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| Breaking down Ethereum 2.0 and its impact on crypto markets By Teddy Oosterbaan October 13, 2021 Sponsored by ETH Price -4.2% $3,428.62 Market Cap $402.86B Volume (24H) $18.79B (As of 10/12/21 @ 1:05 UTC. ETH price % change over 24 hours.) If you were forwarded this newsletter and would like to receive it, sign up here.
An under-the-radar rendezvous of core Ethereum developers took place in Greece last week, with major progress being made toward the Merge.
According to ConsenSys’ Ben Edgington, a Beacon Chain developer, the teams accomplished the transition of a multi-client devnet from proof-of-work to proof-of-stake. Eth1 execution clients and Eth2 consensus clients successfully merged to create a network capable of processing transactions.
This news comes shortly after the announcement of Altair’s coming upgrade on Oct. 27. The Altair upgrade is a significant step in the transition to proof-of-stake, giving developers a “low stakes warm-up” and further functionality on the Beacon Chain. While the puzzle that is the Merge seemingly moved slowly at first, it is beginning to fall into place all at once.
As we approach the eventual transition to proof-of-stake, it is important to note what the upgrade will change and what will stay the same.
Immediate impacts on users and the overall network: Proof-of-stake allows validators to propose and validate blocks without using the energy currently required to mine these blocks. Proof-of-work miners are required to “compete” for blocks, incentivizing them to invest in advanced hardware and more energy usage than their mining peers. Proof-of-stake consensus randomly distributes block proposal opportunities to validators on the network, alleviating some of the competition that is so prominent in proof-of-work.
2. Transition away from economy of scale Going hand in hand with energy efficiency, the need for expensive mining equipment and access to energy allows mining pools and large miners to dominate the network. While economies of scale will almost always arise, proof-of-stake allows users with arguably smaller initial investments to become validators on the network. In theory, this counters centralization and adds increased security to Ethereum as validators become diverse and widespread.
3. Ether emissions fall The economics of Ethereum under proof-of-stake will differ from its current status. Ether rewards will depend on a variety of factors throughout the network, but the emission rate is expected to fall below the 2 ether block reward currently issued under proof-of-work.
What won’t change immediately with the merge: The transition to proof-of-stake consensus will not have an immediate impact on gas fees or transaction speed. However, the upgrade will lay the groundwork for sharding, which “spreads the network’s load across 64 new chains” and is a key part of Ethereum’s roadmap to scalability.
Network users and blockspace consumers should have a similar experience when they are interacting with the Ethereum blockchain. The execution layer will remain the same post-merge and using Metamask or other software wallets should feel the same to end users.
3. Maximal extractable value (MEV) Unfortunately, getting rid of miners does not get rid of MEV, and users of the proof-of-stake network will still be subject to the whims of transaction ordering by those looking to extract value from liquidations, frontrunning and arbitrage. Eth1 clients will still be responsible for the creation of blocks, much like they are today. Therefore, the transaction ordering process will take place the same way, before the blocks are passed to Eth2 clients to finalize the bundled transactions.
Welcome to another edition of Valid Points.
– Teddy
Pulse check
The following is an overview of network activity on the Ethereum 2.0 Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics. Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.
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Validated takes Divergence Ventures was caught exploiting airdrops from Ribbon Finance and other portfolio companies. BACKGROUND: The venture firm had made a minimum of at least 705 ETH by gaming future airdrops on multiple addresses, potentially using insider information. While the tactic is often used by DeFi investors, the community is questioning the ethics of using confidential information and immediately dumping the governance token.
OpenSea delisted DAO Turtles, presumably because of concerns around securitization. BACKGROUND: As creators experiment with the possibilities of non-fungible tokens, marketplaces are wary of the financialization of art and NFTs. FTX also announced that it would be avoiding NFTs with royalty mechanisms for regulatory reasons, potentially creating demand for a fully decentralized NFT market.
U.S. regulators continued digging into stablecoins and their issuers, a week after Gary Gensler referred to the tokens as “poker chips”. BACKGROUND: The exponential growth and lack of transparency throughout the stablecoin industry has worried investors and regulators alike. The Treasury is considering launching a FSOC examination on whether or not stablecoins are a threat to economic stability.
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Factoid of the week
While the pandemic has stunted some industries, fintech development and adoption have accelerated. Join executives from across the financial and technology sectors at Accelerate Finance: Money in a Mobile World on Oct. 13 to understand what's next in tech and how consumer expectations are driving change.
Open comms Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.
You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is: 0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.
Search for it on any Eth 2.0 block explorer site!
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