“You can still deposit at any time”: Articulating the significance of ETH2.0
Kelsie Nabben
November 25, 2020
This is Part 2 of an analysis on ‘what is Ethereum?’. For Part 1 on ‘the significance of the Ethereum blockchain’, see “THIS IS NOT A BLOCKCHAIN”, where I argue that Ethereum is digital infrastructure in pursuit of decentralisation. Otherwise, dive right in…
We just witnessed a digital infrastructure being upgraded: meaning that ugly moment when you see the scaffolding protruding from the concrete and it is still teaming with workers in high-vis vests and hard-hats. Infrastructure is usually invisible and upgraded in increments (Star, 1990). If all goes according to the roadmap, the bridge will soon fade into the background, and we will not think about how it functions, is funded, or maintained. If not, we will remain acutely aware of Ethereum as infrastructure, as we witness it break-down.
“You can still deposit at any time.”
– Vitalik Buterin, Co-founder, Ethereum
There have been lots of informative online posts about ETH2.0 and how it works. The aim of this piece is to shed some more colour on why it is significant. It is a story about decentralisation. A vision of a secure, decentralised transaction base-layer to network humanity.
1. A Stake in Security
The design philosophy for Proof-of-Stake (PoS) on the Ethereum blockchain has been security and scalability through multiple implementations. This is being done in order to address multiple assumptions about how it could all go bad.
What most people don’t think about in terms of how things could conceivably go bad include software code errors (e.g. The DAO hack), and collusion (“cartels”) to attack consensus on the blockchain network. Proof-of-Stake does not address software bugs. They are addressed by open-source code and multiple teams, in multiple coding languages, developing multiple ETH2.0 clients. Hopefully one works. PoS attempts to address and dis-incentivise the risk of collusion.
Proof-of-stake removes reliance on hardware manufacturing, supply chains, and warehouses; all of which were never part of the original vision of a decentralised proof-of-work network.
While it could be criticised as creating an economic cost barrier to entry (32 ETH is required to stake to the deposit contract), the initial investment is a more palatable fixed cost, when compared to the specialised hardware, electricity, and internet required to run a Proof-of-Work node. It is also more expensive to attack.
Thus, Proof-of-Stake provides security of the blockchain from attacks through economic loss of digital coin being ‘slashed’, instead of security through economic investment in lots of mining hardware and maintenance. Not to mention the electricity.
2. Scalability
To quote the ‘age-old’ adage, Ethereum is not Visa or Mastercard… yet. The reason anyone cares about scalability is because it reduces the cost of transactions and increases the volume of throughput.
ETH2.0 brings with it a multi-faceted new array of fun verbiage. The TLDR, as it relates to scalability, is this:
Ethereum 2.0 allocates transactions, and block validation, to a number of blockchain ‘shards’. The ‘Beacon Chain’ is the administrative chain, which coordinates and synchronises data across the array of shards, to confirm the ‘state’ or catalogue of transactions, which is important to determine who owns what.
Other fun vocabulary to note is related to scalability is as follows. ‘Casper’ is the specific Proof-of-Stake protocol. Side-chains remove transactions from the main chain, but are inherently less secure as less economic value is staked in securing them. ‘Plasma’, which is not a side chain, whereby computation occurs off the main chain but data is regularly backed up via a regular root ‘commitment’ of the state of transactions on the chain. Finally, cryptography — such as zero-knowledge proofs and other fancy math, that reduces the size of data or amount of data stored on the main chain.
And if all this fails in the world of Ethereum, there are a number of other friendly but competing blockchains which hark back to the early days, that aim for decentralisation in different ways, e.g. Cosmos ‘internet of blockchains’ through Byzantine Fault Tolerance consensus, and PolkaDot through on-chain governance.
3. Number Go Up
The enthusiasm from the Ethereum community in staking ETH to the Beacon chain deposit contract is a strong signal of confidence in the future of Ethereum, and perhaps survivability. Thus, the positive price movement reflects the fresh wave of demand for ETH.
Cracks Appear?
Will this achieve a ‘truly decentralised’ base-layer, or will the bridge collapse back into the ice ages?
So far, our digital infrastructure is being readily constructed before our eyes, for a full-stack, decentralised, autonomous future for actual freedom in cyberspace.
Yet, some of this vision is already appearing to crumble, with new corners of centralisation naturally forming. Although simplicity is a goal, decentralisation might die by our own laziness. Just as you could outsource your proof-of-work to someone else to set up and maintain your mining rig, staking infrastructure providers have emerged in the market to offer ‘staking-as-a-service’. Such companies will gladly run and maintain your staking node for a cut of the staking reward and a fee. This means that what we could see is large portions of various PoS chains being validated by small, private tech start-ups.
The fear is that the infrastructure providers are therefore responsible for maintaining consensus on significant proportions of the blockchain, and vulnerable to deliberate or accidental failure. This is a blueprint for disaster, as their servers, cyber-security, operational-security, or governance could easily fail.
Level Up
These insights are just some observations to make sense of the significance of Ethereum 2.0, and consciously recognise the development of digital infrastructure, as a disparate community of developers and fans seek to build a ‘world computer’. As always, the space of decentralised digital infrastructure remains boring, but historic.
For more narratives to your inbox, visit https://kelsienabben.substack.com/people/1619235-kelsie-nabben
With thanks to the RMIT Blockchain Innovation Hub team for prompting a discussion on this topic, especially Professor Sinclair Davidson for feedback.
