High gas fees. Environmental concerns. Network congestion.
These are problems that plague @ethereum. Then there's the merge. But what exactly is it?
Understand the merge, and its impact on performance & price.
This is part 4 of #multichainfuture. Let's dive in. 🧵 1/n
These are problems that plague @ethereum. Then there's the merge. But what exactly is it?
Understand the merge, and its impact on performance & price.
This is part 4 of #multichainfuture. Let's dive in. 🧵 1/n
A/ What the merge is
You've probably heard of terms like 'the merge', 'sharding', 'L2s'. But you may be unclear what upgrades the merge entails.
The merge actually involves only one core technological change- 2/n
You've probably heard of terms like 'the merge', 'sharding', 'L2s'. But you may be unclear what upgrades the merge entails.
The merge actually involves only one core technological change- 2/n
A transition to proof of stake from proof of work. That's it. Nothing to do with 'sharding', 'L2s' etc.
To be clear, this change paves the way for further upgrades. But when the merge drops, the only difference is that @ethereum will use PoS.
Now for those key questions: 3/n
To be clear, this change paves the way for further upgrades. But when the merge drops, the only difference is that @ethereum will use PoS.
Now for those key questions: 3/n
How will using PoS affect:
(a) gas prices
(b) environmental concerns
(c) network congestion?
These are fundamental problems that influence the usability of @ethereum and #ETH price.
We will dissect that later. But first, how PoS works: 4/n
(a) gas prices
(b) environmental concerns
(c) network congestion?
These are fundamental problems that influence the usability of @ethereum and #ETH price.
We will dissect that later. But first, how PoS works: 4/n
B/ How PoS works
A quick refresher on PoW- miners have 'skin in the game'. They need to expend computational resources to solve hash puzzles.
They do this because of the economic incentives- block rewards and transaction fees.
PoS works differently- 5/n
A quick refresher on PoW- miners have 'skin in the game'. They need to expend computational resources to solve hash puzzles.
They do this because of the economic incentives- block rewards and transaction fees.
PoS works differently- 5/n
PoS replaces 'miners' with 'validators'. Each validator will have an effective balance of stake.
To encourage proper behavior, validators will receive rewards, penalties and punishments.
Let's break things down. First- what are stakes? 6/n
To encourage proper behavior, validators will receive rewards, penalties and punishments.
Let's break things down. First- what are stakes? 6/n
1. Stake
In PoW, you buy mining rigs and use them. In PoS, you instead buy tokens and put them to work.
Doing so creates 3 properties: 7/n
In PoW, you buy mining rigs and use them. In PoS, you instead buy tokens and put them to work.
Doing so creates 3 properties: 7/n
(i) Anti-Sybil. Both mining rigs and tokens are limited resources. Attackers thus can't create the illusion that they own lots of tokens and have more votes.
To have more votes, attackers *have* to actually own those tokens! Our second property- 8/n
To have more votes, attackers *have* to actually own those tokens! Our second property- 8/n
(ii) Accountability. If certain validators misbehave, you'll want to punish them. If they act properly, you'll want to reward them.
When validators put up stakes, they are easily identifiable. This allows us to hold them accountable!
Our final property- 9/n
When validators put up stakes, they are easily identifiable. This allows us to hold them accountable!
Our final property- 9/n
(iii) Align incentives
This is straightforward- to be a validator, you've to own #ETH tokens. Thus, you're more likely to want the @ethereum ecosystem to succeed!
Now that you know what stakes are, time to move on to effective balance! 10/n
This is straightforward- to be a validator, you've to own #ETH tokens. Thus, you're more likely to want the @ethereum ecosystem to succeed!
Now that you know what stakes are, time to move on to effective balance! 10/n
2. Effective balance
Each validator has an actual balance- the number of #ETH tokens they are staking. Actual balance can change every epoch due to rewards and punishments.
Effective balance is a representation of actual balance- it changes once every few weeks/month. Why? 11/n
Each validator has an actual balance- the number of #ETH tokens they are staking. Actual balance can change every epoch due to rewards and punishments.
Effective balance is a representation of actual balance- it changes once every few weeks/month. Why? 11/n
@ethereum is a distributed network. You want to keep the communication overhead to a minimum.
By rarely changing effective balance, you reduce communication. The network can then reach consensus quicker, which means faster transactions!
Next- issuance 12/n
By rarely changing effective balance, you reduce communication. The network can then reach consensus quicker, which means faster transactions!
Next- issuance 12/n
3. Issuance
Issuance simply means the amount of new ETH created by the protocol. They are meant as rewards for miners.
Speaking of rewards, we are finally talking about incentives! 13/n
Issuance simply means the amount of new ETH created by the protocol. They are meant as rewards for miners.
Speaking of rewards, we are finally talking about incentives! 13/n
4. Rewards
Validators get rewards through the 3 methods:
(i) Block proposal
(ii) Attestation
(iii) Sync committee
Let's examine each of them- 14/n
Validators get rewards through the 3 methods:
(i) Block proposal
(ii) Attestation
(iii) Sync committee
Let's examine each of them- 14/n
(i) Block proposal
Each epoch, a validator will be randomly chosen to propose a block. They do so by including transactions that have not been finalised.
If the selected validator proposes a valid block & >= 2/3 of validators agree, the block is added to the chain! Next: 15/n
Each epoch, a validator will be randomly chosen to propose a block. They do so by including transactions that have not been finalised.
If the selected validator proposes a valid block & >= 2/3 of validators agree, the block is added to the chain! Next: 15/n
(ii) Attestation
Each epoch, validators need to 'link the chain' by pointing out the source and target block to connect a chain to. This is known as attestation.
Why is this important? We need to clearly identify a single chain that represents 'truth'. Because of this, 16/n
Each epoch, validators need to 'link the chain' by pointing out the source and target block to connect a chain to. This is known as attestation.
Why is this important? We need to clearly identify a single chain that represents 'truth'. Because of this, 16/n
Validators can also attest for the head of the chain. This is important as an attacker can easily create another (longer) chain to 'overwrite' the history.
Speaking of attackers- having more validators helps secure the system. This is where sync committees come in. 17/n
Speaking of attackers- having more validators helps secure the system. This is where sync committees come in. 17/n
(iii) Sync committees
In @ethereum, validators need to store the whole history. This is a lot of data! To encourage more people to secure the system, the merge will allow for 'light clients'.
These are nodes with less computation power- e.g. your phone. What will it do? 18/n
In @ethereum, validators need to store the whole history. This is a lot of data! To encourage more people to secure the system, the merge will allow for 'light clients'.
These are nodes with less computation power- e.g. your phone. What will it do? 18/n
Light clients can query data (e.g. find out the latest block), submit transactions and partially validate the network. How?
About every day, 512 validators will be randomly chosen to form the sync committee. Their job is simple- 19/n
About every day, 512 validators will be randomly chosen to form the sync committee. Their job is simple- 19/n
Inform the light nodes of what the new block header is. Light nodes can then verify the block headers.
Thus, while light nodes cannot verify the whole history, it can verify what has occurred recently.
Now that we're done with rewards, time to move on to penalties! 😈 20/n
Thus, while light nodes cannot verify the whole history, it can verify what has occurred recently.
Now that we're done with rewards, time to move on to penalties! 😈 20/n
5. Penalties
Penalties are small punishments.
In attestation, validators are penalised when their submission is missing, late or incorrect. In block proposal, there is no explicit penalty. Yet, proposing an invalid block will be rejected!
Sync committees are different- 21/n
Penalties are small punishments.
In attestation, validators are penalised when their submission is missing, late or incorrect. In block proposal, there is no explicit penalty. Yet, proposing an invalid block will be rejected!
Sync committees are different- 21/n
The magnitude of reward and penalty in sync committees is the same. Because sync committee rewards rather profitably, the penalty for improperly doing a sync committee role is rather high!
Next up- punishments in @ethereum. 22/n
Next up- punishments in @ethereum. 22/n
6. Punishment
Punishment in @ethereum is also known as 'slashing'. Slashing is reserved for behavior that is highly likely to be malicious.
Here're 2 examples: 23/n
Punishment in @ethereum is also known as 'slashing'. Slashing is reserved for behavior that is highly likely to be malicious.
Here're 2 examples: 23/n
- Proposing 2 blocks of same height
- Attesting the same target to 2 different sources
Both actions violate the idea of a single chain as truth. Thus, they've to be punished heavily.
To discourage coordinated attacks, @ethereum invokes 2 types of slashing- 24/n
- Attesting the same target to 2 different sources
Both actions violate the idea of a single chain as truth. Thus, they've to be punished heavily.
To discourage coordinated attacks, @ethereum invokes 2 types of slashing- 24/n
A slashed validator will suffer an initial punishment. Think of this as a quick fine when the offence is found.
Within 18 days, if more validators are found to commit similar behavior, each slashed validator will suffer a correlation punishment. Put it another way- 25/n
Within 18 days, if more validators are found to commit similar behavior, each slashed validator will suffer a correlation punishment. Put it another way- 25/n
Coordinated attacks involve groups of validators acting similarly. If such coordination is found, it's important that we punish them heavily.
Likewise, there are also rewards for proposing reports of poor behavior.
This is how PoS works. Let's turn to its impact. 26/n
Likewise, there are also rewards for proposing reports of poor behavior.
This is how PoS works. Let's turn to its impact. 26/n
C/ The merge's impact on @ethereum & ETH price
Now that you understand the merge, I've a quick quiz for you.
Out of these 3 constraints, which will be affected by the merge?
(a) High gas fees
(b) Environmental concerns
(c) Network congestion
The answer: 27/n
Now that you understand the merge, I've a quick quiz for you.
Out of these 3 constraints, which will be affected by the merge?
(a) High gas fees
(b) Environmental concerns
(c) Network congestion
The answer: 27/n
Only (b) environmental concerns.
You may be surprised, but it's really simple. Going from PoW to PoS only changes the consensus mechanism. And because PoS requires much less energy (up to 99.95%), @ethereum will be environmentally friendlier.
What bout (a) and (c) then? 28/n
You may be surprised, but it's really simple. Going from PoW to PoS only changes the consensus mechanism. And because PoS requires much less energy (up to 99.95%), @ethereum will be environmentally friendlier.
What bout (a) and (c) then? 28/n
@ethereum @ethereum's roadmap includes innovations like sharding and L2s. These are the changes that will affect the scalability and usability of @ethereum.
So- how will the merge affect the price? 29/n
So- how will the merge affect the price? 29/n
The merge is not going to be a huge influence on the price if you judge based on the 'fundamentals'- number of transactions, gas fees etc.
However, PoS allows for new innovations to be implemented. Here's the truth- 30/n
However, PoS allows for new innovations to be implemented. Here's the truth- 30/n
We need to understand how those innovations work to form a clearer thesis on the long term value of @ethereum.
Follow me @0x_armin to make sure you receive upcoming breakdowns on sharding and L2s.
Like/RT the first tweet below to help your friends learn about the merge: 31/end
Follow me @0x_armin to make sure you receive upcoming breakdowns on sharding and L2s.
Like/RT the first tweet below to help your friends learn about the merge: 31/end
https://twitter.com/0x_armin/status/1553364800461123585
Sources:
1/2 @benjaminion_xyz brilliant online book on the merge. It is very technical and more in-depth than most posts out there. I struggled through it, but I'll encourage you to read it yourself!
eth2book.info/altair/
1/2 @benjaminion_xyz brilliant online book on the merge. It is very technical and more in-depth than most posts out there. I struggled through it, but I'll encourage you to read it yourself!
eth2book.info/altair/
2/2 The official @ethereum merge documentation- meant more for the mainstream audience!
ethereum.org/en/upgrades/me…
ethereum.org/en/upgrades/me…
UPDATE (1/1)
After the merge, new $ETH issuance will decrease by ~90%.
It's hard to say for sure how this affects the price, because other factors like number of users, scaling tech will influence the supply/demand.
Credit: @simoanorak for pointing this out
Source in next tweet
After the merge, new $ETH issuance will decrease by ~90%.
It's hard to say for sure how this affects the price, because other factors like number of users, scaling tech will influence the supply/demand.
Credit: @simoanorak for pointing this out
Source in next tweet
Source: ethereum.org/en/upgrades/me…
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