OKEx Insights: Transformation or Exit? Life and death choices for miners in the ETH 2.0 era
As Coindesk reported on Nov. 4, the ETH2.0 deposit contract is now in effect. Meanwhile, Vitalik Buterin tweeted on November 6, 2020 titled:"Why Proof of Stake? (Nov 2020)"The article expressed that the adoption of PoS in ETH2.0 has become a foregone conclusion. The news about ETH2.0 flows out frequently, which indicates that it is coming.
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Image source: Weibo
Image source: OKEx
Image source: OKEx
From the discussion of followers and the rise in the price of ETH, it undoubtedly reflects investors' expectations for ETH2.0. However, in addition to technical optimization, the ETH2.0 update has also changed the mining reward algorithm. Is this the same expectation for miners who are directly exposed to ETH2.0?
The answer is uncertain.
Since the advent of ETH, it has adopted the same mining reward algorithm as BTC - PoW. PoW (Proof of Work) Proof of Work requires all nodes to solve cryptographic puzzles. That is, the miners who solve more cryptographic problems within the same time will get more rewards. In short, PoW is distribution according to work, and the more you do, the more you get.
As ETH gradually approaches the public's field of vision, the disadvantages of PoW are becoming increasingly prominent. First of all, PoW cannot perfectly reflect the ability of miners, but requires miners to spend a lot of money to buy larger and more responsible mining machines. Only with faster mining machines can miners solve password problems faster and get more mining rewards ;Secondly, ETH will adjust the difficulty at important nodes. With the gradual increase of mining costs, when the cost of mining is higher than the mining income, people's enthusiasm for mining will be greatly reduced, resulting in a significant reduction in computing power, and the network security of the public chain using the PoW mechanism will be threatened.
Considering the above defects, when upgrading ETH2.0, the Vitalik team proposed that when ETH is fully upgraded to 2.0, the PoS mechanism will be used to reward miners for mining.
PoS (Proof of Stake) is a form of election in which any node is randomly selected to verify the next block. There are no miners in Proof of Stake, but new blocks are made by validators. Validators are not chosen completely at random. To become a verifier, you need to deposit a certain amount of tokens as equity in the node network, which can be understood as a deposit.
Image source: OKEx Insights
Image source: OKEx Insights
V God also expressed the reason for choosing PoS in his latest article published on November 6:
Image source: OKEx Insights
Image source: OKEx Insights
Second, under the PoS consensus mechanism, it is easier to recover from attacks. In a GPU-based system, without any defenses, a persistent attacker can easily disable the entire chain permanently (or switch to PoS or PoA). In an ASIC-based system, the community can respond to the first attack, but then becomes helpless again. First, the community will respond to the first attack by changing the PoW algorithm through a hard fork, thereby "locking" all ASICs (attackers' and honest miners'). But if the attacker is willing to bear this initial cost, after that the situation will revert to the same as the GPU situation (since there is not enough time to build and distribute new algorithms for ASICs), so the attacker can continue to spawn camps cheaply attack, it is inevitable. However, in the case of PoS it will be much better. For certain types of 51% attacks (notably rolling back finalized blocks), there is a built-in "Slashing" mechanism in Proof-of-Stake whereby the attacker's majority stake (not including others) will be automatically destroyed. For other attacks that are harder to spot (51% coalition censoring - A 51% coalition censoring everyone else), the community can coordinate on a minority user-activated soft fork (UASF), where the attacker's funds are again mostly destroyed. no explicit"Hard Fork Currency Elimination", except for the coordination and selection of a few blocks on UASF, the others are all automatic, and only need to be executed according to the protocol rules.
Similarly, V God said that PoS also has certain flaws:
First, PoS is more like a"closed system", wealth concentration takes a long time. In PoS, if the verifier has some, they can be used to pledge them to obtain more income, but in PoW, miners can continuously obtain more rewards through external resources. Therefore, in the long run, the distribution of coins in PoS is likely to become more and more centralized. However, the general reward (validator income) in PoS is very low, the more people verify, the less income everyone gets, and the centralization may take a long time to double.
Second, PoS requires"weak subjectivity", PoW does not need it. In PoS, when a node comes online for the first time, or any node comes online after being offline for a long period of time (i.e. many months), the node has to find some third-party source to determine the correct chain-head. This could be their friends, exchanges, block search sites, client developers, etc. That is to say, PoS is quite subjective and requires a certain foundation of trust to continue. But PoW does not have this requirement.
Image source: OKEx Insights
Image source: OKEx Insights
From the perspective of the concept and advantages and disadvantages of the reward mechanism, it is undoubtedly beneficial for ETH2.0 to convert PoW into PoS, but is this the case?
Seven years have passed since the release of the ETH white paper.
For the ETH miners who have entered the market, it has been a long journey. They have experienced the hardships that Ethereum is not optimistic about, the silence of not being noticed by the market, spending huge costs, and spending a lot of effort in it. With the continuous increase in mining costs As it increases, miners' income in ETH in the mining pool gradually decreases.
Will the PoS shift change their situation?
I think it may or may not be the case. For some miners who entered the market early, they may have made a lot of money in the early stages of Ethereum. For the PoW mechanism, they only need to regularly update equipment or pay a certain amount of electricity, and the input cost is much lower than the early income. The PoS conversion has little effect on them.
For the miners who entered the market later, this may be a misery. They have already spent a huge amount of money to buy expensive mining machines in the early stage. The change of the PoS mechanism may make it difficult for them to pay back the cost they invested in ETH in the short term. . Therefore, a large number of miners may switch from mining ETH to mining other small coins in order to recover the cost of mining machines. ETH will lose a group of advocates. For the miners who leave, this is not necessarily a relief or the best way to recover costs. With the launch of ETH2.0, the income it brings may be far higher than the income of small currencies, and miners need to spend more It takes a long time to recover the mining cost, or the opportunity will be missed. At the same time, miners will need to invest new costs in the PoS mechanism to obtain better opportunities. This requires miners to have enough savings and patience to invest, but perhaps after a period of time they will have more income than the input.
This is a good opportunity for new verifiers who intend to enter the market according to market conditions. Compared with old miners, they save the cost of expensive mining equipment at the initial stage, and can use the saved cost in PoS Investing more money in the process may have a higher chance of being selected for verification. However, according to the article published by V God, in Ethereum 2.0, the team expects that the annual validator reward is equivalent to about 0.5-2% of the total supply of ETH, and the more validators, the lower the interest. As the number of validators investing in ETH2.0 increases and the coins put into the ETH2.0 fund pool increase, the rewards received by the validators will also decrease, and the benefits earned by users through verification will decrease.
The change of ETH2.0 reward mechanism from PoW to PoS mechanism has an advantage in terms of design concept and investment cost. For miners, opportunities and challenges coexist; at the same time, market investment is uncertain, and the currency price will be based on any factors. Ups and downs; how to invest in the market at the right time requires careful consideration by investors.
