Presentation of valid points: the risks and advantages of betting on Eth 2.0

Is alive! Welcome everyone, to the first edition of Valid Points, CoinDesk’s ongoing commitment to chronicle the evolution of Ethereum 2.0. You can subscribe to the newsletter here.

Today we commemorate the launch of Ethereum 2.0, which marks the beginning of Ethereum’s live transformation into a proof-of-stake blockchain. The new blockchain is said to be many times more efficient, scalable and secure than the current network of decentralized applications.

While Ethereum 2.0 will take years to fully develop, its first development phase, phase 0, is now officially underway. With the activation of phase 0, there is a new use case for Ethereum’s native cryptocurrency, Ether. It is called staking.

What is staking? How does it work? What is the risk / reward profile of using Ether to bet on Ethereum 2.0? These are some of the pressing questions we will start unraveling in the coming months. We will also discuss the ramifications of Ethereum 2.0 development on the growing ecosystem of decentralized finance (DeFi), as well as the competitive landscape of smart contract blockchain platforms.

Our newsletter, which chronicles the progress of Ethereum 2.0 since its launch, will be released every Wednesday. To support our coverage of the network, CoinDesk will stake their own funds – 32 ETH to be exact. The goal: to delve into CoinDesk’s editorial coverage of Ethereum 2.0 and gain an unpainted perspective on the next big iteration of the Ethereum blockchain. To this end, we will also donate all proceeds from our ETH staked to charity. Read more about CoinDesk’s knowledge mission on Ethereum 2.0 here.

Now let’s get started!

There is a total of 900,129 ETH (roughly $ 532 million at the time of writing) staked on Ethereum 2.0. This is 66% above the initial goal for network launch.

With more than enough funds and user participation to secure network operations, Ethereum 2.0 worked successfully through its first epoch, which means it worked its first cycle for creating and processing new blocks.

At 22:58 UTC on 1 December, a total of 100 epochs were finalized through the participation of 21,291 validators. Validators can be considered the equivalent of miners on Ethereum who are responsible for protecting the network and its data.

Active validators on Ethereum 2.0 earn, on average, 0.00403 ETH / day, or $ 2.36 / day at the time of writing, for their participation in the network. This amount will likely decrease as the number of validators on the network increases.

Each day, up to 900 new validators can be uploaded to Ethereum 2.0. There are about 6,200 validators queued for activation as of Tuesday waiting to go online… and the CoinDesk Eth 2.0 validator is one of them.

Read more about the status of our Eth 2.0 validator below.

If you had invested in ether on January 1, you would have grown 364% to date, according to CoinDesk 20.

And while impressive, the assets built on the Ethereum blockchain have seen even greater gains this year. Take, for example, this “blue chip” DeFi token: YFI – the governance token of the robo-hedge fund Yearn Finance that didn’t exist a year ago – has risen 2,300%, according to Messari. Overall, the DeFi asset class grew 456% year-to-date against the dollar.

But not everyone was lucky: loan protocol Compound’s COMP token plummeted after a very productive summer, down 55% from the beginning of the year.

The successes and mistakes with Ethereum tokens and DeFi in general could push some investors to seek more stable returns, particularly those with less software risk. Which brings us to Ethereum 2.0 also known as Serenity, a proof-of-stake (PoS) blockchain that promises stable returns on ETH deposits.

The proximity between “DeFi Summer” and the launch of Eth 2.0 makes the pair a relatively simple comparison – if you have a DeFi coin lying around, chances are you have some ether. Fortunately for DeFi traders, the niche sector’s first bear market coincided with the relaunch of Ethereum and the subsequent distribution of rewards.

A PoS network, Eth 2.0 rewards are denominated in ether and adhere to a distribution curve dependent on participation and average percentage of stakers. Many Ethereum developers like to compare it to a bond, although the maturity of this bond relies more on GitHub pull requests merging in time than a corporate employee mailing checks.

When annualized, the rewards by epoch (a period of time during which transactions are proposed and validated by token deposits) are competitive with some rewards in the DeFi project.

In fact, Eth 2.0 staking rewards start at around 20% for the first stakers. They will continue to decline as more validators join the network between 7% and 4.5% per year.

For comparison, a snapshot of DeFi returns from more reputable projects shows returns around 5% -7%, according to DeFi Rate. This is not to say that a higher return cannot be found yet, but you are taking the risk of the software that has determined the fate of many DeFi projects this year.

Staking is also risky, complete with several compromises from DeFi. Not only can your initial deposit be cut for failing to keep up with the net, but there are still hidden software risks.

Each Eth 2.0 validator must choose their own specifications to work with from five different teams who have programmed Eth 2.0 in various languages. These specs may have exploitable flaws, regardless of the fluidity of testing during the second half of 2020. This is one of the reasons why the rewards for the episode are so high from the developers.

In addition, some clients have managed to enter the deposit agreement late, causing investors to miss their first high-yield opportunities. For example, Prysmatic Labs has made substantial changes to its final implementation of the Eth 2.0 specification. Unfortunately, the customer was not ready until the deposit agreement was filled out. Eager validators, including CoinDesk, are queuing for validation but will at least lose the juicy first week rewards.

Staying in Eth 2.0 also means that your ether is blocked for months or years. You can look at it, but don’t touch it.

However, secondary markets may be able to address concerns over the lock-up period. For example, Coinbase chief product officer Surojit Chatterjee yesterday announced plans to create a market for staked ether, also known as Beacon Chain ETH (BETH) in a blog post. It will be interesting to see how liquid a BETH market becomes compared to other tokens, given the inherent counterparty risk associated with staking.

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