How to understand the economic incentives of Ethereum 2.0?
Foreword: Ethereum 2.0 adopts the pos consensus mechanism. How does it motivate people to pledge tokens and how to ensure the security of the network? What is the appropriate issue rate? The author of this article, Eric Conner, is translated by "Wang Zelong" from the "Blue Fox Notes" community.
At the heart of each blockchain system is the creation of blocks and the resulting tokens. This is important for the survival of any blockchain, because by generating new tokens and giving them to miners or pledges, the network can motivate people to increase the hash rate or pledge tokens to secure the network. Given that the networks of both Ethereum and Bitcoin store hundreds of billions of dollars in value, it is important that miners or pledgeees receive appropriate rewards in order to protect the network from attacks.
Currently in Ethereum, the above mentioned rewards are realized by block rewards and transaction fees. In the PoW mechanism, these rewards are paid to miners who find the next block. In the next few years, Ethereum will convert this reward system into a PoS mechanism, which will pay for the certifier who creates the next block. This shift has brought many changes, but the biggest one is that the basic economics surrounding the Ethereum agreement will change. I want to describe these changes at a higher level, but first we must understand how the system works today.
In the PoW mechanism, miners receive block rewards, which in turn help pay for their operating costs and, ideally, help them make a profit. This part of the profit depends largely on the price of the underlying asset, which is why we usually see the hash rate fluctuating with the price. With the rapid growth of Ethereum prices during 2016-2018, in order to better integrate sound economic principles with appropriate secure payments, the network decided to reduce its incentives from five Ethereum to two Ethereum. This is similar to Bitcoin, where block rewards are halved every four years.
The rationale behind this decision is that in order to become a currency and a strong value store, the network must maintain its block rewards and make it change to zero over time. Less supply means less selling pressure, which in turn gives Ethereum holders confidence that their value will accumulate. Again, the most important thing here is to keep the distribution as low as possible while still protecting the network.
Eric's past, present and future issuance rates
This explains everything on the chart up to the Serenity Phase 0 event, which will begin in early 2020, when Ethereum 2.0 will start running. I don't want to cover too many details of these stages, but focus on how it affects what we are currently discussing.
In the new chain, the concept of miners will be replaced by equity pledges. This means that it is no longer necessary to use the graphics card to mine, Ethereum users only need to send 32 Ethereum and pledge them. Each equity pledge will complete a series of tasks from the proposal to the certification block and will be rewarded accordingly. A very important factor in the PoS mechanism is that it makes it easier to secure the network while keeping the minimum tokens issued, which in turn makes Ethereum a more powerful SoV.
This is because the newly generated tokens are only distributed between those rights pledges at any given moment, and we do not need the entire network of tokens to pledge to ensure network security. In fact, it is probably safe to have a token pledge of 5-10% of ETH. This means that the overall distribution rate of the network can be greatly reduced.
According to the latest Phase 0 specification, expected pledge income and network issuance rate
First of all, I want to emphasize that because the relevant specifications are still in real-time development, these figures are still controversial, and I hope they can rise some before the release of Phase 0 (about 25%). As we can see in the table, based on the economic incentives given to the equity pledge, the market will decide how many equity tokens will be pledged. I expect the pledge of Ethereum at a level of 10 million, which will make the new issuance rate of the Ethereum network at 0.24% per year, which is 95% lower than the current level.
Just like mining, pledge also generates costs, which is an important reason for setting these values. We want to make sure that the verifier does not run at a loss, otherwise there will be almost no tokens pledged on the network. Each verifier wants to run a beacon node and then run as many authentication clients as possible based on the Ethereum they have.
After deepening the relevant specifications and talking to people studying Ethereum 2.0, my latest estimate of the Ethereum's verifier's annual operating costs is $120 per beacon node and $60 for each additional validator. Based on the above costs, we assume that the price of the Ethereum is $165 and the daily online transaction fee is 500 Ethereum, which will pay the certifier:
Obviously, if the Ethereum price is excellent, these returns will also rise, but it is commendable that even in the bear market, the verifiers still have the incentive to run a node with a total of 10 million Ethereum.
This is a quick overview of the Ethereum 2.0 economic incentives. I hope it encourages people to dig deeper into relevant content and help research appropriate incentives, cost estimates, and more.
Update: Because offline as a certifier , I have some questions about inactivity leaks . Here are the relevant scenarios and how they affect the certifier's revenue:
1. The block is finalizing and you are offline. Your storage will lose x% during the year of x=current_interest.
2. The block has not been finalized (more than 33% of the certifiers are offline, unlikely) and you are offline. This may cost you 60% in 18 days.
Let's give a simple example of the first scenario: you save 32 Ethereum at 2.5% interest, and you get 0.00219 Ethereum online every day. If you go offline every day, you will lose 0.00219 Ethereum. Now calculate your annual net profit.
Blue Fox Notes Appendix:
Here is the latest release rate recommended by V God: (Blue Fox Note: The latest annualized return has been significantly improved over the previous version, it also needs to consider the eth borrowing income in the market, and some borrowings are currently more than 6.2% annualized.)
Risk Warning: All articles in Blue Fox Notes do not constitute investment recommendations . Investment is risky . Investment should consider individual risk tolerance . It is recommended to conduct in-depth inspections of the project and carefully make your own investment decisions.