The transformation of the Ethereum 2.0 reward mechanism from PoW to PoS has advantages in design concepts and investment costs, which present both opportunities and challenges for miners.
Original title: “OKEx Insights: Transformation or Exit? Life and death choices of miners in the ETH 2.0 era
Written by: OKEx
According to Coindesk’s report on November 4, the deposit contract of ETH2.0 is now in effect. At the same time, Vitalik Buterin published an article titled “Why Proof of Stake? (Nov 2020)” on Twitter on November 6, 2020, expressing that ETH2.0 adopts PoS as a foregone conclusion. The frequent outflow of news about ETH2.0 indicates that it is coming soon.
In this regard, users are eagerly looking forward to the upcoming ETH2.0, and make certain analysis and popular science in the network exchange platform.
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In addition, what most reflects users’ expectations and concerns is the change in the price of ETH tokens. According to OKEx data, since the announcement on the evening of November 4th, ETH has risen sharply, reaching a maximum of $467, and then stabilizing $450. As of November 9, the increase was as high as 24.8% compared to November 4.
Image source: OKEx
From the discussion of the followers and the rise in the price of ETH, it undoubtedly reflects investors’ expectations for ETH2.0. However, the ETH2.0 update is not only technically optimized, but also changes in 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 the cryptographic puzzle. That is, the miners who solve the more cryptographic problems in the same time will receive more rewards. In short, PoW is about distribution according to work and doing more.
As ETH gradually approaches the public’s field of vision, the disadvantages of PoW have become increasingly prominent. First of all, PoW does not perfectly reflect the ability of miners, but requires miners to spend a lot of money to buy larger and more responsible miners. Only when the miners operate faster, can miners solve cryptographic problems faster and get more mining rewards. ; Secondly, ETH will adjust the difficulty of important nodes. With the gradual increase of mining costs, when the cost of mining is higher than the mining revenue, people’s enthusiasm for mining will be greatly reduced, resulting in a substantial reduction in computing power, and the network security of the public chain using the PoW mechanism is threatened.
Taking into account the above shortcomings, when upgrading ETH 2.0, the V God team proposed that the PoS mechanism will be used to reward miners when ETH achieves a full upgrade to 2.0.
PoS (Proof of Stake), the proof of stake is in the form of election, in which any node is randomly selected to verify the next block. There are no miners in the proof of stake, but a validator to create a new block. The verifier is not selected completely at random. To become a validator, you need to deposit a certain amount of tokens as equity in the node network, which can be understood as a deposit.
The size of the stake determines the probability of being selected as a validator, which is linearly related. We can assume that Lily deposits $100 in it and Jackson deposits $1,000. Then, when the election is held, Jackson has a 10 times higher chance of becoming a validator than Lily. In short, PoS is to distribute according to money and make money with money.
Image source: OKEx Insights
V God also stated in his latest article published on November 6 the reasons for choosing PoS:
First of all, compared to PoW, PoS is more secure at the same cost. Taking the cost of attacking a network with a block reward of $1 per day as an example, the total cost of a PoW attack based on GPU mining is about $0.26, (assuming the attack time is 6 hours), and as the attacker gets block rewards, It may be reduced to zero; the total cost of a PoW attack based on ASIC chip mining is $486.75 (consisting of $486.67 ASIC and $0.08 in electricity and maintenance costs); and the total cost of a PoS attack is $2189 ($0.9 per day*6.667 years). As the pledge increases, the cost will also increase. However, in the solution proposed by the V God team, there are two ways to achieve a safety gain of 5-20 times at low cost. One is to keep the block rewards unchanged to benefit from improved security; the other is to reduce the block rewards on a large scale (thus reducing the “waste” of the consensus mechanism) and keep the security level unchanged. The overall situation is achieved, and PoS is more secure at the same cost.
Image source: OKEx Insights
Secondly, under the PoS consensus mechanism, it is easier to recover from attacks. In a GPU-based system, without any defense measures, a persistent attacker can easily paralyze 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. First, the community will change the PoW algorithm through a hard fork to respond to the first attack, thereby “locking in” all ASICs (attackers and honest miners). But if the attacker is willing to bear the initial cost, the situation will return to the same as the GPU situation afterwards (because there is not enough time to build and distribute new algorithms for ASICs), so the attacker can continue to spawn camp cheaply Attack, this is inevitable. However, it will be much better in the case of PoS. For certain types of 51% attacks (especially rolling back the finalized block), there is a built-in “Slashing” mechanism in the proof of stake. Through this mechanism, the attacker’s majority stake (not including Other people’s) will be automatically destroyed. For other attacks that are more difficult to detect (51% coalition censoring-A 51% coalition censoring everyone else), the community can coordinate on a soft fork (UASF) activated by a few users, and the attacker’s funds are once again mostly destroyed. There is no need for explicit “hard fork currency elimination”. Except for the coordination and selection of a few blocks on the UASF, the others are all automatic and only need to be implemented in accordance with the protocol rules.
Similarly, V God said that PoS also has certain flaws:
First, PoS is more like a “closed system”, where wealth concentration takes a long time. In PoS, if validators have some, they can be used to pledge them to obtain more revenue, but in PoW, miners can continuously obtain more rewards through external resources. Therefore, in the long run, the distribution of coins in PoS may become more and more concentrated. However, the general reward (validator’s income) in PoS is very low. The more people verify, the less revenue each person gets. Centralization may take a long time to double.
Second, PoS requires “weak subjectivity”, while PoW does not. In PoS, when a node goes online for the first time, or any node goes online after being offline for a long period of time (that is, multiple months), the node must find some third-party sources to determine the correct chain head. This may be their friends, exchanges, block search sites, client developers, etc. That is, PoS is subjective and requires a certain foundation of trust to continue. But PoW does not have this requirement.
However, compared to PoW, the mechanism of PoS is closer to decentralization and is consistent with the original design concept, which will also be the team’s biggest advantage in choosing it.
Image source: OKEx Insights
From the perspective of the concept and advantages and disadvantages of the reward mechanism, it is undoubtedly good for ETH2.0 to transform PoW into PoS, but is it true?
It has been 7 years since the publication of the white paper.
For the ETH miners who have entered the market, this is a long journey. They have experienced the difficulty of not being optimistic about Ethereum, the silence of not being paid attention to by the market, costing huge costs, and spending a lot of effort in it. With the continuous mining cost Increase, and the income of miners in the ETH pool gradually decreases.
Will the transformation of PoS change their situation?
In my opinion, it may or may not. For some miners who entered the market early, they may have made a lot of money in the early days of Ethereum. For the PoW mechanism, they only need to update the equipment regularly or pay a certain electricity bill, and the input cost is far lower than the early benefits. PoS conversion has little effect on them.
For the miners who enter the market later, this may be a misery. They have already spent a huge amount of money in the early stage to purchase expensive mining machines. The transformation of the PoS mechanism may make it difficult for them to pay back the cost of ETH investment in the short term. . Therefore, a large number of miners may switch from mining ETH to other small coins in order to recover the cost of mining machines. ETH will lose a group of supporters. For miners who leave, this is not necessarily the best way to relieve or recover costs. With the launch of ETH2.0, its benefits may be much higher than those of small currencies, and miners need to spend more Long time cost to recover the mining cost, or missed opportunities. At the same time, miners will need to invest new costs in the PoS mechanism to get 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 they have invested.
For new validators who plan to enter the market based on market conditions, this is a good opportunity to enter the market. Compared with older miners, they can save the cost of expensive mining equipment invested in the initial stage, and can use the saved cost in PoS Invest more funds in China, with a higher probability 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 number of coins put into the ETH2.0 fund pool increases, the rewards obtained by the validators will also decrease, and the profits earned by users through verification will decrease.
The transformation of the ETH2.0 reward mechanism from PoW to PoS has advantages in design concepts and investment costs. For miners, opportunities and challenges coexist; at the same time, market investment is uncertain, and currency prices will be based on any factor. Ups and downs; how to invest in the market at the right time requires investors to carefully consider.
