How will ETH migrate to Ethereum 2.0? What impact will it bring?
Editor's Note: This article comes fromUnitimesEditor's Note: This article comes from
, author Aaron Hay, translator Jhonny, reprinted with authorization by Odaily.
As a follower and supporter of the Ethereum project, I have always supported healthy discussions surrounding the development and upgrade of the Ethereum network. The purpose of this article is to present readers with an in-depth discussion of the economic advantages and challenges involved in the current one-way bridge model (one-way bridge) adopted by the ETH migration design around Ethereum 2.0.
From a technical point of view, the feasibility of one-way bridge and two-way bridge has been well studied [1], but there is currently no good one-way migration of ETH. The advantages and challenges of economic design are discussed, and so far, the economic aspects of unidirectional bridging have been very limited.
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Discussion so far
In addition, there are some developers who support two-way bridging [2], and some discussions about integrating the Eth1.0 chain into the Eth2.0 chain through local integration in the future [3], but in view of the current Eth2. 0 specification [4], this article will discuss the economics of the one-way bridge model and introduce several economic incentives that I believe are crucial in this model.
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What is a one-way bridge migration?
The one-way bridge mode means that the current ETH holders on the Eth1.0 chain can choose to send their ETH on the Eth1.0 chain (by sending it to a mortgage contract (Deposit Contract) deployed on the current Eth1.0 chain Middle) to destroy and get the same amount of ETH on the Eth2.0 beacon chain (some people call the ETH on the Eth2.0 chain Beacon Ether, namely BETH), these newly minted BETH will be locked in the beacon in the chain.
When the amount of ETH pledged in the mortgage contract reaches a certain target (about 2 million pieces), the beacon chain will be officially launched (expected to start in early 2020, and may be later in the first quarter of 2020).
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Why use one-way bridging?
The advantages and disadvantages of one-way bridging and two-way bridging are presented below. It should be noted that the disadvantages of the one-way bridging method listed below are mainly analyzed from a technical point of view, while the listed disadvantages are mainly analyzed from an economic point of view.
one-way bridging
advantage:
advantage:
Stable security, the deposits mortgaged by users will only increase;
Both the Eth1.0 chain and the Eth2.0 chain do not need to be forked (ETH migration can be realized).
shortcoming:
shortcoming:
Early pledgers have a higher risk of lock-in (assets locked for at least 1~1.5 years);
Two ETH coins (ie ETH and BETH) may appear in the futures market;
two-way bridging
advantage:
advantage:
The risk of asset lock-up is lower, and more assets will flow into the Eth2.0 system;
If there is a problem with Eth2.0, ETH can be moved back to the Eth1.0 chain.
shortcoming:
shortcoming:
The total amount of pledged ETH will be highly volatile;
There is a risk of zero stake, and there will likely be more problems in the early stages.
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Inflation in Eth1.0 and Eth2.0
As the activities on the Eth1.0 chain gradually and completely transfer to the Eth2.0 chain, at some point in the future, the inflation rate on the Eth1.0 chain will drop to 0%.
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Figure 1: Trend chart of ETH supply and corresponding issuance rate (the blue line indicates the supply, and the orange line indicates the issuance rate)
What is unclear from the graph above is how Eth2.0 migration and projected inflation are factored in. The figure shows that in phase 0 (beacon chain phase, early 2020), there seems to be a signal of an increase in the issuance rate, which means that the issuance of Eth1.0 and Eth2.0 are bundled together.
In addition, the picture below is the Eth2.0 additional issuance plan proposed by Vitalik Buterin. It should be noted that the issuance rate changes accordingly according to the amount of BETH pledged in the Eth2.0 system. In the early stage, the reward (annual rate of return) obtained by the staker will be higher, and then the reward will decrease as the number of staked BETH increases.
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Figure 2: The maximum increase rate and maximum annual rate of return of BETH after the start of Eth 2.0 staking proposed by Vitalik
Let’s analyze the three cryptoeconomic design decisions presented above:
1. "The ETH on the Eth1.0 chain will be destroyed" In Figure 1 above, the inflation of Eth1.0 and Eth2.0 are combined, but I think that considering the one-way bridging method, the old and new should be The inflation of the two chains is separated.
This "burn first - mint later" model means that the total supply between Eth1.0 and Eth2.0 is an inverse relationship, that is, "burning" means a reduction in the supply of ETH on the Eth1.0 chain," Minting" means an increase in BETH supply on the Eth2.0 chain.
When the number of destroyed ETH on the Eth1.0 chain exceeds 4,890,000, the ETH on the Eth1.0 chain will experience deflation [5].
In other words, the inflation rate of ETH on the Eth1.0 chain will decrease as the percentage of ETH destroyed and migrated to the Eth2.0 chain increases.
The upshot is that, other things being equal, the value of the remaining ETH on the Eth1.0 chain will increase as this migration moves forward.
2. "BETH will be minted and locked"
Newly minted BETH coins will be locked in the beacon chain (approximately 1.5 years). Therefore, only futures or over-the-counter transactions negotiated between individual validators can bring limited liquidity to BETH.
Given BETH's limited liquidity, I would expect the price of ETH on the Eth1.0 chain to be higher than the price of BETH on the Eth2.0 chain during the 1.5 year lockup period. For Eth2.0 validators who choose to accept this low liquidity and execution risk, they will be rewarded with a certain amount of BETH (see Figure 2 above).
But whether the decision of the early verifiers to destroy ETH on the Eth1.0 chain and pledge BETH is worthwhile depends on the exchange rate between ETH and BETH (the closer to 1:1 the better) and the rewards obtained after becoming a verifier.
Verifiers may take the risk of BETH trading at a lower price than ETH for a considerable period of time (for example, because the development progress of the Eth2.0 chain is delayed or the old and new chains may never be fully merged, etc.).
In view of the low liquidity of BETH in the early stage, I am curious whether a part of BETH will be converted into WBETH on the Eth1.0 chain (ie wrapped-BETH), thereby unlocking greater liquidity and utility.
3. “BETH Locked in the Beacon Chain Will Generate Yield”
It is worth noting that the validator rewards in the Eth2.0 chain will be distributed to validators in the form of BETH.
When savvy cryptocurrency holders evaluate the best ways to deploy and profit with their holdings, not all are created equal. Let’s compare the options that holders may face:
Option 1, lend DAI on the Compound platform and get 14.80% annual floating interest rate (paid in DAI); Option 2, pledge BETH to become a validator and get 18.10%-1.56% annual floating interest rate (paid in BETH).
Since DAO and BETH have different values, and the two options face different risks (such as DAI faces smart contract risks, while BETH faces low liquidity and execution risks), it cannot be directly compared by comparing the interest rates of these two options. Decide which option is better.
The point here is that for savvy cryptocurrency investors, the BETH returns that early Eth2.0 validators can capture may not provide them with strong economic incentives to accept the risks involved in Eth2. There are many other ways to obtain income provided by the ETH of the current Eth1.0 chain.
In my opinion, the main problem in the way of migrating ETH on the Eth1.0 chain to the Eth2.0 chain through a one-way bridge is that 1 ETH ≠ 1 BETH, which may be harmful to the development of Eth1.0 and Eth2.0 The cryptoeconomic ecosystem has ripple effects with unintended consequences for the community.
Ideally, there will be economic incentives in place to drive the growth of the entire Ethereum community.
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The effect of one-way bridging on price
Finally, given that the Eth1.0 chain may eventually be fully merged into the Eth2.0 chain at some indeterminate date in the future, I would like to introduce how game theory will play a role in this process.
I think the possibility of a complete merger of the old and new chains is neither 100% nor 0%, but somewhere in between. But even with a 10% chance of that, that would have a significant effect in limiting price volatility between ETH and BETH in the interim, but I'm not sure how that would play out in the market. Perhaps we envision it through the following two examples:
Example 1: A proposed merger in the stock space is a good example: If Company A acquires all outstanding shares of Company B at $1 per share, and there is a 99% probability that the two companies will merge, the market will pass Price Company B's stock at around $1 to reflect this possibility.
Example 2: In the field of decentralized finance (DeFi), I think MakerDAO's stabilization mechanism for DAI, Global Settlement (global settlement) is a good example: for users who hold DAI, the price of DAI is maintained at around $1 Part of the principle is that at any time in the future, all DAI can be returned to users at a price of $1 through global asset settlement. If global settlement occurs, you buy (sell) DAI for less than $1, which means you make a profit (loss).
Similarly, if there is a high probability that the Eth1.0 chain will be merged into the Eth2.0 chain, then BETH can be exchanged at a price similar to ETH.
