These long-standing misconceptions need to be cleared up about Ethereum mergers

Original author: domotheus, encryption KOL

Original compilation: 0xCC, Rhythm BlockBeats

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Original title: "ethereum should know: Proof of Stake edition"

As the merger nears, more and more articles are signaling that it is indeed near. This has also brought about a series of discussions related to PoS, and people are discussing the same topics and misunderstandings over and over again. I have seen this situation to a certain extent when the Kiln testnet was successfully merged last week, and we will see more similar things in the future, so I summarize some common questions and opinions below.

Whenever I see someone making these points, I can share this article with him, and I hope you can do the same. If there are some flaws in this article, please correct or make supplementary suggestions.

What is a merge?

More information can be found at ethmerge.com, so this section will be brief.

After the merger, Ethereum will adopt PoS (Proof of Stake) instead of PoW (Proof of Work) consensus. The merger is not "ETH 2.0", there is no "ETH 2.0", this is already an outdated term.

If you are an ETH holder, you don't need to do anything. You will still hold the same amount of ETH after the merger, no "ETH2 coins" and no migration required. Everything is exactly the same, only the consensus mechanism has changed.

It is called "merging" because ETH merges the beacon chain (consensus layer) with the existing chain (execution layer) and discards The PoW part of the execution layer.

To explain, "consensus" is just a fancy word for how transactions are ordered and secured. Both PoW and PoS are different means of achieving consensus.

PoW: "The cost of disrupting the block order is too high, because it is more cost-effective to follow the rules."

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PoS: "The cost of disturbing the block order is too high, because I will lose all my staked money if I do so."

Since it is only a change in the consensus mechanism, PoS itself will not significantly reduce Gas costs.

Why merge?

Reduced security costs as less energy is required to reach consensus.

For PoW, the income needs to pay for all the hardware and energy used by the miners, otherwise it will be No one goes to mine anymore. This requires issuing large amounts of Ethereum and selling it quickly in exchange for fiat currency to pay bills.

But PoS is not the case. PoS only needs to pay speculators some income, so that people are willing to deposit capital instead of investing directly elsewhere. Other than a regular computer and internet connection, there's no big bill to pay. So the rate of return just needs to reflect the opportunity cost and risk involved.

More sustainable.  

The security of a chain is basically proportional to its market value. Either PoW (higher value Token rewards = more reason to play by the rules = more miners = harder to break consensus) or PoS (higher value mortgage Token = more reason to play by the rules to avoid losing collateral) That's all.

Newly issued tokens essentially transfer value away from all holders and redistribute it to specific people. All else being equal, selling these tokens can extract value from the network.

This opens the door to many future scaling solutions: data sharding, stateless, light clients, etc.

By separating the execution and consensus layers, this will help reduce future code complexity.

Pacifying the environment and gamers is certainly a positive side effect, but it was not the main reason for switching to PoS. The switch is more due to external factors. Ethereum as a protocol does not have much control over the entire network, such as energy production, GPU supply chain, and so on.

When will it be merged?

The official date has not yet been announced. For various reasons, the developers and the community are cautiously optimistic about the merger in mid-June.

It is still being tested, and the developers are completely sure that there is no The merge will not occur until an error occurs.

I personally don't pin my hopes on June, but I think at least it will be done in summer, unless there is a huge problem in the testing process. For example, a critical bug that takes weeks to fix, or a bug in the specification itself that takes months to fix.

The difficulty bomb is set in June, so there will be a hard fork whether or not there will be a merge by then.

It is recommended to bookmark wenmerge.com for a quick look at the latest estimates for testnet merges.

A long-standing misconception

The idea: "You idiot! The development team will Procrastinating as in the past, they promised a merger years ago and it still hasn't happened."

First some Note: An official merger date has yet to be announced and has never been announced before. A deadline that does not exist, how can there be delays?

Claims like "will switch to PoS in 2018" come from extreme optimism and underestimate the complexity of PoS design and the complexity of a secure transition from PoW to PoS. Work done by previous developers amounted to a partial completion of the Casper FFG specification (a mechanism for mixing PoW and PoS), but it was eventually scrapped. There are many differences in the status quo:

After years of research and analysis of potential attack directions, there is now a complete protocol specification.

The client has been implemented, but the test has not yet been carried out.

Everyone is working while merging, nothing else is working except merging. The necessary steps required for merging have been completed. It's not even "they've done something as complex as EIP1559, so they can focus more on merging now", it's: "they're putting all their attention on merging". It's unlikely that the merge will be delayed again because developers are working on other content. There is nothing else they can do until the merger is complete.

Since December 2020, PoS is actually running as a beacon chain. This means that Ethereum’s PoS has been tested (to an extent) in production for over a year now with over 10 million ETH in operation. It just hasn't produced blocks for the executive layer yet.

Viewpoint: "Millions of pledged ETH will collapse the moment they are unlocked." 

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To be sure, there will be plenty of lockers looking to end up profiting, especially those who locked up ETH when 32 ETH was only worth $10,000. But from one perspective, there is much more to consider.

Merging does not unlock any ETH. Unlocking will happen in the first hard fork after the merge, probably 6-8 months later. This means that within a few months, no additional ETH issued by PoW (about 13,000 ETH/day) will be sold, and no ETH issued by PoS will enter circulation.

Just like you have to queue up to deposit ETH, you have to queue up to withdraw ETH. Assuming a large-scale sell-off event occurs, everyone will be in the queue and will be unlocked sequentially at a rate of 1125 per day. So there is no "open the gate and let the water go" moment. It takes more than a year for everyone to unfreeze, and about 38,000 ETH enter the circulation every day during a year (about 1% of the daily average).

After the merger, validators will also start to receive fee rewards, and some estimates indicate that the rate of return may double. Thousands of people are now queuing up to enter staking. Since they can accept 5% ETH yield, I don't think they will give up depositing when the yield becomes 10%.

By far the biggest risk involved with staking is the merger itself. Something catastrophic could cause the merger to go wrong, and despite that risk, and despite ETH being locked to an unknown future date, people have been locking their ETH for over a year. How many people or institutions are willing to sit on the sidelines and wait for this risk to disappear before entering?

Staker withdrawal means fewer validators, which means higher rewards for non-exit stakers. It also means more incentive for other people who haven't invested before to start investing...

Of course, this is the crypto world, let crypto be crypto. The merger will bring excitement and volatility, there may be a "sell the news" dip, who knows? I won't pretend to know the future, but it seems to me that more ETH is likely to flow into the lock rather than out.

Point of view: "If PoS is so good, why didn't Ethereum do it from the beginning?"

PoW is easy to conceptualize and implement, PoS is not. When we went back to 2014, PoS was a theoretical concept that was still being researched, and only some blockchains implemented a certain version of it.

Before considering implementing PoS, there are some fundamental questions that need to be addressed from a research perspective.

There is no one-size-fits-all PoS. Each PoS blockchain has its own PoS specification, with pros and cons in all aspects, so it's not as simple as "this chain does it, why can't Ethereum do the same thing".

Starting with a PoW chain, anyone can mine crypto without permission, which makes the crypto distribution mechanism better than those that were originally PoS Chain is much better. Because those chains are PoS from the start, a decision must be made on how to distribute the initial crypto, rather than distributing the crypto permissionlessly.

Ethereum has pre-mined, pre-sold, but after years of changing hands, it has now been diluted to about half, making its distribution closer to that of BTC. So in 2022, when ETH is an extremely liquid and readily available asset, this is not a big deal.

Viewpoint: "This is really just the last trick to entrap miners after years of hard work."

From day one, PoS has been the end game, and everyone mining knows it will end sooner or later. There is nothing injustice going on here.

Economics trump any form of miner loyalty to the chain. You can think of a chain as a business and miners as employees.

Miners/employees have received block rewards for their services (i.e. secure consensus). Wages are paid by employers and it comes from diluting the value of existing token holders.

Miners flow to the chain that offers the highest reward, and if there is another crypto that can be mined by GPUs that offers more rewards, most miners will immediately ditch Ethereum.

Similarly, Ethereum will pay less if a validator can perform the services it needs for less.

This is not entirely exclusive. Miners can also be holders of ETH, and users of the blockchain. There is nothing stopping them from becoming stakers and earning staking rewards.

Viewpoint: "If mining does not cost real-world energy, then this crypto no longer has intrinsic value." < /h4>

I don't quite believe that. There's nothing magical about computing hashes over and over until you find one that meets arbitrary requirements. I mean, a PoW blockchain whose work is done through decryption does not mean that decryption itself brings value to the world. Raising a crypto's mining difficulty doesn't magically make everyone richer, it just makes mining less profitable (not if, of course, the demand for that crypto also goes up).

In my opinion, the value of a coin ultimately comes from supply and demand, and demand comes from the value of block space. Regardless of whether ETH is produced by miners or stakers, people need ETH to buy block space. Of course, more miners, more security/decentralization, which further increases the value proposition of blockspace, which is a positive feedback loop, but the feedback loop also exists in Ethereum of PoS, which is just as cool.

Viewpoint: "PoS is the only way to centralize."

PoS and PoW Basically the same, but there are differences. "Better" or "worse" just depends on your perspective. In my opinion, PoW is really just an extra step to PoS.

Ethereum, as a community, attaches great importance to decentralization, and any potential centralization trends will be noticed by the research team and methods of mitigation will be proposed, even with other important at the expense of things like scalability (keep the gas limit low so that more nodes can participate, even if it causes congestion and high fees).

Decentralization is a slow process and we are not there yet, despite some shortcomings. There are many centralization crutches that need to go away in the long run. Personally, I find it much more appealing to come up with a bunch of stuff to solve a problem than to "give up and say you can't do it because of a problem".

Ethereum's PoS has some interesting designs that are often overlooked. There are no serious penalties for a single validator to crash, disrupt, or directly attack the network. And a thousand validators doing so at the same time will be punished more severely.

This means that if you are a large enterprise with thousands of validators, it is in your own interest to decentralize them and avoid using Cloud hosting, using different clients, etc. Of course, capital is still centralized, but at least the point of failure is decentralized, which is good for the overall health of the network.

PoW mining through energy is much easier to spot and shut down by authorities than larger mining industries that rely on centralized amortized costs. Moving mining rigs around the world is difficult, but staking does not, and does not require any additional hardware beyond consumer-grade equipment.

Viewpoint: "PoS is actually "the more money you earn, the more you earn."

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Yes. Unfortunately, we live in a world of high wealth inequality. Blockchain does not solve this problem.

But this is also the real situation of PoW. Whoever has money can buy more mining machines and make more money. In mining, ROI is also getting better with economies of scale. Centralized mining operations can get better hardware discounts and move to places where electricity is cheap. Independent small miners simply cannot compete with it in reality. With PoS, everyone earns the same proportionally, whether their stake is $10 or $10 million.

It may be centralized, but those big mining operations have no reason to attack the network and cripple it because they have millions of dollars invested in the infrastructure. So... maybe you're fine with the existence of large centralized entities, just that they have a huge stake in the network?

Viewpoint: "Deposits passively generate interest, which is printing money out of thin air? This is simply a replica of the central bank and legal currency!"

Validators are still doing "work": creating blocks and validating other blocks. It's just that the work consists entirely of the actual useful work the blockchain needs to reach consensus, rather than calculating hashes over and over again.

This is not really "free money printed out of thin air", these funds still have costs, they are just more abstract and less intuitive than an energy bill . He mainly exists in the following costs:

Opportunity cost: Why gamble if another investment can bring you better returns?

Poor Liquidity: Funds are locked from the moment you make a deposit. You need to wait in line for your validator to activate, and when you withdraw money, you need to wait in line to get it back.

Inherent Risks: This is still fairly new and things can go wrong: a critical error, the network is attacked, your collateral gets compromised, etc.

Volatility: This is still a volatile asset, if you denominate it in your local fiat currency, use an asset that could drop 30% overnight To get a 5% yield is not so good.

Maintenance: Validators are required to maintain validators, update software, etc. to ensure 100% uptime.

This is where it gets interesting: the more lockers, the lower the reward per person. It also means that all costs will be priced by the market itself. If the staking yield is too low, then the rewards don’t justify the cost and people pull out and invest elsewhere, a move that brings the yield back up. Likewise, if the yield is too high, it will attract more capital and bring the yield back down.

In terms of inflation. Suppose the market thinks 5% is an ideal rate of return, of which 3% comes from additional issuance. Calculated in this way, about 30 million ETHs are mortgaged each year, and 900,000 new ETHs will be issued. With a total supply of 120 million ETH, the inflation rate is 0.75%. As long as the gas fee is above 23gwei, EIP1559 will burn more than that amount of ETH. I want to emphasize that Ethereum will soon become a deflationary asset with yield.

“ETH has never had a supply cap and they have been changing monetary policy.”

For years, Ethereum’s goal has been to “secure a minimum viable issuance for the network,” prioritizing network security over controlling supply caps. No update to monetary policy has increased supply inflation. Low inflation has been the goal since day one.

Once the burn rate of EIP1559 matches the issuance rate, there will be an equilibrium point that acts as an effective supply cap - again market forces determine the value of Ethereum blocks Valuation of the space.

There is no "Ethereum Central Bank" arbitrarily adjusting interest rates and printing money to cronies. The market itself determines how much inflation/deflation there is, there is no one entity that controls Ethereum the way a central bank controls the inflation rate of fiat currencies.

Viewpoint: "Whales have enough money to take over and change the rules of the game and crack down on honest lockers." < /h4>

No, Ethereum does not have any form of on-chain governance.

The protocol update is a community effort (Layer 0), you don't need to lock up ETH to put forward bad proposals and participate in the protocol update.

The process is exactly the same as PoW. Even if you have 99% of the computing power, you can't make invalid transactions, steal other people's assets, change the rules of the protocol, or really do anything other than reorganize blocks without the private key. 1% of honest nodes will reject any block that does not follow the rules and you will be mining on an invalid/useless chain. Now replace "hash computing power/mining" with "staked amount/locked position", and the same is true for PoS. The difference though is that someone caught reorganizing a block will have their entire stake destroyed, whereas the chain cannot completely destroy the miners.

Simply put, this involves a lot of ETH. Up to 10 million counts of ETH before the merger, or about $30 billion. Both the amount of ETH locked and the value of ETH are expected to rise, so attacks become less and less likely because the economic cost involved in doing an attack is too high. And if the attack is from an external actor, it is ridiculous that he can get so much ETH, where can you buy 10 million ETH to own 51% of the shares?

Viewpoint: "32 ETH is too much, ordinary people don't have so much money."

< p>I agree this is a great question. The reason for this high number is that it has to fall on a technical balance: it has to be low enough to have enough validators to keep the chain secure, but high enough to avoid having too many validators to keep the chain secure. Expenses bloated.

From a technical point of view, there was a big problem involving 32ETH, which was worth about $7000 at the time. In early 2017, someone even suggested a minimum of more than 1000ETH.

Fortunately, just like the existence of mining pools, there are also lock pools, which allow users to participate in lock positions with small amounts. This is thanks to permissionless, decentralized, non-custodial protocols like RocketPool, Secret Shared Validators using smart contracts. And because of the secondary penalty mentioned above, I believe that in the long run, decentralized staking operations will be better than centralized ones. Protocols like Rocket Pool are best seen as high-level abstractions of underlying staking rather than "just a staking pool".

Viewpoint: "PoS has not been proven yet, while we know PoW works."

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This is actually totally fair, obviously we can't really refute this, only time will tell. It's just that I think it's irrelevant in the context of Ethereum's move to PoS. If you don't believe in it, don't participate/invest in it. I personally believe in a long-term sustainable PoS Ethereum, but even so, I would be happy to see bitcoin continue to use its PoW.

This is all part of the great crypto experiment of our lifetime. PoS Ethereum will either just be a gust of wind and fail into obscurity, or it will succeed in creating a monstrously powerful network capable of surpassing humans.

I see in bitcoin and Ethereum that prioritizing decentralization is key in order to achieve this. While the philosophies are quite different, I'm happy to own both to really see the long-term value.

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