Ethereum Merger: Will it be the biggest event in the encryption field this year? Are you all ready?

Ethereum 2.0 pledged over 12.6 million, a record high: According to a report on May 16, the analysis platform Nansen data showed that the pledge of Ethereum 2.0 has exceeded 12.6 million, accounting for 10.4% of the total circulation, a record high. The amount of Ethereum pledged on the Lido platform exceeds 4.1 million, accounting for 32.5% of the total amount of Ethereum 2.0 pledges, which is also a record high.

On March 26, Ethereum core developer Tim Beiko summarized the latest core developer meeting, including the progress of the merged testnet Kiln, the difficulty bomb, the Shanghai upgrade, the progress of the Ethereum executive layer, and more.  

On April 13, Tim Beiko, the leader of the Ethereum merger, responded on social media that The Merge will not be completed in June and is expected to be completed within the year. This not only means the real transformation of Ethereum from PoW to PoS, but also means that the so-called "Ethereum 2.0" is accelerating to lift the veil.

Just in January of this year, the Ethereum Foundation announced that in order to welcome the merger, the expressions "Ethereum 1.0" ( ETH 1) and "Ethereum 2.0" (ETH2) will be eliminated and replaced by "execution layer" and "consensus layer". ", there is no doubt that this is literally preparing for the arrival of Ethereum 2.0 in the sense of the final specification.
At the beginning of December 2021, Vitalik Buterin published an article titled "Endgame" (the final stage), putting forward the view that all blockchains will eventually merge in the future, and at the same time listed the methods that allow block verification to be decentralized. And tools that happen in a censorship-resistant way.

In short, currently Ethereum’s beacon chain runs separately from the mainnet, and while the beacon chain runs in parallel using the PoS consensus mechanism, the current Ethereum mainnet continues to be secured through the PoW consensus mechanism.

The merger (The Merge) is to make these two systems finally merge together - when ready, the Ethereum mainnet will merge with the beacon chain, and the mainnet will introduce the ability to run smart contracts and the full history and current state into the PoS system.

That is, after the merger, the existing Ethereum mainnet client (“execution client”) will continue to host the Ethereum Virtual Machine (EVM), and verify and broadcast exchanges, but will stop participating in Proof-of-Work (PoW) mining, And give up the responsibility for reaching consensus on the blockchain chain head (top block).

Instead, this consensus will be the responsibility of the "consensus client", which is responsible for packaging the exchange from the "execution client" together with the information required for consensus into "beacon blocks", which make up the Beacon chain. "Miners" will be replaced by "validators" who deposit (aka stake) ETH into an Ethereum smart contract:

The ETH staked by validators will be used as collateral to incentivize them to complete the verification work correctly. Validators who do not perform validation work (for example because they are offline) or perform malicious behavior will cause a portion of their pledged ETH to be destroyed. On the other hand, if validators behave well, they will be rewarded with ETH.

This marks the end of the Ethereum PoW consensus mechanism, and also means that once the merger occurs, the stakers will verify the Ethereum mainnet, and the entire Ethereum network no longer needs GPU mining, and the previous miners may invest in the new PoS system .

According to an information session hosted by ConsenSys, three researchers working on the merged technology believe that merging the ethereum mainnet with the PoS beacon chain reduces network energy usage by at least 99.95%.

The blockchain consists of three parts: the consensus layer, the execution layer and the data availability layer. Merging is an upgrade to the consensus layer, but the gas fee is paid to the execution layer.

This means that The Merge changes the PoW consensus to POS, the PoW chain will not produce new Ethereum, and the newly added Ethereum will only be produced from PoS, which will reduce energy usage, but will not affect Gas costs.

According to current data estimates, after the upgrade of Ethereum to the PoS mechanism in The Merge, the number of newly added Ethereum in PoS is about 600,000 per year. The number destroyed due to EIP-1559 in a year is about 4.7 million.

This means that from then on, the net destruction of Ethereum will be greater than the net output, which is -4.1 million. Combined with the current number of about 120 million Ethereum, not only will there be no more issuance of Ethereum every year, but it will also be in a state of deflation:

(0.6M POS - 4.7M burn)/118M = -3.5%

This will undoubtedly provide strong support for prices from the supply side. At the same time, with the advancement of Eth2 and the imminent implementation of the London upgrade, facing the expectation of burning, coupled with the demand for PoS, ETH will undoubtedly become more scarce, which is the most powerful boost to the demand level of currency prices.

At the same time, although the current pledged APR is about 4.5%, the income will continue to decline as the total number of ETH pledges increases, but not long ago, Jacob Franek, a core contributor to the Web3 startup accelerator Alliance, tweeted that Coinbase expects the annualized return of ETH pledges The APR will rise to 9-12% after The Merge.

In fact, from this perspective, the behavior of staking at least 32 ETH to obtain rewards can be simply compared to the "Ethereum graphics card mining" under the new situation-every 32 ETH can be compared to a mining machine, and the rewards generated by staking It is mining output.

However, before participating in Ethereum staking, we need to clarify some unique mechanism designs in Ethereum staking, because this is directly related to the specific participation methods we can currently choose in the market.

At least 32 ETH. Deposit at least 32 ETH (or multiples of 32) into the deposit contract when participating in the pledge, which is undoubtedly a relatively high capital threshold for most users;

Slash penalty. Slash penalty means that the pledged node will be punished for not complying with the agreement (basically around the technical operation and maintenance level), that is, at least 32 ETH pledged in the node will be deducted. If the pledged ETH Token drops to 16 due to the accumulated Slash penalty The node will automatically withdraw from the network if it is less than 100 coins;

It can be seen from the above that the small amount of ETH cannot participate, the technical threshold of the verification node, and the liquidity of the pledge Token are the issues that need to be paid attention to directly when participating in the pledge. At present, the targeted ETH staking services on the market can basically be summarized as "two categories Four modes".

• Managed

The biggest advantage of hosting is that it encapsulates the technical threshold of node construction and maintenance, and ordinary users do not have to care about hardware and software settings, Slash penalties, etc. at all.

• Fully Managed <br>Fully managed users do not need to worry about the operation and maintenance of the verification node. The custodian will handle all node affairs. maintain validator nodes, and draw a share of the pledged income.

  Users can also pledge in small amounts (less than 32 ETH), because the escrow agency can help small pledgers make up 32 ETH to participate in the pledge.

  But in the same way, during the pledge period, the user no longer has the right to control the assets, and once it is attacked, the user's assets will face greater risks. Details such as punishment are unknown to users.

  It is not even known whether the assets under custody will be used for pledge. The most fearful thing is that "we are interested in the benefits, but others are concerned about the principal". Therefore, for the "full custody" solution, the credit and brand of the custody institution are very important .

• Pledge pool custody <br>The pledge pool solution not only supports small (less than 32 ETH) pledges on the basis of complete custody, but also solves the liquidity problem caused by long-term lock-ups of pledges.

  The most representative ones are of course the Ethereum Staking-related services of major CEXs such as Binance and OKX. The basic mode is to lock ETH on the corresponding interface of the trading platform. The minimum quantity requirement is only 0.1, which is equivalent to We lock positions on the trading platform, and the trading platform collects the tokens of platform users to lock positions through official channels.

  The biggest advantage is the one-click fool-style pledge, which does not require at least 32 ETHs, and also provides liquidity in the form of centralized guarantees.

  In addition, not only CEXs, but also special Ethereum pledge agreements such as Lido Finance and Rocket Pool can also allow users to obtain Staking income without locking ETH. (Take Lido as an example):

  Lido deposits ETH into the Ethereum smart contract and receives stETH as a receipt. The balance of stETH Token will be adjusted over time to reflect the distribution of staking rewards generated by the contract.

  At present, from the perspective of user deposit balance, the top two ETH liquidity staking service providers are also Lido Finance and Rocket Pool, among which Lido occupies an absolute dominant position, with over 12.6 million Ethereum as of May 16 The number is unmatched.

• unmanaged

Non-custodial is decentralized, and the difference from custodial is the difference between DEX and CEX, that is, the control of ETH assets is always in their own hands.

• It is the most direct form of non-management for self-built node users to run the client and maintain the node by themselves, but it requires strong technical strength and experience in node operation and maintenance.

  Therefore, the advantage is that users have complete control over self-built nodes, and there is no centralization risk of centralized hosting, but the disadvantage is that it requires high capital and professionalism, and it is difficult for ordinary users to participate.

• After the wallet on the semi-custodial beacon chain is created, two sets of keys will be generated, namely the withdrawal key (withdrawal key) and the validator key (validator key):

  Withdrawal key, which will allow us to withdraw your ETH and rewards when the (beacon chain) withdrawal function is launched (maybe 1 year later);

  Verifier key, the signature key that the verifier software actually needs to use when verifying the beacon chain.

  Among them, the withdrawal key and the validator key do not need to be controlled by the same entity, which provides greater flexibility for the service form of ETH staking, and is also the core idea of the semi-custodial solution represented by imToken and others:

  Compared with the self-built node solution, the "semi-custodial" solution allows separate storage of the verifier's key and the withdrawal key, thereby helping users solve the problem of operating and maintaining nodes, that is, asset control and ownership by introducing third-party node service providers It is still in the hands of the user.

  This kind of design is actually similar to EOS, DOT , ATOM, IRIS and the like entrusted to professional nodes, but the control of assets is still in their own hands. The shortcoming is that it also requires at least 32 ETHs, and the capital threshold is high, but the advantages are also great. obvious:

  The control and ownership of assets is owned by the user, and the service provider cannot control the user's principal and income. The pledged funds are completely corresponding to the verification nodes on the Eth2 chain, the status of the nodes is transparent and visible, and the online rate and income level can be tracked in real time.

On the whole, the vernacular blockchain summarizes the respective characteristics and advantages of these "two categories and four modes" as follows:

If it can be summed up in one sentence, it is:

For the vast majority of ordinary users with long-tail needs, based on their own professional technical capabilities and capital threshold restrictions, the hosting method is definitely the first choice, and in consideration of liquidity, the pledge pool > full custody.
In addition to the long-tail demand, users with sufficient funds do not have the technical strength and experience in node operation and maintenance, so half hosting > self-built nodes; even if they have technical strength and experience in node operation and maintenance, from the perspective of cost, It is also semi-hosted > self-built nodes (of course, friends who have feelings, regardless of cost, and are not afraid to trouble each other).