Ethereum / The Merge
TL;DR
Proof-of-Stake (PoS) is an important evolution in blockchain networks. This switch away from mining is decentralizing networks and reducing the environmental impact of protocols. Importantly too, PoS is giving institutional token holders a chance to earn rewards.
While a number of smaller networks already run a PoS consensus mechanism, by far the most significant push is coming from the Ethereum network.
Traditionally a Proof-of-Work (PoW) network, Ethereum is currently running an additional PoS beacon chain (often referred to as ETH2). These two chains are expected to fully transition over to PoS this year, in an event known as The Merge.
As mentioned, The Merge will move Ethereum to Proof-of-Stake (PoS) to enable a ‘cheaper’ and more democratic consensus mechanism. Consensus is how network participants agree on the state of the decentralized Ethereum chain.
In traditional PoW blockchains, miners use energy (computing power) to create blocks and achieve consensus. By relying on energy, each commitment to the chain carried an economic cost. Good behavior was rewarded with block rewards (tokens), whereas energy would be wasted by acting against protocol rules. Essentially, PoW incentivizes energy consumption and economic investment.
The move to PoS will drastically reduce the cost and environmental impact of block creation. It is estimated that The Merge will reduce Ethereum’s energy consumption by around 99.95%.
PoS also removes the need to purchase expensive mining equipment. Instead, token holders can earn a share of block creation rewards by staking their ETH tokens to validators. This lowers the barrier of entry for small at home stakers and thereby strengthens decentralization of the network.
Staking models show that the expected annualized reward rate for ETH staking could increase from the current ~4.2% to as high as ~9% immediately following The Merge. This is because following The Merge, ETH holders staking their assets to Blockdaemon validators will receive two additional reward streams directly to their existing withdrawal address:
Following The Merge, transaction fee rewards and MEV rewards will be sent to your withdrawal address, these are forecasted to nearly double the total amount of rewards. The staked ETH and staking rewards will still be locked for the time being. The next hard fork scheduled for early 2023 should allow you to withdraw your stake.
Start Earning ETH ASAP:At the moment, your ETH is just sitting idle. But it could already be generating rewards. If you stake your ETH with Blockdaemon today, you can expect roughly 4.2% rewards once your validator has been activated. The long-term reward forecast is a lot higher (see point 3), but 4.2% is still a great staking reward and is infinitely better than zero.
Beat The Rush:
Earn More ETH:Our clients will not notice any change in services during and after The Merge. Blockdaemon’s expert engineers will manage every step of the process, so you don’t have to. Locked ETH funds will remain bonded until after a follow-up network hardfork, which will take place about 6 months after The Merge.
In the meantime, we continue to earn staking rewards for our customers both today, and in the post-Merge era. These rewards are underpinned by our 100% slashing insurance and 99.9% uptime guarantee.
Blockdaemon actively supports the lead-up to The Merge through our leading infrastructure and generous contribution to client testing. Client testing is crucial, as various combinations of execution and consensus clients are tested in the lead-up to the release. We’ve also strategically invested in Obol Labs. Obol is a trust minimized staking protocol for public blockchain networks based on Distributed Validator Technology (DVT).
Blockdaemon connects businesses to blockchains. If you want to stake your ETH quickly, easily, and safely, reach out to us today.
Operationally, nothing changes for you as the ID of your validators stays constant and we take care of all necessary client updates to ensure a smooth transition from the technical side.
Financially, once your validator became actively participating in securing the Ethereum consensus on the Beacon Chain, you have started to earn rewards regularly for attesting to blocks proposed from others, and occasionally from publishing a block itself when it is your turn.
Starting with The Merge, there will be additional income streams that previously have gone to the Proof-of-Work miners. Models suggest that both of these together could about double the total revenue of a validator:
Maximal extractable value (MEV) refers to the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block. The Ethereum Foundation explains some MEV use cases and consequences on their website.
As a validator, you probably cannot and don’t want to search for MEV opportunities yourself. But there is a way to benefit from it, while at the same time helping the network – some call this “ethical MEV” or “democratized MEV”. By far the most prominent implementation of doing this was developed by Flashbots. Flashbots is a research and development organization working on mitigating the negative externalities of Maximal Extractable Value (MEV) extraction techniques and avoiding the existential risks MEV could cause to stateful blockchains like Ethereum.
If you don’t opt out in writing, we will be running a software (most likely MEV-boost by Flashbots) on your validator node that allows it to participate in democratized MEV as explained above. In that way, you help to alleviate negative consequences for the network and take a fair share (as automatically determined by the market) of profits from the MEV searchers. If the block your validator is publishing contains any MEV transaction in so called bundles, you will receive the “tips” the same way as you receive the normal transaction fees, therefore sent to your ETH1 withdrawal address. We expect no increased risks to the stability of the validator in running the MEV-Boost software. Flashbots has been the trusted MEV solutions on Ethereum for over two years.
The transaction fees (and any potential MEV rewards) are transferred automatically and immediately to your ETH1 withdrawal address that you specified when setting up your validator with us. We can never touch any of your funds! Each individual validator node is currently expecting to create a block every ~60 days on average. If you use the same withdrawal address for multiple validators, you will see these rewards being transferred to the address more often, respectively.
Your validator rewards (for block creation itself, attestations etc., emitted from the protocol) will continue to accrue on your validator until withdrawals are enabled via the respective EIP (Ethereum Improvement Proposal) several months AFTER The Merge. The current specification stipulates that any excess amount > 32 ETH (= your accrued rewards so far) will be automatically pushed out to your ETH1 withdrawal address about 1-2x per month. Depending on when your validator has started operating, expect a larger amount of accumulated rewards the first time, followed by somewhat regular but much smaller payments.
The staking collateral of 32 ETH per validator will NOT be withdraw-able with The Merge! It will only be enabled in a hard fork afterwards, which is expected to be ~6 months after The Merge.
There may well be attempts to make the transition contentious and keep other PoW-fork(s) alive after The Merge, even though Ethereum Classic already exists as a PoW alternative.
If any forks occur (e.g. from Eth-PoW), the forked token would be based on the balances from the existing Ethereum addresses to which a customer would need to control the private key. But even then, these assets would need to be named and supported by exchanges, custodians, etc to become liquid for its holders. Blockdaemon is non-custodial, thus does not hold any Eth for customers and will not be involved in this.
Current customer can reach out to their Technical Account Manager (TAM) (formerly known as Relationship Managers) for more details or any other question. If you’re not yet a customer please use the contact form below.
Previous Ethereum Newsletters:
Blockdaemon offers institutional-grade Ethereum infrastructure, on-chain data through APIs and staking services.
Whether you are a developer that needs end-to-end managed nodes to access the Execution Layer (Eth1) or you are a financial institution that wants to earn maximum yield on your assets with validator nodes on the Consensus Layer (Eth2), we have you covered.
