Ethereums’ transition to Proof-of-Stake has been in the bushes for quite some time now. Like most of you, we are eagerly waiting for this to happen. We are keen on exploring the new staking ecosystem that will emerge once Ethereum morphs into Ethereum 2.0 first hand.
In the meantime, Mara Schmiedt, Georgia Rakusen, and Collin Myers from ConsenSys Activate did a great job of outlining this ecosystem and conducted an in-depth, quantitative study with 287 participants already owning Ether. They published the findings of their research in the “Ethereum 2.0 Staking Ecosystem Report”.
In this post, we would like to bring you up to speed in terms of Ethereum 2.0 and share the reports’ main insights without going into too much detail.
Let’s start with a little bit of background.
What is Ethereum 2.0?
Ethereum needs to evolve to achieve its’ mission of becoming the world computer. Ethereum 2.0 is the upgraded version of Ethereum 1.0 with improved scalability, security, and energy efficiency. This is mainly achieved through two improvements to Ethereum 1.0, namely the switch from Proof-of-Work to Proof-of-Stake and the introduction of sharding. PoS institutes improved security through cryptoeconomics, while sharding results in higher throughput by splitting up the main chain into so-called shard chains. Ethereum 2.0 is also referred to as Serenity or simply Eth2.
In a PoS system, validators take the role of miners and provide computing power, storage, and bandwidth to validate transactions and propose new blocks. For doing so, they receive periodic payouts denominated in ETH. Validators need to lock 32 ETH into a deposit contract, which functions as a sort of security deposit, which gets forfeit in case of malpractice. This way of incentivizing honest behavior requires far less energy than in PoW systems, in which miners are incentivized through sunk costs in the form of hardware and electricity.
For more on PoW vs. PoS, check out this short video by Vitalik:
Sharding is the process of splitting up a database into smaller parts called shards. It is a way of partitioning the computational and storage workload across different nodes. Hence, the transactional load of the entire network does not have to be processed by each node, but instead, nodes can focus on maintaining information related to their shard. In Ethereum 2.0, the shards communicate and coordinate through the beacon chain and crosslinking.
Sharding is a major part of Eth2 and a complex topic in itself. This video by Blockgeeks does an excellent job of explaining and a good starting point in case you want to learn more:
When will Ethereum 2.0 launch?
The change from Ethereum 1.0 to Ethereum 2.0 will not happen overnight, but rather through three phases:
Phase 0 | Beacon Chain
Estimated to start in Q3 of 2020, phase 0 will launch the beacon chain, a PoS blockchain that will run alongside the current PoW Ethereum blockchain. While this is probably the most crucial milestone, it does not result in any significant changes for the end user. The main objective is to test the basic PoS infrastructure.
Phase 1 | Shard Chains
In phase 1, which is expected to start in 2021, shard chains will be released that interoperate with the beacon chain. This allows for the computational workload to be split across shards, ultimately increasing the throughput of the overall network. Initially, 64 shards will be launched, so together with the beacon chain, a total of 65 chains will operate in parallel. The current PoW Ethereum chain is expected to be the first shard on Ethereum 2.0.
During the first two phases, Eth2 can “only” be used for staking as well as sending tokens. No smart contracts are enabled on Eth2 in phase 0 and phase 1.
Phase 2 | Execution Engine
The final phase of the transition is expected to take place in 2022. It will enable transfers and withdrawals, cross-shard transfers, smart contract calls, and building execution environments so that Dapps can be built upon Eth2. Phase 2 should mark the end of the PoW Ethereum chain.
Staking in Ethereum 2.0
Other than the 32 ETH that need to be locked in a deposit contract and operating a node that is constantly online, there are no more restrictions to who can become a validator in Eth2.
It is important to note that during the transition (phase 0 & 1), you will have two Ethereums running in parallel, namely Eth1 and Eth2. There will be a one-way, non-reversible bridge between the two. Thus, you cannot convert tokens back from Eth2 to Eth1.
The decentralization of the network is fostered by the fact that consumer hardware is prospectively sufficient in order to participate in staking. Hence, ETH holders have two options if they want to participate:
- Run their own validator node
- Use the services of a staking provider
And this is where we will jump into the ConsenSys study’s main findings:
Of the 287 participants, around 65% plan to stake on Eth2. Roughly half of those want to run their own node, whereas the other half plans on using the services of a staking provider. The remainder is either undecided, not going to stake or hasn’t answered the question.
The study states that the majority of the respondents (63,2%) hold 32 or more ETH. It was interesting to read that almost half of the respondents (46%) manage their funds with a hardware wallet. Of those planning to use a staking provider, roughly a third (30,2%) manage their funds via a centralized exchange.
The participants that plan on staking, either on their own or via a staking provider, stated that they plan on staking roughly half of their Eth holdings.
It is no surprise that when asked about what staking providers the respondents knew, big exchanges such as Coinbase or Binance scored the highest. Nevertheless, we are flattered to also be in the list.
We want to thank ConsenSys Activate and especially Mara Schmiedt, Georgia Rakusen and Collin Myers for their work and highly encourage everyone to check out the full report here:
Insight Report: Eth 2 Staking Ecosystem | ConsenSys
The launch of Ethereum 2.0 this year requires ETH holders to voluntarily stake their funds to ensure the continuation…
Having closely followed Ethereum for the last several years, we couldn’t be more excited about the transition to Eth2. We are eager to provide our staking services to any ETH holder and are more than happy to hear your thoughts, feedback, wishes and concerns about staking in Ethereum 2.0!
Since this was only a quick intro to Eth2 and there is so much more to unravel, we provide you with the sources for this post in case you want to dig a little bit deeper yourself: