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| Breaking down Ethereum 2.0 and its sweeping impact on crypto markets, weekly By Christine Kim Research Associate May 26, 2021 Sponsored by ETH Price -3.07% $2,558.27 Market Cap $296.79B Volume (24H) $115.90B (As of 5/25/2021 @ 20:25 UTC. ETH price % change over 24 hours.) If you were forwarded this newsletter and would like to receive it, sign up here.
Today is the third day of Consensus, CoinDesk’s largest event of the year.
Complete with educational panels, workshops, keynotes, fireside chats, and networking experiences, Consensus assembles the best and brightest of the crypto industry to explore the ongoing evolution of cryptocurrencies around the world.
Like last year, Consensus is a fully virtual event. One of the perks from my experience of having everything online is being able to watch panels from the comfort of your own bed or listen to keynotes while cooking breakfast.
Even so, these types of events can get overwhelming with their jam-packed programming. So, take a break with me.
Whether you’re in between panels at Consensus, getting started with your regular Wednesday workday or doing something else entirely, have a seat, take a breath and join me for a moment to explore what’s happening in the world of Ethereum 2.0.
I’m your host, Christine Kim. Welcome to another edition of Valid Points.
- Christine
Pulse check Source: CoinDesk Data Dashboard and beaconcha.in (Data as of May 25 @20:24 UTC) If you’re new to “Valid Points” and the topic of Ethereum 2.0 in general, be sure to check out our 101 explainer on Eth 2.0 metrics to get up to speed about terminology used throughout this newsletter.
Last week, I did some back-of-the-envelope calculations on just how much profit the CoinDesk Eth 2.0 validator has made since its activation on February 17, 2021.
Factoring out the initial costs of purchasing the ether from cryptocurrency exchange Coinbase and transferring funds from a secure hardware wallet to the Eth 2.0 deposit contract, as well as the amount of ether lost due to technical difficulties experienced shortly after validator operations were activated, CoinDesk has increased its initial holdings of the crypto asset by 0.2 ETH. Costs and revenue breakdown of Zelda Source: CoinDesk Research Moreover, the price of ether has appreciated 450% since the ether was initially bought, which means CoinDesk’s total ether holdings of 32.7 ETH have risen in value from being worth around $15,000 to almost $85,000, at the time of writing.
It’s important to note that none of these funds are available to withdraw or transfer to any exchange from the Eth 2.0 Beacon Chain due to the one-way bridge that only allows ether to move from the Ethereum blockchain to Eth 2.0 but not the other way around. This additional functionality will eventually be added to Eth 2.0 at some point after the Ethereum blockchain and the Beacon Chain are merged.
Once the merge is complete, CoinDesk plans to donate all profits to charity, just as it has from the beginning of this staking project. This is because CoinDesk’s mission in becoming a validator on the Eth 2.0 network at its most risky and nascent phase of development is not to make money but rather to report accurately about Ethereum’s transition to a proof-of-stake (PoS) consensus mechanism.
For more information about CoinDesk’s Eth 2.0 staking operations, nicknamed “Zelda,” check out the official announcement post here.
Running costs
One factor that the costs and profit breakdown of Zelda (see above) does not show are the running costs associated with hosting operations on Amazon Web Services (AWS). At minimum, running costs should amount to $200/month (or roughly 0.077 ETH/month), according to CoinDesk Director of Engineering Spencer Beggs.
However, there are additional network charges that fluctuate daily, depending on how much data and bandwidth Zelda consumes. To track these running costs more accurately, Beggs has recently created a new tracking system within AWS that should be sending us more accurate numbers in a few weeks. (Stay tuned!)
But factoring in the minimum base cost of running Zelda on AWS, and estimating a monthly earning from validator rewards at 0.20841 ETH, CoinDesk still nets on average 0.1314 ETH or $344 in profit each month from staking operations.
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New frontiers Speaking of back-of-the-envelope calculations, Carl Beekhuizen also ran some numbers based on estimations of how much energy validators have been consuming on the Eth 2.0 Beacon Chain.
Of the 140,000 or so active validators on Eth 2.0, Beekhuizen assumed roughly 87,897 were average at-home stakers and 52,695 were professional stakers, such as exchanges or staking-as-a-service (SaaS) businesses.
To make the math simple, he made additional assumptions that for every 5.4 validators an average at-home staker runs, their infrastructure would consume at maximum 100 watts of electricity.
For a professional staker, the assumption was similar: 100 watts of electricity for every 5.5 validators run. This, according to Beekhuizen, is “a gross over-estimate” of how much professional staking operations actually save in electricity costs through economies of scale. However, for the purposes of this quick and dirty calculation, the savings on electricity for a professional staker would only be slightly more optimized than for an at-home staker.
Doing the math
I will go one step further in simplifying by making the electricity costs of the at-home staker and professional staker equal, since they’re not all that different in Beekhuizen’s calculations. Thus, with these assumptions in mind, you get a total amount of energy consumed by validators to secure the Eth 2.0 Beacon Chain of roughly 2.6 megawatts. Back-of-the-envelope math inspired by Carl Beekhulszen’s original calculations Source: CoinDesk Research About the resulting total, Beekhuizen wrote:
“This is not on the scale of countries, provinces, or even cities, but that of a small town (around 2,100 American homes).”
He added that compared to the energy consumption of the Ethereum blockchain fueled by proof-of-work (PoW) mining, a PoS consensus protocol would ensure that Ethereum uses at least 99.95% less energy than it currently uses.
While these energy estimations are impressive and reinforce the core reason behind why Ethereum developers want to expedite the merge to Eth 2.0 as soon as possible, it’s not all sunshine and rainbows.
Where PoS falls short
In a separate blog post published on Sunday, May 23, founder of Ethereum Vitalik Buterin explained that PoS, like PoW, still struggles with the same fundamental issue of limited transaction throughput. Like Bitcoin, Ethereum – even with PoS and greater energy efficiency – cannot easily scale up for millions and billions of users without sacrificing core principles of network decentralization and security.
To Buterin, this is why coupling PoS with a technology known as sharding is so important.
“Sharding fundamentally gets around the above limitations, because it decouples the data contained on a blockchain from the data that a single node needs to process and store,” writes Buterin.
As background, nodes are the computers that verify blockchain data and propagate it to the rest of the network. The more nodes there are, the more resilient and easily verifiable a blockchain is.
Traditionally, a node connected to a PoW blockchain will contain a full account of all on-chain transactions and addresses. However, a node connected to a sharded blockchain will only keep records of a fraction of on-chain data. To get a snapshot of a blockchain’s full transaction history and on-chain addresses, a user would need access to data maintained by multiple different nodes as opposed to just one.
Putting it all together
This is why for a sharded blockchain there is a minimum number of nodes required for a blockchain to reach a certain scale of transaction throughput. For example, in order to process 10,000 transactions per second (TPS), assuming each node can only process 50 TPS, the network needs at least 200 nodes to function properly.
A sharded blockchain enables blockchain capacity and transaction throughput to increase along with the number of nodes, such that scalability does not sacrifice network decentralization.
There are risks to a sharded network. What if several nodes suddenly go offline? What if the network grows so large that a full copy of transaction history is no longer maintained by anyone in the network?
These risks are unlikely, according to Buterin, at least until Ethereum begins to break past a million TPS. To put that number into context, Ethereum currently averages around 12 TPS.
There will always be limits to blockchain capacity but the work to expand it by significant amounts without sacrificing network decentralization is a value and goal that Ethereum developers are working to crack.
Validated takes 5 big takeaways from Day 1 at Consensus (Article, CoinDesk) 8 questions for Ethereum’s Andrew Keys (Article, CoinDesk) Bitcoin and ether bounce back after disastrous week for crypto markets (Article, CoinDesk) NFTs are the ‘art world’s napster’ says Christie’s auction house executive (Article, CoinDesk) Important concepts for users and wallets when adding support for EIP 1559 (HackMD post, Trenton Van Epps) The limits to blockchain scalability (Blog post, Vitalik Buterin)
A message about Consensus 2021 This Week at #Consensus2021
Factoid of the week
Open comms Reply any time and email christine.kim@coindesk.com with your thoughts, comments or queries about today’s newsletter. Between reads, chat with me on Twitter.
Valid Points incorporates information and data directly from CoinDesk’s own Eth 2.0 validator node in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.
You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is: 0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.
Search for it on any Eth 2.0 block explorer site!
I'll be extending today's conversation on Ethereum 2.0 with Consensys’ Ben Edgington in a CoinDesk podcast series called “Mapping Out Eth 2.0.” New episodes air every Thursday. Listen and subscribe through the CoinDesk podcast feed on Apple Podcasts, Spotify, Pocketcasts, Google Podcasts, Castbox, Stitcher, RadioPublica, IHeartRadio or RSS.
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