Despite the excitement and excitement in the Ethereum community, many people do not yet fully understand the importance – and the opportunity – of the second largest blockchain for large institutions and companies.
The type of network participation is changing dramatically, as are the incentive mechanisms for securing open protocols without permission, as evidenced by the move from Ethereum to a radically new consensus mechanism.
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Evan Weiss is the director of operations at Bison Trails.
Anyone who holds ether (ETH) as an asset can participate in securing the network and earn rewards. With the protocol growing and in use, now is the time for large companies to take a look at the Eth 2.0 opportunity.
The future of Ethereum
Ethereum, currently the second largest market capitalization network valued at over $ 40 billion, is said to be a globally distributed computer for executing peer-to-peer contracts. In other words, it is “a world computer that cannot be shut down”. More importantly, Ethereum has become the most widely used blockchain protocol in the world, processing more than $ 6 billion a day.
Eth 2.0, the next iteration of this distributed system, represents years of research and coordinated efforts by teams around the world. A primary goal of Eth 2.0 is to enable the protocol to continue to grow and scale with our industry in order to support the trillion-dollar value transfer decentrally.
See also: The Risks and Opportunities of Using Eth 2.0
Prior to its skeletal system launch on December 1, more than 835,520 ETH were put into the Eth 2.0 deposit contract, well above the minimum ETH required to trigger the “genesis” of the new network.
Not only is this launch a huge milestone for the crypto community, the transition also represents a major change in the way the protocol is secured as the network moves from mining (proof-of-work or PoW) to staking (Proof-of bypasses stake or PoS).
Token ownership and rewards
In decentralized protocols, mining and staking try to achieve the same goal and determine the network consensus. An agreement on the “state of the chain” ensures that the cash balances in the blockchain storage are correct. But networks based on mining and those based on stakeout work very differently in the real world to achieve this consensus.
In PoS, mining to secure the network is a different activity than holding tokens. Many bitcoin miners are sophisticated actors with big balance sheets. They optimize access to cheap hardware and power, but don’t always meet the margins necessary to remain profitable. PoW miners face the significant risks of volatility in the price of native protocol assets they hold and the depreciation of their assets – a risk greater than the appetite of some investors.
Much of this PoW mining takes place in China and is controlled by a few large mining companies. These large mining companies are not known for their operational transparency and are therefore not an attractive option for established companies or institutions with fiduciary responsibility.
Policy makers understand that this is a clear bias towards allowing users to own a small portion of the next generation internet.
With the proof-of-stake, on the other hand, token holders are responsible for validating blocks. By participating in securing the network, these owners receive rewards. PoS protocols have a built-in inflation mechanism that increases the supply of coins and distributes them proportionally to the coins wagered.
More importantly, for PoS networks, large token holders and corporations don’t have to meet the heavy hardware requirements, find locations with cheap access to electricity, or rely on international miners to actively participate in the supply side of the network.
To participate in Eth 2.0 you need at least 32 ETH and an active validator. For companies and large token holders, active PoS network participants can also consider operating an internal infrastructure as well as the time investment and opportunity costs of capital.
In the five years since Ethereum debuted, a number of new PoS protocols have been introduced, including Polkadot, Celo, NEAR, and Flow. There has also been a proportional increase in Infrastructure as a Service companies. These companies make it safe and easy for token holders and institutions to earn network validator rewards.
These enterprise cloud-based blockchain infrastructure providers can strengthen the network by geographically distributing the network nodes without incurring the costs associated with proof-of-work mining.
In addition, we see a trend towards professionalization in the deployment industry, as new products are brought onto the market that provide liquidity for staked tokens and also offer insurance protection against the reduction of penalties – an important concern for institutions.
While the use of Ethereum continues to grow like a hockey stick, staking offers the opportunity to own a small slice of the growing Web 3.0 ecosystem. A distributed web based on blockchain technology is a drastic departure from the internet we are familiar with today, where there is no way to own or monetize your usage.
Policy makers understand that this is a clear bias towards allowing users to own a small portion of the next generation internet. With Ethereum bringing trillions of dollars to power in daily settlements, owning a portion of this next generation web will become a once in a lifetime opportunity.
Finally, asset taxation is an important consideration for institutions. Promising work is being done to advance the idea that reward setting should be treated as “property created” so that rewards are taxed when they are sold, not when they are first created. These “investments” would give token holders the option to hold their equity awards for more than a year and then receive long-term treatment of capital gains under applicable tax regulations.
Clarity here would provide even more security that participation in PoS networks does not come at the expense of excessive taxation.
See also: US lawmakers don’t want proof-of-stake networks to be overwhelmed
Eth 2.0 is a fundamentally new type of business opportunity. It offers non-technical market players the opportunity to own part of the Ethereum protocol and the fees associated with its use. While the company is still in the earliest stages of its rollout, there is already a well-established ecosystem of professional companies supporting institutional investors with a cloud-based infrastructure.
It’s experimental, but the rewards are for the brave new user.
Year in Review is a collection of posts, essays, and interviews about the year in Crypto and beyond.