About PoS, you need to know these 14 points
Original Author: u/domotheus
Original compilation: ETH Chinese
As the merger approaches, more news will gradually emerge, and many more articles will be published by many ill-informed crypto journalists. This signals to more people that a merger is indeed close, which will lead to more questions and discussions about PoS, while also repeating the same topics and misconceptions. I saw this to some extent last week when the successful merger of the Kiln testnet was announced, and I expect to see more of the same going forward. So laying out some of my common points here, like I did in my last post (which was more about Ethereum in general), I boiled it down to a few simple points.
What is a merger?
What is a merger?
More information can be viewed in the website ethmerge.com, so I won't spend too much space on this part
- After the merger, Ethereum will be secured by PoS consensus instead of PoW.
- It is not "Eth 2.0" after the merger. There is no such thing as ETH 2.0. This is an outdated vocabulary.
- If you are currently holding ETH, then you don't have to do anything. After the merger, you still hold the same amount of ETH, there will be no"ETH2 Token"Something like this, no need to migrate anything, etc. Everything remains the same, only the underlying consensus mechanism changes.
- The reason why it is called "merging" is that the upgrade will merge the beacon chain (consensus layer) and the current chain (execution layer) and discard the part of the execution layer PoW.
- "Consensus" is just a fancy word for ensuring that transactions are ordered and that ordering is economically guaranteed not to change. PoW and PoS achieve consensus through different means:
PoW: "The cost of disturbing the block ordering is too high, and it is more profitable to participate in accordance with the rules."
PoS: “The cost of disrupting block ordering is too high, because if I do, I lose all my staked assets.”
Why merge?
Why merge?
- It will be cheaper to maintain security because less energy needs to be consumed to achieve consensus.
PoW: Requires miners to be able to at least cover the cost of all hardware and energy usage, otherwise no one will mine. This requires a large number of coins to be issued and sold quickly in exchange for fiat currency to pay the bills.
PoS: Just give stakers some yield and make people willing to deposit assets instead of investing directly elsewhere. There are no expensive bills to pay other than a regular computer and a steady internet connection, so the yield just needs to reflect the opportunity costs and risks involved.
- more sustainable:
The security of a blockchain is basically proportional to its currency price. This is true for both PoW and PoS: the former (more valuable Token rewards = more reasons to follow the rules = more miners = harder to break the consensus); the latter (more valuable pledge Token = more follow the rules To avoid loss of pledged Token).
Newly issued tokens essentially take value away from all holders and redistribute it to some. All other things being equal, converting tokens into fiat can extract value from the network.
- This will pave the way for many scaling solutions, with data sharding, stateless, light clients and more
- Can help reduce some of the complexity of code updates by separating the responsible content between the execution layer and the consensus layer.
- Supporting the environment and placating players is certainly a nice side effect, but not the main reason for switching to PoS. Because this is mainly influenced by external factors, and Ethereum as a protocol does not have much control (such as the source of energy production, GPU supply chain, etc.).
When will it be merged?
- No official date has been announced yet. It’s just that the developers and the community are cautiously and optimistically expressing their hope for the merger in June, for the reason, please refer to the article “Five Signals that the Ethereum Merger Will Happen in June 2022”.
- Testing is still going on and the merge won't happen until the devs are fully confident that nothing will go wrong.
- I personally wouldn't pin my hopes on a June merge, but I'm sure it will happen in the summer, unless there's a very serious bug during testing (e.g. a critical bug that takes weeks to fix, spec itself would take months to fix and re-implement if there were bugs).
- The difficulty bomb is set to explode in June, so there will be a hard fork upgrade at that time, merged or not.
- I recommend bookmarking the wenmerge.com website to quickly see the latest status of each testnet merge to estimate the mainnet merge.
Don't be silly, they'll put it off like they did before. A merge was promised years ago, but it hasn't rolled out yet
- First some useless nonsense: no official merger date has been announced, and never has been. The deadline has never been set, why delay it?
- The quote "Ethereum will switch to PoS in 2018" stems from an extremely optimistic attitude, which not only underestimated the complexity of PoS security design, but also underestimated the complexity of the transition from PoW to PoS security. The work done at that time amounted to a partial completion of the specification of Casper FFG, a hybrid PoW-PoS mechanism, which was eventually abolished. But now there are many different designs. None of these new designs worked then, but they do now.
After years of research, analysis of possible attack vectors, and continuous improvement, a complete protocol specification was written
The client implementation is all completed, now only the test is left
All work revolves around merging, and little else is being done outside of merging. The necessary preparatory steps for the merger have been completed. Not saying "they've done complex work like EIP-1559, so now they can focus more on merging", but "all attention will be on merging". It is unlikely that a situation will arise where the merge is "postponed again" and the developers start another work. Nothing else can be done until the merge is complete.
PoS has actually been running on the beacon chain since December 2020. This means that Ethereum's PoS has been tested and run in the form of a product for more than a year, and the pledged assets on the beacon chain currently exceed 10 million ETH. It's just that the current PoS has not yet produced blocks for the execution layer.
Once the pledged ETH assets can be unlocked, the price will collapse
Of course, many stakers ultimately want to make a profit, especially those who locked up their stake when 32 ETH was worth only $10,000. But there are still many other aspects to consider:
Merging does not unlock any ETH. Withdrawals will be made in the first hard fork after the merger, probably 6-8 months later. In the past few months, there will be no additional issuance of PoW Tokens (approximately 13,000 ETH/day) will be sold, and there will be no additional issuance of PoS Tokens in the market for the time being.
Just like staking ETH needs to be queued, withdrawals also need to be queued. Assuming there is a massive sell-off, everyone is in this queue, and the exit rate is limited to 1125 validators/day. So there is no “opening the floodgates” moment. It will take more than a year for all stakers to unlock. Over the course of a year, about 38,000 ETH was reflowed into the market every day (or... about 1% of the average daily volume).
After the merger, validators will also start receiving fee rewards, which is estimated to double the rate of return. (Combined ETH issuance and staking yield estimates). Thousands of people are queuing up to stake right now. Since they accept 5% annualized rate of return, I don't think they will give up and continue to pledge when the annualized rate of return becomes 10%.
By far the biggest risk involved with staking is mergers. Something catastrophic could happen. However, despite these risks, people have been staking and locking their ETH for over a year, despite the uncertain date of unlocking ETH. How many people/institutions are watching from the sidelines, waiting until this risk is gone before joining the staking fleet?
And don't forget that the withdrawal of stakers means fewer validators, which means that validators who do not quit will have higher yields. Likewise, there is more incentive to join staking for those who have not done so before.
But, of course, this is cryptocurrency, and its properties as a cryptocurrency will not change. Mergers bring some exciting and volatile possibilities, or there could be a downside with all the good news, who knows. I won't pretend that I can predict the future, but it seems to me that more ETH is likely to be staked than withdrawn.
If PoS is so good, why didn't Ethereum use it from the beginning?
PoW is easy to conceptualize and implement, PoS is more difficult. Especially back in 2014, it was mostly a theoretical concept still being researched, with some blockchains implementing some version.
From a research point of view, there are several fundamental issues that need to be overcome before considering the implementation of PoS.
There is no one universal PoS scheme. Each PoS blockchain has its own PoS specification, and each has advantages and disadvantages. So many people say "other blockchains have done it, why can't Ethereum do the same thing", it's not that simple.
One benefit of starting with a PoW chain is that it allows anyone to mine permissionlessly. This makes Ethereum's Token distribution method much better than those chains that are PoS from the beginning (they have to decide how to distribute the initial Token, and the distribution method really cannot achieve permissionless).
Related to the above: Yes, Ethereum still has pre-mining/pre-sale, but after years of mining and multiple rounds of bull-bear cycles, ETH is constantly changing hands, and the pre-mined Token has now been diluted to half of the total supply , the proportion of holdings of the top 10,000 ETH holders is close to that of the top 10,000 BTC holders. So, in 2022, when Ethereum is an extremely liquid and easy-to-buy asset, it's not a big deal.
It really was a ruse that ruined years of hard work by miners
Since its release, PoS has always been the ultimate goal of Ethereum, and every miner knows that it will end one day. There is no scam or unfair situation here.
Economic factors trump any form of miner loyalty to the blockchain. You can think of a blockchain as a company, and miners as employees.
Why merge?"Why merge?")。
Miners generally look for the chain that offers the highest reward, and if another token that can be mined by the GPU gives more rewards, most of them will immediately abandon Ethereum.
Likewise, Ethereum pays less if stakers can perform the services they provide at a lower price.
It's not exactly exclusive. Miners can also be Token holder blocks and blockchain users. There is nothing stopping them from holding their earned rewards and participating in staking.
If you are not consuming real-world energy to mine, the token loses its intrinsic value
I don't quite agree with this statement. There's nothing magical about computing hashes over and over until you find one that meets arbitrary requirements. I mean, imagine a PoW blockchain where work is done by solving Sudoku puzzles; Once the value of a certain side is found, it is easy to verify. This does not mean that solving Sudoku itself brings value to the world. Raising the mining difficulty of a certain token doesn't magically make everyone richer, it just makes mining less profitable -- unless, of course, demand also goes up, but so far that's been the case in the cryptocurrency world. Not too much of an issue.
I think the value of a Token ultimately comes from supply and demand, and the demand comes from the value of the block space. People need ETH to buy block space, whether ETH is generated by miners or stakers. Of course, more miners means more security/decentralization, further increasing the blockspace value proposition in a positive feedback loop. But this kind of feedback loop also exists in PoS Ethereum, and they are also super cool!
PoS is a recipe for full centralization
It is basically the same as PoW, but slightly different. "Better" or "worse" really depends on your perspective. In my opinion, PoW is really just an additional step to PoS.
Ethereum as a community places a high value on decentralization, and the research team will find ways to mitigate any potential centralization vectors. Even at the cost of sacrificing other important things like scalability (e.g., keeping the gas limit low so that more nodes can participate in a decentralized network, even if it leads to network congestion and transaction fees high).
image description
Ethereum Protocol Development Roadmap
There is something interesting about Ethereum's PoS design that is often overlooked: quadratic penalties. There are no severe penalties for a single validator node to go down, malfunction, or directly attack the network. And if a thousand validators do it at the same time, there will be a more severe penalty.
That said, if you're a large organization running thousands of validator nodes, it's in your own interest to spread them out, avoid cloud hosting, use different clients, etc. Sure, the assets are still centralized, but at least the points of failure are decentralized, which is good for the overall health of the network.
Some large mining entities rely on a central location to amortize costs that authorities can monitor based on energy usage and shut them down. Moving mining equipment around the world is difficult, but staking only relies on private/public keys and consumer-grade computers.
PoS actually makes "the rich get richer"
Yes. Unfortunately, we live in a world of extreme wealth inequality. Blockchain cannot solve this problem.
The same is true for PoW. Whoever has money can buy more mining machines and earn more money. In addition to mining, the return on investment is also affected by economies of scale: the centralized mining industry has a lot of money to buy hardware at a certain discount rate and move to places where electricity is cheaper. Individual miners simply cannot compete with it in reality. Whereas in PoS, everyone gets the same rate of return proportionally, whether they stake $10 or $10 million.
"It’s true that these large mining industries may be centralized, but they have no reason to attack the network because they have millions of dollars invested in the infrastructure...” So you're saying, are you okay with the existence of large centralized operators, as long as they have some sort of large share of the network?
Is this passive interest on your savings? Print money out of thin air? Isn't this just like the central bank issuing additional fiat currency?
You have to stretch it to make that point, but I've seen people do it (laughs). These views usually start with "PoS is nothing new".
Validators are still doing some "work": creating blocks and validating other blocks. It's just that the work consists entirely of actually useful work (which the blockchain needs to reach consensus on), rather than computing hashes over and over until one of them satisfies an arbitrary requirement.
This isn't really "free money printed out of thin air", there are still costs involved in the pledged assets, they're just more abstract and less intuitive than energy bills.
Opportunity cost - why take a pledge if another investment can give you a higher rate of return?
Poor liquidity - from the moment you deposit, your funds are locked, queued for your validators to activate, and then when you withdraw, queued again to withdraw.
Inherent Risks - Staking is still a fairly new thing and things can go wrong along the way. A critical error could occur, the network could be attacked, your staked hardware could be damaged, etc.
Volatility - it's still a volatile asset after all, and if you're the kind of investor denominated in your local fiat currency, it doesn't matter when the asset could drop 30% overnight while yielding maybe 5% Not very attractive (however, once the asset doubles, a 5% yield is very nice, turning a 100% yield into 110%).
Maintenance costs - you still need to maintain your validator nodes and keep them secure, ensure 100% uptime, update software, etc.
Here’s where it gets interesting: the more stakers there are, the lower the individual staking rewards get. This basically means that all the costs listed above will be priced by the market itself. The reason is simple: if the staking yield is too low for the rewards received to cover maintenance costs, then people will quit staking and invest elsewhere. Fewer people are staking, and yields have picked up again. Similarly, if the rate of return is too high, more capital will be attracted, and the rate of return will drop again.
As for inflation: Assume that the market as a whole has an ideal rate of return of 5%, of which 3% comes from the issuance of Tokens. Calculated in this way, about 30 million ETHs are pledged and an additional 900,000 ETHs are issued each year. With a total supply of 120 million ETH, the inflation rate is 0.75%. As long as the gas fee is at least 23 gwei, the inflation rate is lower than the ETH burn rate brought by EIP159. (I can’t stress this enough: Ethereum will soon be a deflationary asset with yield)
“Nice math but no supply cap and they change monetary policy all the time”
For many years, the goal has been"Achieving Minimum Viable Issuance While Ensuring Network Security", rather than setting an arbitrary supply cap, Ethereum prioritizes the security of the network.
As for monetary policy changes, none of the updates were inflation-boosting. Low inflation (and especially deflation) has been the goal of the community since day one.
Once the burn rate of EIP-1559 matches the issuance rate, there will be an equilibrium point that acts as an effective supply cap — again determined by market forces valuing Ethereum blockspace.
So, there is no such thing as an "Ethereum central bank" that arbitrarily adjusts inflation/deflation rates and prints money to cronies. The market itself determines the inflation/deflation situation, and no single entity can control it like a central bank controls the inflation rate of fiat currencies.
Whales have enough funds to control and change the rules and slash honest validators
There is no such risk, Ethereum does not have any form of on-chain governance because of this. The update of the protocol is the result of the joint efforts of the community (Layer 0), you do not need to stake any assets to report some bad notices and participate in the process.
This aspect is exactly the same as PoW: even if you have 99% of the computing power, you cannot make invalid transactions without private keys, steal other people's assets, or change the rules of the protocol. Can't really do anything other than reorganize blocks. 1% of honest nodes will reject any block that doesn't follow the rules, then the bad guys will be mining on an invalid/useless chain. The same is true under the PoS consensus. Now we just replace "computing power/mining" with "pledge weight/pledge" (the difference is that if the perpetrator of the reorganized block is discovered, all pledged assets will be fined and confiscated. However, the blockchain cannot completely destroy the mining equipment).
Simply put, a large amount of ETH is involved on the chain. There are currently more than 10 million ETH, and that is before the merger. At current prices, that's about $30 billion. Both the "amount of ETH staked" and "the value of ETH" are expected to rise, so attacks become less and less likely because the economic cost of launching an attack is too high. And if the attacker is from outside of Ethereum, it is ridiculous to get so much ETH in the first place (Where do you buy 10 million ETH to achieve 51% pledge ratio? Or 20 million?)
32 ETH is too much, most people don’t have that much money
I agree this is a great question. There are some proposals to lower the threshold for staking (better signature aggregation or active validator caps and rotations), but they don't seem to be a high priority right now, making sure the base layer can be secure.
The reason why such a high number of ETH pledges is required is because this value needs to just meet a technical point. In short, it needs to be low enough that everyone can participate, and there are enough validators to ensure the security of the blockchain; but high enough so that there are not too many validators and the blockchain overhead is too high big. And each validator node has the same amount of pledge, so that each validator has exactly the same weight when deciding who produces a block in the distributed random process, which reduces a lot of complexity.
From a technical point of view, there was a lot of math involved in arriving at the threshold of 32 ETH, which was worth about $7,000 at the time. Early math in 2017 even suggested a minimum of over 1000 ETH.
Thankfully, like mining pools in PoW, PoS also has staking pools that allow small amounts of ETH to be staked. This is not necessarily contrary to the slogan "Not your private key, not your Token", thanks to the like RocketPool, Secret Shared Validators"secret sharing verifier"(not yet available) schemes that leverage smart contracts to be permissionless, decentralized, and non-custodial. And because of the quadratic penalty mentioned above, I believe decentralized staking will outperform centralized staking schemes in the long run. I recommend everyone to read superphiz's staking guide for more information. If you value decentralization, participating in staking through exchanges is very bad.
Related to the above, it's best to think of a scheme like Rocket Pool as a higher-level abstraction of basic staking, rather than just a "staking pool". I've written more details about it here for anyone interested.
PoS has not been proven to work, but we know PoW works
This argument is actually perfectly reasonable, and obviously we can't really refute it. Only time will tell. I just think this argument is irrelevant in the context of Ethereum being switched to PoS, and has been deciding to switch all along. If you don't believe in it, don't participate/invest in it. I personally believe in a long-term sustainable PoS Ethereum.
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