Brief introduction of ETH 2.0 economic model analysis report

Since then, we have been hard at work analyzing the ETH 2.0 network and its PoS-based economic incentives. Our conclusions are based on our own research. We built an economic model to reflect the inputs and outputs of the ETH 2.0 network, and interviewed a number of stakeholders representing key players in the Ethereum ecosystem.

We've compiled all of our research into the report below:

secondary title

ETH 2.0 Economic Examination: An Analysis of the Ethereum PoS Incentive Model

We would like to thank MolochDAO, the friends we have spoken with, and the Ethereum Foundation for their support of our project. Special thanks to Danny Ryan, Barnabe Monnot, Trent Van Epps, and Vitalik Buterin for comments and suggestions on early drafts.

While we strongly recommend that you read the full report, we provide a summary below. If anyone has any questions please get in touch via Twitter - @thomasborgers and @tehoban1 - DMs welcome!

The ETH 2.0 network upgrade is to gradually move towards the grand goal of the PoS consensus algorithm and incentive mechanism. In turn, the PoS incentive mechanism also has a profound impact on the economic attributes of the Ethereum network. The design of the PoS incentive mechanism is very complex - on the one hand, it is necessary to reward honest participants who verify transactions and finalize the historical state of the network, and on the other hand, it is necessary to punish offline or malicious validators. In this paper, we use sophisticated economic models and new economic assessment tools to define, measure, and analyze the cryptoeconomic security of ETH 2.0.

First of all, in order to study the economic model of Eth2.0, we use Excel to construct an economic model to explain the output of the ETH 2.0 system under current specifications and specific scenarios. Over the course of the project, we gradually developed and utilized this model to calculate expectations and draw conclusions about validator revenue, costs, benefits, and currency issuance based on the data. In the ETH 2.0 system, there are nearly 100 variables that have a significant impact on the output value. Through this model, we dynamically demonstrate the impact of ETH price changes and the total amount of ETH pledged on the verifier's income, highlighting the impact of variables on network security.

We define the level of economic security that ETH 2.0 Phase 0 must achieve, using a set of assumptions around the cost of attacking the network. The implication of this level of security is to make the cost of attack higher than the potential benefit of the attack, and to allow ETH 2.0 Phase 0 to achieve the same level of security as ETH 1.0 (the current Ethereum blockchain). We identified two main classes of economic attack vectors. Each attack vector has different variants and different degrees of risk: Supermajority Attack and Finality Attack. In Phase 0, we focus primarily on attacks aimed at disrupting the network. We found that the network was at risk of this type of attack during Phase 0, but we were more concerned about subsequent phases. Based on the historical price and computing power of ETH, we estimate that a pledge ratio of 13.8% provides sufficient security.

secondary title

in conclusion

1. in conclusion

2. The PoS mechanism of ETH 2.0 is much more complicated than the PoW mechanism. ETH 2.0 is a highly complex and thoughtful system. This system is carefully designed and built, but difficult to understand from the perspective of validators, resulting in uncertainty and unpredictability, making it difficult for potential capital efficiency-seeking validators to understand.

3. The security of the ETH 2.0 network depends on three key variables: ETH pledged, ETH price, and volatility. Each variable has a direct or indirect impact on the cost of attacking the network. The total amount of pledged ETH is the most controllable variable, while the price of ETH has a great direct impact on network security, but it is not controlled by the system. Volatility may be caused by different factors, which will indirectly affect ETH pledged volume and ETH price.

4. Attacks on ETH 2.0 are easier to scale than attacks on ETH 1.0. In ETH 2.0, the cost of the hardware required to participate in the network is reduced, so the (attack) hardware and electricity consumption will also be minimized. Additionally, the boom in DeFi and the connectivity of ETH 2.0 will dramatically accelerate this trend.

5. Validator behavior becomes more predictable in pursuit of capital efficiency. While the participation of Ethereum fans is crucial to the successful launch of the Beacon Chain, it is not enough to achieve a high enough level of security for the network. Attracting capital-efficient validators helps achieve ETH collateralization goals.

6. According to the historical price of ETH, when the ETH pledge rate reaches 13.8%, the security of ETH 2.0 is comparable to that of ETH 1.0. According to the fluctuation of ETH's historical price, we calculated that only when the ETH pledge rate is not lower than 13.8%, ETH 2.0 can obtain a sufficiently high security.

7. There are economies of scale in validation activities, but as the value of ETH increases, the scale effect diminishes. Under the PoW mechanism, the only way to increase revenue is to expand the scale of operations; under the ETH 2.0 PoS mechanism, the cost of verification activities will gradually decrease as the price of ETH increases. We have found that, in general, network economics are well suited to increasing the decentralization of the network and achieving the design goals of Eth2.

8. 77.7% of the current ETH supply is concentrated in qualified validator wallets (holding more than 32 ETH). There are approximately 86.6M ETH (77.7% of the current total supply) held by non-transactional wallets (holding more than 32 ETH). Another 18.7 million ETH is managed by exchanges. This is a serviceable target market with a strong appeal. To maximize network participation, the main goal of the incentive mechanism should be to convert these wallets into active validators.

9. ETH 2.0 pays much less for security than ETH 1.0. Assuming 15.5M ETH staked (13.8%) under the current Beacon Chain specification, we estimate an inflation rate of 0.55% per annum, well below the current inflation rate of 4-4.5% for PoW networks.

10. Network security relies heavily on the price stability of ETH. In terms of the economic stability and security of ETH 2.0, our main concern is whether the entire network is sufficiently resistant to attack when the price of ETH is low. Given the attacker's ability to quickly scale up an attack, we believe price stability is a real concern.

11. secondary title

suggestion

• suggestion

• Increase the base reward factor to 128 and above: We acknowledge that increasing network costs can help improve network security, but with a base reward factor of only 64, we believe the network is not paying enough for security - at During the transition of the Ethereum network to a PoS mechanism, it is wise to be cautious.