Ethereum Staking Could Very Well Become A $160 million Industry – According To Vitalik's Proposal
According to a brand new proposal provided by the creator of Ethereum – Vitalik Buterin – he argues that he is contemplating an increase in rewards for the validators within the network who would serve to provide security on the operations of the next iteration of the blockchain.
When it comes to the wide range of updates, both theoretical and practical, Ethereum 2.0 is the single largest and most ambitious upgrades in store for the Ethereum blockchain, which is currently valued at around $17.5 billion. The over-arching goal is to eradicate any of the current and persistent bottlenecks within the throughput of transactions on the network, while simultaneously decreasing the costs currently sustained by users.
While the Ethereum network makes use of the proof of work consensus protocol, meaning that miners would compete against one another in order to bundle up blocks of transactions while adding them to a chain that continually grows in scale. Meanwhile, the proposed Ethereum 2.0 upgrade will see this proof of work system replaced with the long sought after proof of stake protocol. This protocol would mean that validators could stake their own funds in order to obtain and attest to various blocks and transactions within the existing network.
In making this drastic shift, the underlying demand for energy would decrease significantly, requiring less computational power and relying more on those users willing to serve as the network's stake-holders once Ethereum transitions to Ethereum 2.0.
Speaking on behalf of Parity, one of the software clients to Ethereum – Fredrik Harryson, the company's Chief Technology Officer explained the value of this kind of system.
“In a proof-of-stake system, your cost of an attack is just buying tokens. You basically want it to be unreasonable that anyone would be able to buy so many tokens that they’re able to attack the network.”
This was something that was initially proposed by Justin Drake, one of the researchers for the Ethereum Foundation in recent weeks. In total, the underlying amount of wealth that could be hypothetically staked on the network would hit 32 million Ethereum, which, according to more recent estimates, would be approximately $500 million.
When taking into consideration that kind of wealth being staked on the network on a reliable basis, this makes it a very profitable venture for entities all around the world – with a potential $160 million in ETH being up for grabs by these same entities, serving as a replacement for the current ecosystem of miners that is currently used with its proof of work mechanism.
Proof of Stake – Rates of Reward
While this upgrade would see a profound change in who influences the continued developments on the Ethereum network, there is still a question of rates of reward issuance. Along with this, how exactly can you get this much money aside in order to ensure the continued security of the network?
The best kind of solution in which this kind of behavior can be incentivized is if Ethereum developers provide a financial return rate that serves as an immediate rewards system for existing validators. This would be very much akin to an interest rate or dividend yield to stakers / validators, rewarding them for locking up their existing ETH and helping to safeguard the broader security of the Ethereum blockchain.
Jonny Rhea, operating as one of the protocol engineer's at Consensys, explained that while this solution is solid on paper, the question turns to what kind of issuance rate you provide these same stakeholders.
“They have to find a number that is appropriate. You don’t want to overpay to secure the chain and you don’t want to underpay,” Rhea continues on to elaborate.
“So, the idea was they did some back of the envelope kind of math to figure out what’s it going to be worth and what should we pay to secure the chain which we pay the validators.”
When it comes to the deeper details of this ‘back of the envelope math' at play, the broader consensus is that this interest rate should be set at around 2.2 percent, that is providing an overall amount of 30 million ETH were to be used as a stake on the network.
This is an initial amount that would have to be considered somewhat in flux, however. If the amount of ETH being staked was to depreciate, the rate of return would have to increase its percentage rate in order to encourage more users to become validators and get on the network. If the contrary were to be true, the rate of return would also need to decrease to make sure that it wasn't overpaying for an essentially oversaturated market of validators.
This envelope mathematics generally equates to economics, or the ratio balance of supply and demand on the network, as Harrysson goes on to explain.
“There’s a sliding scale of rewards that depends on how much ETH is locked up in stake. In a system where you have very small amounts of stake locked up, you want to encourage more people to stake and lock up more ETH to increase the security of the chain.”
Estimations have since been presented by the token strategist for Consensys, Collin Myers, argued through a series of estimations over the course of this January demonstrated that the forecasted rates of return for those that would be validators on Ethereum 2.0 were far too low for what they should be.
If we first take into consideration the minimum staking requirement which exists on 2.0 as being 32 ETH, which is nearly $4,900 USD, and factor in the computing costs, general security risks, risks to code, as well as general uptime along with the average maintenance costs of the network as a whole. Myers argued that the current specifications of Ethereum 2.0, at the moment, resulted in levels of net yields “that are highly unlikely to attract a small validator.” Rhea goes on to add that this was the kind of conclusion provided by “several different people” within Ethereum's existing ecosystem, including financial experts and miners.
As a means to a solution, this latest proposal, which was submitted by the creator of Ethereum, Vitalik Buterin earlier this week, argued for the increase of the rate of return for validators to 3.3 percent given a total staked volume of 30 million ETH within the network.
Overall, this would equal a maximum annual reward issue of nearly 100,000 ETH for validators that choose to stake on Ethereum 2.0, which would, according to newer estimates of ETH value, be worth $160 million.
In comparison to the already existing industry provided by the proof of work mechanism, mining, which is currently estimated to be an industry of $700 million in value.
‘It’s A Subjective Measure’
Envelope mathematics indeed, looking at both validation and mining side by side, there is a considerable disparity in the value of a staking industry versus a mining one. With validating being considerably lower, it's important to consider the fact that the overall inflation rate of ETH is also considerably lower.
“The base inflation would be ~1 percent and the base return [rate] ~3.2 percent,” Justin Drake, an Ethereum researcher, has made an estimate of this kind in response to the proposal made by Buterin. At this moment in time, the inflation rate on Ethereum is now over 4 percent.
When taking into consideration the dynamic range of additional gas costs which, on the current iteration of the Ethereum network can be regarded as being similar to the costs of writing transactions within a mined block. Drake goes on to add the following:
“With half of the gas burnt, then inflation on Ethereum 2.0 would be ~0.5 percent and the validator return ~5 percent. Feels healthy!”
Within Buterin's own proposal, this validator return rate would operate on as long a scale as getting to low percentages as 1.56 percent, if there is a total of 100 million ETH being staked within the network, and to get as high as 18.1 percent if there is only a staked volume of 1 million ETH on the network.
Harrysson went on to explain the kind of mathematics at play with this kind of percent rates. “It’s more like behavioral economics,” Harrysson goes on to explain.
“It’s a subjective measure of what you want your cost of attack to be. So, the question you always ask yourself in blockchain is how much would it cost to attack this chain?”
These kinds of estimations proposed by Buterin over this week are not essentially set riveted into the marble. This proposal, along with the ongoing work of determining the hypothetical sweet spot for engaging as broad a validator population as possible. This is exactly the kind of terminology that Rhea uses to explain just how the community is trying to approach the matter of profitibility and incentive for validators, along with security.
“For now, Buterin’s proposal is what it’s going to be but it’s being put out as a proposal. People are going to go back to the drawing board. I know Collin Myers from Consensys this weekend is going to rerun his analysis based on [the new numbers] and he’ll probably have some interesting feedback.”
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