The core of every blockchain system lies in its blocks and the creation of new tokens. This is crucial for any public blockchain, as by minting new tokens and distributing them to miners or stakers, the network incentivizes people to secure it through computational power or staking. To safeguard billions of dollars worth of value on Ethereum and Bitcoin, the network must offer appropriate rewards.
Currently, on Ethereum, this is achieved through block rewards (and transaction fees). In the coming years, Ethereum will transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS), and the rewards paid by the network will be allocated to block validators in the PoS network. This shift brings numerous changes, but the most significant ones occur in the protocol's fundamental economics. This article aims to describe these changes at a high level, but first, we must understand how the current system operates.
How Proof-of-Work Economics Function
In Proof-of-Work, miners receive substantial rewards, helping them cover operational costs and generate some profit. These profits largely depend on the price of the underlying asset, which is why network hash rates often follow price movements.
As Ethereum experienced rapid price appreciation between 2016 and 2018, users of the network decided to reduce the block reward from 5 ETH to 2 ETH. This adjustment better aligned strong economic principles with appropriate network rewards, viewed as security expenditures for the network. This mechanism is similar to Bitcoin, which reduces its block reward every four years.
The rationale behind reducing block rewards is that, as a currency and store of value, the network must control the issuance of ETH and gradually reduce it to near zero over time. Reducing supply means less selling pressure, which, in turn, boosts confidence among ETH holders that its value will appreciate. Here, the most critical aspect is to maintain the lowest possible issuance while still adequately securing the network.
The chart below illustrates Ethereum's past, present, and future issuance rates.
Transitioning to Proof-of-Stake: Ethereum 2.0
In early 2020, "Ethereum 2.0" began its rollout. On the new chain, the concept of miners is replaced by stakers. This means users no longer need GPU miners; instead, they can stake 32 ETH to participate in block validation. Stakers will perform a range of tasks, from initiating to attesting blocks, and will receive rewards for their contributions.
The benefit of PoS is that it allows us to issue as little new ETH as possible while making it easier to secure the network. This, in turn, enhances ETH's utility as a store of value. This is because newly issued ETH is only distributed to those participating in staking at any given moment, and we do not require the entire network to stake to ensure security. In fact, having 5-10% of the total circulating ETH supply staked is sufficient. This means the network's issuance rate can be much lower.
According to the latest Phase 0 specifications, the anticipated staking returns and issuance rates are as follows.
Projected Staking Levels and Inflation Impact
First, it is important to note that these figures are still subject to debate, as the specifications are under active development. It is expected that they might increase slightly (~25%) before Phase 0 launches. As the chart shows, the market will determine the amount staked based on economic incentives for stakers. It is projected that the total stake will reach around 10 million ETH, which would lower Ethereum's network issuance to as little as 0.24% annually—a 95% reduction compared to the current rate.
Similar to mining, staking incurs costs, which are a crucial consideration when setting these parameters. The goal is to ensure validators do not operate at a loss while preventing too little ETH from being staked on the network. Each validator will likely run one beacon node and then as many validator clients as the ETH they hold allows. After studying the specifications and consulting with Ethereum 2.0 developers, the estimated annual operational cost for a beacon node validator is approximately $120, with each incremental validator costing about $60. Assuming these costs, an ETH price of $165, and daily network fees of 500 ETH, the rewards paid to validators would be as calculated in the table below.
Based on these assumptions, the node收益 (profits) are outlined.
Clearly, if the ETH price rises, these returns would increase. However, it is reassuring to know that even during bear markets, validators would still be incentivized to run nodes with a total stake of 10 million ETH.
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Conclusion: A More Sustainable Economic Model
This overview provides insight into the economic incentive structure of Ethereum 2.0. It is hoped that this encourages deeper learning and aids in researching reasonable incentives, estimating costs, and more.
The transition to PoS represents a significant step toward a more sustainable and efficient blockchain economy, with reduced inflation and enhanced security for all participants.
Frequently Asked Questions
What is the main difference between PoW and PoS in terms of economics?
In PoW, miners receive block rewards and transaction fees, requiring substantial computational power. In PoS, validators are chosen to create and validate blocks based on the amount of cryptocurrency they stake, reducing energy consumption and altering issuance dynamics.
How does staking reduce ETH inflation?
With PoS, the network can operate securely with a lower amount of new ETH issued annually. This reduction in supply growth helps decrease selling pressure and supports value appreciation.
What are the expected returns for stakers in Ethereum 2.0?
Returns depend on the total amount of ETH staked and network activity. Projections suggest annual returns could range from 4% to 10%, but these figures may vary based on final protocol parameters and market conditions.
Is there a minimum amount of ETH required to stake?
Yes, to become a solo validator, you need to stake 32 ETH. However, various platforms and pools may allow users to participate with smaller amounts.
What happens to transaction fees in Ethereum 2.0?
Transaction fees will continue to be distributed to validators, complementing their block rewards and incentivizing active participation in network security.
How will the transition to PoS affect ETH's value long-term?
By reducing inflation and enhancing network security and efficiency, PoS is expected to make ETH a more attractive store of value and utility asset, potentially positively impacting its long-term value.