The evolution of Ethereum 2.0: Your questions answered

Read more: Here’s what you need to know about Ethereum 2.0’s Merge

What about the EthPOW fork I’ve heard about?

There have been discussions about a potential PoW fork of the Ethereum state at the time of the Merge. Justin Sun is involved, as he often is when there’s an opportunity to profit from the efforts of other protocols’ developers. His exchange Poloniex listed tokens ahead of the Merge to allow speculation on it.  

The fundamental problem with non-majority forks for smart contract chains is that a variety of tokens are likely to only have value on a single chain. This is especially true for stablecoins where the issuer will often explicitly decide which chain will continue to have value.

Tether, Circle, and Paxos have all announced their intent to follow the PoS chain, which means their tokens on the other fork will be effectively valueless. This also means that any other protocols on the minority fork will have major issues — and lose value — because the assets won’t be worth $1 as expected.

This is compounded by the fact that there are other stable-assets like Dai that depend on the stable-value of these coins. These would also be expected to have serious issues, as would protocols that implicitly or explicitly expect Dai to be worth close to $1.  

However, there may be opportunities for well-connected actors to profit in the first couple blocks as the value tries to transition between $1 and $0. Many of the people promoting this fork likely hope to do so.

Essentially, this means stablecoins decide forks for smart contract chains — if they’re allowed to become important enough in the ‘ecosystem.’

What is staking?

Staking is the process of participating in consensus for PoS chains.  Ethereum 2.0 will use the Gasper consensus algorithm, which is a combination of Casper developed by Vitalik Buterin and Virgil Griffith, and the algorithm for LMD GHOST fork choice developed by Vlad Zamfir.   

Users with at least 32 ether who can run a validating node are able to earn staking rewards. Staking rewards are provided for proposing a block or attesting to a block. Currently, proposers receive rewards if someone is slashed.

Once the validator is active it’s eligible to be chosen as either a ‘proposer’ who suggests the next block for the network, or as an ‘attestor’ who signs off on the most recently proposed block.  

If you have more than 32 ether and want more staking rewards, then you’ll need to run more nodes as each is treated as having an ‘effective balance’ of 32 ether.

If you have less than 32 ether then you can’t individually participate in staking. You can choose to ‘pool’ your ether with other depositors through a service like Lido. This allows you to still receive some of the rewards from staking and doesn’t require you to manage your own hardware or the full amount of ether.  It also had a token that allowed you to get liquidity before staking withdrawals are available, and was in part responsible for destroying Three Arrows Capital.  

Currently no one who is staking can withdraw, and that is intended to change in a future hard fork.  

What is slashing?

Slashing is the punishment for bad behaving validators. If a set of keys votes more than once on a proposal, proposes two blocks for the same slot, or tries to modify history they can get slashed. Slashed validators lose a portion of their stake and are forced to exit from the consensus process.

What is inactivity leak?

Inactivity leak is a penalty for a node not being online. The more nodes that are offline, the more aggressive this drain is. When the network is still working, this drain is relatively small, but if a very large number of validators go offline, this becomes a much more severe leak.

The intention of this design choice is to drop inactive validators below the minimum 16 ether required to keep staking, so that eventually online validators will again be able to run the chain.  

Is staking secure compared to PoW?

That’s a complicated question. Probably. Maybe. Yes. No. Depending on how you want to structure your question, who you want to ask, and how you think about certain assumptions will strongly affect your conclusion to this question.

PoW has a tendency to centralize into mining ‘pools,’ whereas it’s more economical for a PoS staker to work independently.  

However, because PoS delegates awards proportional to those who already have the largest portion rather than those who are spending the most, it can tend to have a ‘rich get richer’ effect.  

Only, slashing provides an opportunity to impose a very strong cost on attackers. It can effectively destroy the value they hold, and eventually leave them unable to continue the attack as their nodes are removed from consensus.  

Andreas Antonopoulus has discussed how in PoW if you are under attack in this way then one of the most appealing solutions is to change the PoW algorithm and effectively make all existing ASICs worthless (if there are other chains they are not truly worthless, but if Bitcoin were to change then their value would plummet).

However, this is a very broad recourse, and does not specifically target the attacker, where as PoS can specifically target only the ‘bad’ actor.  

PoW has advantages for token ‘distribution,’ by forcing the burning of hard assets (energy) in order to acquire more coins, but it’s less clear that it has advantages for long-term security, especially when distribution of new assets slows or stops. 

A full discussion of the relative security tradeoffs between the two setups is beyond the scope of this piece.

What happened to sharding?

Sharding was still a part of Vitalik’s vision of Ethereum in 2021.  But since then, roll-ups have become better and a new concept called ‘danksharding’ has arisen as the future scaling option for Ethereum.  

The original vision of sharding involved separate universes which would share security at the consensus level. These shards provided separate ‘execution’ environments where the actual transactions and interactions would occur, and would require additional structures to allow communication between them. The complexity of this vision has made it less appealing over time.

What is a roll-up?

Roll-ups are somewhat analogous to Vitalik’s ‘ghost chains‘ that he described in 2014. They are effectively separate blockchains that attempt to share security with the base layer.

Roll-ups perform their execution off the main-chain and then post data to the main chain. Optimistic roll-ups assume transactions are valid unless a ‘fraud proof’ is submitted. Zero-knowledge roll-ups involve the validators for the roll-up submitting a proof that shows the transactions they performed are valid.  

They are also now the vision for Ethereum’s future.