CoinDesk is preparing for the invest: ethereum economy virtual event on. Oct. 14 with a special series of newsletters focused on Ethereum’s past, present and future. Every day until the event the team behind Blockchain Bites will dive into an aspect of Ethereum that excites or confuses us.
The Top Shelf news you subscribed to is down below.
Now, a few words from CoinDesk tech reporter Will Foxley.
Scaling for censorship-resistance
The shakedown of bitcoin derivatives exchange BitMEX last week is a healthy reminder of what motivates many DeFi developers: building censorship-resistant financial markets.
The meaningful comparison between BitMEX and decentralized finance, of course, is the self-executing nature of decentralized exchanges (DEX) on the Ethereum blockchain. Through bits and bytes, developers are working toward a future where U.S. regulators cannot take down financial markets – let alone any application built on top of the Ethereum blockchain.
Still, while theoretically capable of supporting a new world of censorship-resistant finance, the Ethereum blockchain has hit the hard limits of its own infrastructure.
Ethereum isn’t ready for prime time performance. Its mainchain and many decentralized applications (dapp) can barely handle the economic strain users have put it under this summer, which saw fees shoot to record highs twice.
One of the most urgent and interesting questions in crypto is how to create a censorship-resistant economy that actually works. While there are no easy solutions to rising gas fees, it’s a topic drawing some of the most creative minds, all with their own ideas.
On Oct. 14, MakerDAO’s Rune Christensen and Near Protocol’s Illia Polosukhin will discuss the issue of gas fees at invest: ethereum economy. Others will focus on the future of Ethereum, and the long road it has taken towards scalability with Ethereum 2.0. While under development for years, this updated chain remains a gamble.
For instance, Phase 1.5 and Phase 2 – the latter stages of Eth 2.0 that should theoretically push the blockchain to tens of thousands of transactions per second – have not been fully scoped out. Some aspects remain completely unknown. (Perhaps as it should be, given the fast pace of discovery in crypto land.)
But phase 0 is nearly upon us. Multiple testnets have led developers and stakers to the autumn’s main event: the release of a deposit contract for stakers expected this month. Once enough ether (ETH) is deposited in the contract, the new Proof-of-Stake (PoS) blockchain can begin to turn along.
Called the Beacon chain, the PoS blockchain will act as a spinal cord of sorts for Eth 2.0’s multi-blockchain settlement scheme. For now, the Beacon chain stands as a symbol of a censorship resistant future. A promise of technology, but one under development.
It’s a topic Vitalik Buterin will likely go into during his keynote speech at Invest. Others, like Alchemy’s Michael Garland and Anchorage’s Diogo Mónica, will go further into the weeds, discussing not only the mechanics behind this multi-year blockchain swap but also why it matters for people’s bottom line during “ETH Staking: The Service You’ll Want to Buy.”
Join us for a day-long exploration of the ins and outs of the go-to platform for decentralized applications, its current setup and future roadmap.
– Will Foxley
Stake it or farm it?
Ethereum has introduced new ways for people to get their money to work for them. Whether it’s securing or participating in a network or creating other interest from your money, new rewards and incentives abound for those willing to engage. In a panel discussion, titled “Making Your Money Work for You,” Gauntlet’s Tarun Chitra, Stake’s Tim Ogilvie and Balancer Lab’s Fernando Martinelli will discuss how to manage risks, optimize rewards and build a portfolio using ether-based assets.
Tune in from 10:30 a.m. – 11:00 a.m. ET, Oct. 14.
Ethereum 2.0 represents the first time the cryptocurrency industry will see a blockchain of its size and value attempt to transition all users, as well as assets, to an entirely new decentralized network while keeping all operations on the old network active and running.
So what will happen to your ether and non-fungible tokens (NFT) once Ethereum 2.0 goes live? CoinDesk research analyst Christine Kim explains.
Ethereum 2.0 is coming
The years-long upgrade – intended to radically transform the world’s largest smart-contract platform – is inching closer to deployment.
As of July 10, some developers, including Ethereum founder Vitalik Buterin, estimate the oft-delayed Eth 2.0 will launch by the end of this year.
When phase zero of Eth 2.0 does ship, little about Ethereum will change in the near term for users and dapp developers. This is because unlike all other system-wide upgrades in Ethereum history, the Eth 2.0 overhaul will primarily be happening on a different blockchain.
The first phase of development for Eth 2.0 is centered around the creation of a separate proof-of-stake blockchain network called the beacon chain. On this new network, ETH holders with a minimum of 32 ETH can earn rewards in the form of annualized interest on their wealth. To earn these rewards, ETH holders must have the appropriate hardware and software connecting to the beacon chain and a strong understanding of how the technology works.
Ethereum as we know it today will eventually be folded into the Eth 2.0 upgrade in its entirety. The report features commentary from Ethereum developers about what benefits – but also risks – this may bring.
The culmination of over five years of research and development, Ethereum 2.0 is a highly ambitious upgrade.
For an even deeper dive, CoinDesk Research published a 22-page report on “Ethereum 2.0: How It Works and Why It Matters.”
– Christine Kim
Osho Jha is an investor, data scientist and tech company executive who enjoys finding and analyzing unique data sets for investing in both public and private markets.
In this essay, published in early 2020, Jha details why the transition to a Proof-of-Stake chain will turn Ethereum into a functioning store of value.
Store of value
Before diving into the impact that staking could have on ether (ETH), it is important to understand how the ETH “money supply” currently works. As we know, bitcoin (BTC) has a fixed supply of 21 million coins and the rate at which these coins are released into the money supply decreases over time. ETH does not have a fixed supply but, like BTC, it has a declining inflation rate.
There is a fixed issuance of new ETH annually. As the money supply grows, that fixed issuance becomes a smaller portion of the total money supply. As with BTC halvings, ETH over time has reduced the block reward for miners. The transition to Ethereum 2.0’s staking mechanism is set to reduce the inflation rate of ETH to 0.5%-2.0%, putting it in the same company as BTC and gold in terms of supply inflation.
I look at ETH as the fiat to BTC’s gold. Despite negative connotations in the crypto community, fiat currencies aren’t inherently bad and the main advantage of an unfixed total supply is flexibility to adjust supply during different economic climates. Central banks have taken this flexibility to an extreme in recent years, and, while ETH’s supply is not fixed, its projected long term inflation may be a happy middle ground between fixed supply and unbridled money printing.
In many ways, ETH trades like a venture investment. Investors believe Ethereum will be the underlying technology for the future of decentralized apps and they buy ETH in the same way they would shares [of stock]. I find this troubling because, by its very nature, ETH is not a stock and these investors are taking on a bigger risk than they might think.
Staking is the key to making ETH function as a value store. At its core, staking incentivizes holding ETH in a node that can then be used by the network to verify transactions. The greater the number of nodes, the faster the network can function and the more secure it becomes. Staking is not new. Projects ranging from Hedera Hashgraph to Facebook Libra have some sort of staking mechanism built in. But they don’t have the advantage of being the de facto network decentralized app developers lean on.
For investors, there are incentives to staking tokens in a node, including rewards similar to earning interest on a bank deposit. While the staking rewards vary based on network performance and utilization, target returns are close to 10% annually. Though actual returns will vary as the network gets up and running, the possibility of earning returns on coins that would otherwise be in a wallet should entice ETH holders to stake.
In a global low-rate environment, these returns are certainly attractive. And staking may be the killer app that allows ETH to become a “positive carry asset.” In other words, it generates a positive return for holding it as opposed to, say, gold, which is negative-carry, as it incurs storage costs. Long term, positive carry stimulates demand and creates an incentive to borrow cash to purchase and earn yield. Overall, positive-carry assets increase stability of price movements by creating long term holders and widening the investor base.
Investors are becoming aware of this dynamic. To stake a node, there is a minimum required 32 ETH (thought staking pools can allow staking to be done with as little as 1 ETH).
ETH as a store of value
Current events have forced us to adapt to a more digital life and also shown us the limitation of legacy banking systems. Even the distribution of stimulus checks became a nontrivial problem. With the market focused on bitcoin and its role in unstable economic times, the advances being set forth by Ethereum 2.0 have been largely overlooked. However, Ethereum 2.0 lays out a platform which can help create better digital experiences and ease the friction as individuals and institutions transition to a digital-first world.
As we mentioned earlier, staking will turn ETH into a positive carry asset, which in turn brings price stability and broadens the investor base. By staking accumulated tokens, investors will both earn yield and help scale the network in a secure way.
While ETH is being staked, there is demand for stablecoins and banking-esque services, which are being deployed and iterated on in the DeFi space as a whole. With this dynamic, transactions can be made using stablecoins while ETH itself is staked to generate interest income. This may sound foreign and futuristic but it’s not much different than when people keep savings in an interest-generating savings accounts, or investments, and keep day-to-day money in a checking account.
– Osho Jha
Going back to Will Foxley’s introduction, Ethereum 2.0 promises to revolutionize finance and the crypto economy, but there are still a lot of open questions.
Last year, my former colleague Leigh Cuen wrote an article examining many of the most contentious issues surrounding the development and eventual deployment of Eth 2.0.
During the largest blockchain overhaul to date, many of the nuances being discussed are reduced to simple gut reactions: is what’s happening