Comparison of five dimensional data before and after Ethereum merger

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Original breeze beep news

TL; DR

1. Ethereum merger is to prepare for fragmentation, followed by more environment-friendly, higher security and decentralization.

2. The complexity of the merger of the main network is much higher than that of the test network. We are pessimistic about whether the merger can be carried out as scheduled on September 19.

3. After the merger, ETH will reduce production by 90%. Eth released by pledge cannot cover gas combustion, and Ethereum is likely to enter the era of deflation.

4. Compliance will become the sword of Damocles of POS Ethereum network.

5. In the short term, Ethereum merger will bring development dividends to the pledged track. In the long run, the development of staas mainly depends on the ecological prosperity of the public chain and the innovation of the track itself.

The merge is close at hand.

According to the developer conference call, among the three test networks, ropsten and sepolia have been successfully merged, and the merger of the last test network goerli is expected to be carried out in the second week of August. The Bellatrix update will be deployed in early September. Then there is a two-week consolidation deployment. If everything goes well, the main network merger is expected to take place around September 19.


Source: https://blog.ethereum.org/

Merger is the most important upgrade in the history of Ethereum. As the largest and most complex blockchain in the ecosystem, it will complete the transformation of consensus mechanism from POW to POS for the first time. This should be unprecedented in the history of blockchain. If successful, Ethereum merger will provide an important example for other blockchains.


Why merge?


The merger of Ethereum refers to the merger of Ethereum main network and beacon chain. The whole Ethereum network will inherit the transaction status of the original main network, and the beacon chain will be merged as the consensus layer. The most intuitive change after the merger is that Ethereum's consensus mechanism has changed from POW to POS.

Before the merger, there was a pow (proof of work) mechanism. Nodes calculate violently, compete for block rights, and obtain benefits. In this process, in order to ensure network security, a high proportion of nodes need to store all (or most) data, and each node should participate in transaction verification. Nodes are treated indiscriminately, and all transactions are treated indiscriminately.

After the merger, there is a POS (proof of equity) mechanism. The block out node (proposer) and the verification node (verification committee) are randomly selected. When the next stage after the merger is "data fragmentation", different nodes can store only part of the data, and the verification is only carried out by the selected Committee.

This actually reduces the threshold of nodes and reduces the pressure on Ethereum's data storage (it is not necessary to store all data permanently). It is to expand the capacity by optimizing the main network operation rules. It should be noted that POS does not bring capacity expansion, which depends on the implementation of sharding.

ใƒป prepare for slicing

The reason why Ethereum network is transformed into POS is to prepare for fragmentation. In fact, the combination of POS and slicing has been recognized in official documents. Ethereum's official website wrote that "beacon chain (POS) will handle / coordinate fragmentation and pledgor networks."

The author believes that the ultimate goal of the merger is capacity expansion, which should be achieved through sharding + rollup. In order to shard, Ethereum network needs to be transformed into POS first, because POS and sharding are more logically consistent. POW considers globality, while both POS and sharding use the element of "random number". They both pursue "minimum sufficiency and necessity" and reduce storage / verification redundancy.

The second is that the environment praised by everyone is more friendly, with higher security and decentralization.

ใƒป POS is more environmentally friendly

POW network blocking is the competition of computing power, which puts forward higher and higher requirements for machines and electricity. Take bitcoin, the most typical POW network, as an example. According to previous data from Cambridge University, the power consumption of bitcoin network in a year is about 121.36 billion kwh, exceeding that of Argentina, the Netherlands and the United Arab Emirates.

Although the power consumption of Ethereum is far lower than that of bitcoin, as a representative of emerging technology, it is also pursuing to become more environmentally friendly.

It is understood that after the merger, the power consumption of Ethereum network will be reduced by more than 99%. 100000 visa transactions consume about 149 kwh, compared with 0.667 kwh for 100000 transactions on the combined POS Ethereum network.


The power consumption is compared to the height, and the data and pictures are quoted from: Overseas unicorn

ใƒป safety and degree of decentralization

As for network security and decentralization, vitalik has discussed the reasons why he believes that POS has more advantages than pow.

On the whole, the participation threshold of POS nodes is lower. The competition between bitcoin POW nodes has "evolved" to ASIC. In addition to capital, there are machine building and operation and maintenance thresholds, which ordinary people cannot participate.

The POS network cannot refuse anyone to become a node (or part of a node). Although 32 eth now means a high capital threshold of about $45000, more and more service providers have supported small eth pledge, and the threshold of POS in machine and operation is also lower.

In addition, according to some data given by vitalik, the attack cost of POS network is higher than that of pow network. After being attacked, the recovery ability of POS is also better than that of pow network. (it will be introduced later)

On the widely controversial issue that POS leads to richer people, because POS supports a wider range of participation groups, the pledge + gas income of nodes will be shared (equivalent to slowing down the growth of giant whale's wealth with the number advantage of small nodes). Vitalik believes that it may take a century to double the degree of wealth concentration after Ethereum turns into pos. in this process, the redistribution of eth, such as consumption and charitable donations, will also slow down the trend of wealth concentration.

At present, the security and decentralization of POW and POS have not been decided.


Beacon chain before and after merging


Based on the above reasons, Ethereum has determined the future development path of slicing + rollups + POS.

As the first step of the development path, the merger of beacon chain and the current Ethereum main network has been put on the agenda. The merger is expected to take place around September 19.

ใƒป before merger

Just like the space station (Ethereum main network) needs to add new modules (beacon chain), the spacecraft (beacon chain) needs to prepare for docking (merger) in advance. The preparation of beacon chain will start at least on December 1, 2020.

On December 1st, 2020, Ethereum launched beacon chain. Since its launch, beacon chain has been running in parallel with Ethereum main network and independent of each other.

Beacon chain is a POS chain. Proposers responsible for block out and committee responsible for transaction verification are randomly selected from the verifiers of pledge eth.

So from the first day of launching, the beacon chain supports eth pledge / storage function. By pledging 32 or more eth, you can become a verifier and obtain pledge interest. At present, the deposit of eth is still a one-way process, and the extraction of Eth and interest will wait until Shanghai is upgraded after the merger.

Now beacon chain has no other functions except pledge eth, randomly select nodes to block and verify, reward and punish nodes, and maintain the normal operation of the network. At present, it does not support accounts and smart contracts.

In contrast, the current Ethereum main network is a POW chain that carries thousands of applications, hundreds of billions of dollars in chain funds, and three functions: consensus, data availability, and transaction execution.

ใƒป after merger

When beacon chain is merged into Ethereum main network, the pow consensus layer of Ethereum will be replaced by beacon chain (POS), and the transaction status will be inherited from the original Ethereum main network.


Source: Danny Ryan

Beacon chain will coordinate the pledge network, which is similar to a central ledger, record the list of verifiers, and reward and punish the verifiers. After the merger, beacon chain will become a part of Ethereum, and should also assume the responsibilities of transaction execution and data availability. After the implementation of sharding, the beacon chain will also coordinate the sharding network.

According to the current plan, the future development path of Ethereum is to improve the performance of the main network by optimizing the main network consensus (POS) and optimizing the efficiency of data storage / verification. At the same time, it is connected to the "artificial limb" - rollup, and the transaction execution is mainly expanded to rollup.

Therefore, the whole process can be seen as a transition to rollup to undertake the Ethereum transaction execution layer, and Ethereum layer1 as a more efficient data validity layer and consensus layer. Future development does not rule out this situation: Ethereum layer1 retreats behind the scenes, rollup becomes a highly scalable machine for transaction execution, and Ethereum layer1 provides guarantee for rollup data validity and consensus.

In order to promote the transformation of consensus mechanism from POW to POS, Ethereum also set up a "difficulty bomb". The "difficulty bomb" will increase the difficulty index of pow calculation, thus persuading miners to retreat and ensuring that Ethereum will become a "pure" POS chain after the merger. For the miners, some people have predicted the possibility of Ethereum bifurcation.


Merger status


The merging of Ethereum needs to be realized by code changes. Although the merger is based on the principle of "minimum damage", this process must be cautious because it involves a large number of applications and funds. Node and DAPP developers can https://ethereum.org/en/upgrades/merge/ Prompt for operation.

Before the merger of the main network, Ethereum conducted merger tests on kiln, ropsten, sepoli and goerli test networks respectively. At present, kiln, ropsten and sepoli have successfully transitioned to POS. The merger of goerli is expected to take place on August 11.

Since goerli is the test network closest to the Ethereum main network, the goerli merger test is more important. Before that, shadow bifurcation tests will be conducted on goerli and main network respectively. Shadow bifurcation is the trial run of consolidation, and the previous shadow bifurcation is not without problems.

Considering that the test network consolidation is not the real Ethereum main network consolidation. There are thousands of nodes, more than 550000 token smart contracts, and tens of thousands of DFI and NFT applications running on the Ethereum main network. By contrast, the applications and funds in the test network are much lighter, and the merging complexity of the Ethereum main network is much higher than that of the test network.

In addition, the merger of Ethereum has experienced many delays. Jiangzhuoer also said that there are still a large number of applications that have not been tested and merged. Therefore, we are not optimistic about the merger on September 19.

In the beacon chain, the number of verifiers has exceeded 410000, and the number of eth pledges has exceeded 13.1 million, accounting for about 11% of the total supply. Since its launch, the beacon chain has been running steadily, and the beacon chain is ready for merger.


Beacon chain status, source: beaconcha.in


Comparison of five dimensions before and after consolidation


There will be some changes in Ethereum network before and after the merger. Beep news will compare and explain from five dimensions: decentralization, security, node revenue, token supply, and compliance risk.

ใƒป degree of decentralization

Before the merger, the number of active nodes in Ethereum remained in the thousands, reaching 12569 at the peak (at present, the number of active nodes is at the trough of hundreds). These nodes are distributed all over the world. Whether in terms of quantity or geographical distribution, POW's Ethereum network has been highly decentralized.


Ethereum POW node distribution, source: etherscan.io/nodetracker

In contrast, there will be more beacon chain validators who will take over POW in the future. At present, there are more than 410000 beacon chain verifiers (clients pledging 32 ETH).

It should be noted that the nodes in the pow network are of different sizes, and the computing power level of different nodes is different, while each verifier in the beacon chain has pledged 32 eth behind, with the same share and no difference. There may be a situation where a large number of verifiers are controlled by the same whale. Therefore, only comparing the number of nodes cannot completely explain the problem.

When we compare the degree of decentralization, we should also consider the participation threshold of the network. Although the competition of Ethereum POW is still mainly in the GPU stage, the threshold of participation is expected to be reduced after the merger.

In the pow era, to participate in the Ethereum network, you need to have a special machine, and the cost of the machine is not low. The machine is still undergoing continuous iteration. In the era of POS, the requirements of Ethereum network for machines, machine operation and maintenance have been reduced. Users can also directly participate in the pledge with small eth through the pledge service provider, which can further avoid the trouble of machine configuration and operation and maintenance.

Therefore, Ethereum will support a wider range of participants than POW after the merger. You can participate as long as you have eth.

POS may bring about the problem of wealth concentration, which is an important reason why many people have doubts about the merger of Ethereum. In fact, no system can prevent the concentration of resources and wealth.

Considering that Ethereum has a wider participation group, and the pledged tokens can be recovered with interest, participants are more willing to invest costs in the pledge than machine depreciation and obsolescence. The number and continuous participation of "small nodes" can alleviate the growth rate of giant whale's wealth. Vitalik believes that it may take a century for Ethereum to double its wealth concentration.

However, it is undeniable that POS's Ethereum network does not have a threshold for whales, and their wealth advantage will be brought into full play.

ใƒป safety

In terms of security, vitalik has issued a document to demonstrate that the merged Ethereum network is more secure. The demonstration is explained from the attack cost and the difficulty of recovery after the attack.

1) Attack cost

Assuming that the network has a $1 block reward every day, what is the cost of attacking this network?

POW network based on GPU

You can rent cheap GPU, so the cost of attacking the network is only to rent enough GPU computing power to exceed the existing miners. For every $1 block reward generated, the cost of existing miners will be close to $1 (if the cost is higher than $1, miners will quit because it is unprofitable, otherwise new miners will join). Therefore, the cost of attacking the network only needs to be higher than $1/ day, and may only last for a few hours.

Total attack cost: ~$0.26 (assuming 6 hours of attack, the attack cost is > $1/24*6), and because the attacker can receive block rewards, this number may be reduced to zero.

POW network based on ASIC

ASIC is actually the cost of capital: when you buy ASIC, you expect it to take about two years, because it will slowly wear out or be replaced by better hardware. If a chain is attacked by 51%, the community may change the pow algorithm to respond, and then your ASIC will lose value. On average, the cost of pow nodes is about 1/3 of the recurring cost and 2/3 of the capital cost.

Therefore, for every $1 block reward, POW nodes will spend ~ $0.33 on power and maintenance and ~ $0.67 on ASIC every day. Assuming that the ASIC can be used for about 2 years, miners will need to spend $486.67 per unit of ASIC hardware. ($486.67 = 365 days x 2 x $0.67)

Total attack cost: $486.67 (ASIC) + $0.08 (power and maintenance, 0.33/24*6) = $486.75

POS network

The cost of proof of interest is almost 100% of the capital cost (pledged currency). The only operating cost is the cost of operating nodes. Unlike ASIC, the pledged currency will not depreciate, and when you don't want to pledge, you can get back the pledge deposit in a short period of time. Therefore, participants should be willing to pay a higher capital cost for the same degree of reward than in the case of ASIC.

Let's assume that the pledge interest rate of ~ 15% is enough to attract people to pledge (this is the expected APR after eth merger). Therefore, the block reward of $1 per day will attract a mortgage equivalent to 6.667 years of funds ($1/ (15%/ year), which is converted into an amount of $2433 ($1/ day x 365 x 6.667).

The cost of hardware and power consumed by the node is very small. Thousands of assets can be mortgaged for every 1000 yuan of computer, and the monthly power and network charges of ~ $100 are enough. But conservatively, we assume that these recurring costs are ~ 10% of the total mortgage cost. Therefore, we only have a block reward of $0.90 per day corresponding to the cost of capital, so we have to reduce the above figure by ~ 10%.

Total attack cost: 90% * $2433 (capital cost) + $0.10/24*6 (electricity) = $2189

The author adds that in order to realize attacks in POW networks, it is necessary to meet > 50% of computing power. According to the analysis of some people, 1/3 of the pledge share is an important security threshold in the merged POS network of Ethereum. In this case, 0.26/2< 486.75/2< 2189/3ใ€‚

From the calculation results, the attack cost of POS Ethereum network is higher than that of pow Ethereum network. This anti vulnerability comes from the market's confidence in Ethereum (Ethereum is unlikely to become worthless).

Compared with the depreciation and obsolescence of machines, the pledged currency will not be lost, but will bear interest, especially when the pledged assets are expected to appreciate. This encourages more ordinary users to participate. The more decentralized the market participation is, the more funds pledged, and the higher the capital cost required to leverage the Ethereum network.

2) Easier to recover from attacks

In terms of attack recovery, vitalik believes that the recovery ability of POS network is stronger than that of pow network.

For the pow network maintained by GPU, once it is broken, the network has little resistance and recovery ability.

For the pow network maintained by ASIC, the community can cope with the first wave of attacks and change the pow algorithm through hard bifurcation. But at the same time, all machines (including ASICs of attackers and honest nodes) will become worthless. Because there is not enough time to create new ASIC for the new algorithm, the attack and resistance situation will return to the GPU situation (the author's note: because the attacker and the honest node return to the same line, the situation will be better than the attacker attacking the GPU network when he is prepared). Attackers can attack and attack again, making the network unable to recover.

In contrast, in the POS network, for some 51% attacks (especially those that want to overturn the finalized blocks), the POS network has a built-in smashing mechanism, and the attacker will be severely hit while attacking. There are also ways to weaken attackers for more difficult to detect attacks (especially 51% of attacks that conspire to intercept others' information). However, as mentioned above, ensure that attackers pledge shares < 1/3 is an important safety threshold.

ใƒป eth supply and node revenue

At present, the most exciting narrative of Ethereum merger in the market is "production reduction". Eth production will decrease after the merger; Eip-1559 burn base gas fee; Users are encouraged to pledge eth, reducing the circulation of eth. These factors are likely to make Ethereum enter the era of deflation.

Inflation / deflation of eth depends on two factors, namely, the annual output (new increment) of Eth and the amount of eth burned as base gas every year (destruction).

The output of eth comes from two parts, namely, the block out reward and the pledge reward of eth on the beacon chain. The reward for block production before the merger belongs to the miners, with an average output of 2.08 eth every 13.3 seconds, so the reward for block production in one year is about 4.93 million eth. After the merger, the reward for block out will be cancelled.

As for eth pledge incentives, a total of about 13million eth are pledged, and about 584000 eth are released as pledge incentives a year. Before and after the merger, the pledge rewards are allocated to the verifiers on the beacon chain.


Pledge reward depends on the total pledge amount and APR, and APR gradually decreases source: ultrasound.money

Now the total supply of eth is 119.7 million, so before the merger, the annual output of Ethereum accounted for (493+58.4) /11970=4.6% of the total supply. After the merger, this data became 58.4/11970=0.49%. The merger led to an 89.4% reduction in eth production.

Eth destruction, according to watchtheburn Com data, the base gas fee destroyed every day continues to fluctuate. Since eip-1559 came into effect (September 27, 2021), more than 2.55 million eth have been destroyed in less than one year.

2.55 million eth> 584000 eth. It can be seen that after the merger, unless the ETH pledge volume increases sharply, the ETH reward released by the pledge is far from enough to cover the combustion and destruction of gas. Ethereum is likely to enter the era of deflation after the merger.

Coupled with the pledge incentive (some people have called eth "chain treasury bonds", because the income is stable, users are willing to participate, and currently 11% of eth has been pledged to the beacon chain), the market circulation of eth should be at a low level, which are all price boosting factors.

But at the same time, the author also believes that for an "applied currency", the deflation model is not sustainable in the long run because it is insufficient to meet the use demand of slow growth. (not as investment advice)


Base gas combustion, average daily combustion > 3000 eth, source: watchtheburn.com


Source: beep news


Eth supply curve simulation source: ultrasound.money

Before and after the merger, due to the release of Eth and the adjustment of distribution, the verifier will take over part of the income of the original miners, and the annual yield of the verifier will rise from 4.6% to 9.2%.


Source: ultrasound.money

ใƒป compliance risk

Ethereum is the virtual asset closest to the concept of "commodity" after bitcoin, but the merger may change this image. Heath P. tarbert, former chairman of CFTC, once hinted that "on the blockchain with POS as the consensus mechanism, those tokens used as collateral will likely be regarded as securities commodities".

Stake. Fish also analyzed in the 2021 pledge ecosystem report that "because the pledge looks like fixed income in a sense, it may lead regulators to believe that the verifier is closer to financial entities than miners. If this happens, the verifier will not be able to maintain compliance".

Therefore, on the whole, the merger is likely to bring optimization to Ethereum in decentralization, security, node revenue and eth supply, but compliance is the potential sword of Damocles.


Stacking Chengxin bonus track


With the merger of Ethereum entering the countdown, the stacking track has received unprecedented attention.

There are three problems with direct pledge eth: first, the amount threshold should reach 32 eth or more; second, the pledge deposit and interest cannot be withdrawn immediately, resulting in high opportunity costs; third, there is a node operation threshold. Stacking as a service (staas) is the link between ordinary users and beacon chain, so that ordinary users can also participate.

Staas solves the above three core problems: capital threshold, capital liquidity and node operation. Staas gathers user funds and can join the network as an operator for every 32 eth.

At the same time of receiving users' funds, staas will issue a corresponding amount of XH derivatives to users as vouchers for redeeming Eth and generating interest. These xhs can circulate in the secondary market, thus releasing the liquidity of users' deposits and reducing the opportunity cost to 0. Xeth can also participate in defi LEGO to improve capital efficiency.

Some staas operate nodes by themselves, while others match the ETH pledge needs of users with the node operation capabilities of node operators, so that ordinary users can save the trouble of node configuration, operation and maintenance.


Source: beep news

On the whole, the head effect of this market is obvious.

From the perspective of the number of users and eth pledge, Lido is the absolute head. Kraken, binance and other CEX also occupy a lot of shares because they are closest to users and easy to operate. The second is professional pledge service providers such as stakefish and segment. In terms of decentralized pledge flow pool, the data of rocket pool is also high.

Due to the serious homogenization of operation and function, the competition between staas is fierce. Most of these platforms have lowered the capital threshold to 0.1 eth (some even have no capital restrictions), and the corresponding service charge is basically stable at the level of 10-15%. On these platforms, users' operations are also similar.

Lido became the head mainly due to two points: the first is the brand effect, and the second is the trading depth of derivatives Seth. Defi applications such as Lido and curve have established a deep relationship. Now the eth/sth pool on curve has a liquidity of $1.2 billion, providing users with sufficient trading depth for changing hands on sth.

But these cannot be regarded as Lido's absolute moat. For example, in the recent Black Swan incident, the price of sth broke down. Lido has also been questioned about the risk of centralization for Ethereum. At present, no staas has absolute differentiation advantages. Users can still abandon one staas and choose another, with little resistance.

From the perspective of fundamental needs, the competition between staas will be carried out around the comprehensive dimensions of user experience (ease of operation), capital threshold, service charge, degree of decentralization (Security), depth of xeth transaction and so on.


Source: Guosheng securities

In the short term, the Ethereum merger will bring development dividends to the pledged track. In the long run, the development of staas mainly relies on the ecological prosperity of the public chain and the innovation of the track itself.

The innovation of the track itself may come from two aspects: one is the XH derivatives, which will contain the risk of breakout and the potential of combining defi; The second is the innovation of staas mechanism.

Rocket pool and SSV network are staas with relatively innovative mechanisms seen by beepnews at present.

The rocket pool platform provides services by "matching" node operators and users. Unlike Lido, which filters node operators through Dao, any node operator can create a mini pool on the rocket pool.

They only need to pledge 16 Eth and RPL, a platform token worth 1.6 eth. The remaining 16 Eth and rocket pool will be "pooled" from the client. When the node has a smashing, the ETH of the node operator will be deducted preferentially. RPL will be sold and exchanged for eth to supplement the ETH of node operators.

For each node operator, the upper limit of user funds they gather is 16 eth. Although this brings the limitation of expansibility, it can bring good decentralization effect.

SSV network adopts decentralized validator Technology (DVT). User pledge involves two kinds of private keys, namely, withdrawal private key and verifier signature private key. The verifier signature private key needs to be signed continuously, and offline or malicious behavior will cause fines. Therefore, when the user entrusts the node operator or liquidity service provider to pledge eth, it is necessary to give the verifier signature private key to the other party.

Through DVT, users can encrypt the private key signed by the verifier, divide it into multiple parts, and assign it to different node operators. In this case, when a small number of node operators are offline or have malicious behavior, the whole verification result will not be affected and eth will not be confiscated. This will also lead to a more decentralized Ethereum network. This idea can also be applied to other POS networks with slashing mechanism.

Reference article:

Detailed explanation of Ethereum founder vitalik: three key factors for POS security to be better than POW by chain

What potential centralization risks will Ethereum face after the merger by TJ Keel

Ethereum to POS is coming: in depth analysis of stacking track and representative projects by Mint Ventures

Blockchain industry transformation Ethereum merger, starting with the decline in the price of graphics cards by Guosheng securities

Note: This article is not taken as investment advice


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