comparing Ethereum 1.0 and Ethereum 2.0
The current version of Ethereum also known as Ethereum 1.0 runs on a Proof of Work (PoW) model. Under this system, physical computing power and electricity is required to generate blocks on the Ethereum blockchain. The computer power is achievable with the help of miners, combined with the electrical power needed, the PoW model is complicated and expensive, reducing the efficiency of the network in general.
Ethereum 2.0 is designed to work under the Proof of Stake (PoS) model, a decentralized system that guarantees improved security, energy efficiency and scalability. Generally preferred as a positive upgrade to the PoW version of Ethereum 1.0, the PoS Ethereum 2.0 will rely on validators (decentralized miners) and deposits of Ether as a potential reward.
Another notable upgrade to the Ethereum network is the introduction of Shard Chains which are billed to foster faster transaction throughput and efficiency.
Miners in Deep :
The transition to the PoS algorithm will change the approaches to mining, which is why most miners will likely leave the market. Given that ETH is the most popular coin for home mining, the impact will be palpable.
As a result, ETH miners will be left with the choice of either selling their equipment to start staking or switch to other networks and mine coins that are not planning any major shakeups in their protocols. But the reality is that most miners will most likely switch off, and the remaining market participants will start staking their assets.
Consequently, the network will abandon the proof-of-work consensus algorithm, leaving Ether (ETH) miners with very few options. Since their equipment will become obsolete, they will be forced to start mining altcoins, or recertify as ETH stakers.
To mine or not to mine?
Once Ethereum runs fully on the PoS rails, miners will have two options. One is to sell the equipment and use that money to accumulate more ETH and start staking, while the other option, which is available exclusively for GPU miners, is to simply switch over to other Ethash networks and mine altcoins. Nick Foster, a representative for United States-based mining equipment dealer Kaboomracks, told Cointelegraph that most ETH miners will pick the latter option:
“I would say most miners are not really into mining to get ETH or a specific coin. Yes, a certain number mine and hold, but I would argue against the notion that a large population of altcoin miners hold their coins for any amount of time.”
Foster went on to describe how he switched to mining Ravencoin (RVN), an Ethash peer-to-peer blockchain asset, with his 3GB GPU unit once it became unprofitable to mine ETH:
“It’s mining raven, and I sell to BTC instantly for stability sake and sell to USD to pay my power right after. I would say lots of people are employing a strategy like this.”
As Foster summarized, he expects ETH miners to hop off the network, while new player, those who didn’t invest in the power infrastructure or the rigs will be staking ETH. He described the following scenario:
“I can’t imagine how much of a dork I would be if I found a five-year lease with $0.04 power, and I was mining ETH and I decided to sell everything and just keep paying my lease so I could stake ETH as a replacement.”
Marc Fresa, the founder of mining firmware company Asic.to, agreed with that sentiment in a conversation with Cointelegraph: “If you’re invested into mining, you don’t want staking since you have the build out for it.”
One of the major altcoins that might benefit from PoW miners leaving Ethereum is Ethereum Classic (ETC), a more conservative version of the blockchain that reportedly has no PoS-related plans. Since it also runs on the Ethash algorithm, its hash rate might experience a significant spike as a result of the potential miner migration caused by the Ethereum 2.0 launch.
Conclusion
From the foregoing, the relevance of miners to the new version when it is launched will be at a very low ebb. A more vital question is what the overall relevance of miners will be afterward.
The emergence of Ethereum 2.0 will not completely render the old version useless from the very beginning. Ethereum 1.0 will continue to function normally but this would not undermine the laid down plans. The intention for Ethereum 1.0 is to effectively become the first shard on Ethereum 2.0 when Phase 1 launches. Until then, the Ethereum 1.0 chain will continue as it is now and will undergo improvements to enable it to eventually be an Ethereum 2.0 shard.
So that’s all for today folks. Thank you for reading!
