Ethereum 2.0 - Transition to Proof of Stake
Ethereum 2.0 is a new concept that ETH developers, led by Vitalik Buterin, are trying to follow. The aim is to shift its focus to Ethereum staking, ie proof-of-stake. Economic activity, which is associated with the possibility of staking Ethereum doubles. With the news came Binance Research.
What is proof-of-stake and staking?
Staking is a method of accumulating cryptocurrencies, which takes place if you hold a cryptocurrency in a supported wallet for a long time. The rewards generated in this way amount to $ 8 billion (global) at the time of writing. Such cryptocurrencies include, for example, ADA or LINK. However, these numbers could double to 16 billion thanks to Ethereum 2.0.
Proof-of-stake is a method used to validate blocks. The creator of the next block does not determine the computing power, but its wealth or the age of the tokens held.
Ethereum 2.0 is approaching, what can we expect?
Ethereum 2.0 - Serenity is an interesting upgrade for the second largest cryptocurrency in terms of future capitalization.
Validator - a participant in the solution of an algorithm that has passed at least a minimum deposit of 32 ETH "Ethereum 2.0 validators can expect to earn an annual fee of 4.6% to 10.3% for staking." The validator bets or stops the possible amount of a given cryptocurrency. In PoS-based blockchains, a number of validators rotate, propose and vote on another block, and the weight of each validator's vote depends on the size of their contribution. Significant benefits of PoS include security, reduced risk of centralization and energy efficiency.
In general, the PoS algorithm looks like this. The blockchain monitors a set of validators, and anyone who holds the basic cryptocurrency of the blockchain (in the case of Ethereum 2.0, ETH) can become a validator by performing a special type of transaction that stops their ETH from being deposited. The process of creating and approving new blocks is then performed using a consensus algorithm in which all current validators participate.
Assigning rewards to validators can work on two main types of consensus algorithms: Chain based PoS and BFT PoS
Advantages of PoS over PoW
It is not necessary to consume a large amount of electricity to operate the blockchain. Recently, many critics have come to the conclusion that the operation of the blockchain in the PoW system consumes a large amount of electricity, thus creating an environmental impact. The PoS system consumes much less electricity.
There is no need to issue enough new coins to motivate participants to participate in the network. Of course, lower energy consumption and the need to invest in expensive hardware are associated with a lower financial burden. Therefore, for the operation of the blockchain, a smaller reward in the form of releasing new coins is enough. Reduced risks of centralization, due to less economic and technical complexity. Due to the much greater availability in terms of financial aspects and less technical complexity of the operation of this system.
Ethereum 2.0 proof of stake benefits
For entering the ETH and confirming the correct blocks, you will be rewarded with another ETH through the network-wide interest rate and you will receive a portion of the network transaction fees. The minimum deposit will be 32 ETH. Sufficient technical performance of the computer and a stable internet connection are assumed. The key to proper validation is to ensure a constant online mode for the purpose of constant block approval and thus ensuring network security.
Therefore, if your validator client goes offline at any time, you will automatically be fined your deposit to support the availability of validators. If blocks are being completed and your validator client is offline, you may lose your current share. For a closer understanding, this share can be explained as follows: if the annual profit share is 5% and you are offline for one day, you lose the daily profit share, ie. 0.0137% with the fact that this share can grow if you are more days offline.
If the blocks are not completed, ie. that more than 33% of validators are offline and you are also offline, you can lose 60% in 18 days. The system has a condition. If your bet falls below level 16 ETH you will be completely excluded from the validation system.
Withdrawal of ETH from the PoS system
If you need to withdrawal your ETH from the PoS system, the client will be placed in the queue. If the queue does not exist, the minimum time to select ETH from the system is 18 hours and it is dynamically adjusted depending on how many validators select resources at a given time. The length of the bet is therefore not fixed for a certain period. In case of interest, I can analyze in detail the economic advantage of the PoS Ethereum system in the next article.
Ethereum 2.0 works as a decentralized world computer. The testnet of this system is already working. Prysmatic Labs is behind the upgrade. Scheduled launch 3.1.2010.
Transition to Ethereum 2.0 will have interesting consequences. Personally, I am interested what will happen to Ethereum miners. How it will affect other currencies ? How will Ethereum Classic react? We can discuss the possible consequences in more detail in the next article.