The first of Ethereum 2.0 (ETH 2.0) is now live, with the team behind it describing its launch as successful, while ETH erased all its gains today.
At 12 UTC today, per the Ethereum Foundation livestream and Beaconcha.in’s genesis dashboard, the first phase has been launched. The Slot 1, the first that was able to be signed by a validator, was signed with “Mr F was here.”
Normal people: we should really put something profound in the first block of the ethereum PoS chain, something about giant leaps for mankind or whatever.
Ethereum community: pic.twitter.com/cOu94fUPE9
— vitalik.eth (@VitalikButerin) December 1, 2020
For the record: Mr. F is a reference to Queen and Vitalik’s autograph to them. https://t.co/06yR3wcL35
— Hudson Jameson (@hudsonjameson)
Earlier today (10:39 UTC) ETH traded at USD 624 and was up by almost 7.5% today, outperforming bitcoin (BTC)’s 6.2% increase. However, later, ETH dropped to USD 586 (12:50 PM UTC), erasing its gains today, the price is also down by around 2% in a week.
Prior to the launch, the developers, researchers, and client teams who joined the livestream stated that what they want to see is validators coming online, that is, high participation. Though the testnets experienced some participation issues, the team didn’t expect that with the mainnet. 2/3ds of validators being online for each epoch (lasting 32 slots (12 sec each), or 6.4 minutes) is the minimum, added the Ethereum Foundation researcher Danny Ryan. At the end of epoch 3, about half-hour into the launch, it should be obvious if the launch is successful or not, he said.
The genesis was initiated as expected, and the proposals followed, with the team commenting that they are satisfied both with the state of the mainnet and the participation soon after, with 6 blocks missed out of 32 in the first epoch, more than 82% of blocks finalized, and 82% participation rate – more than the bare minimum of 66% needed. Ideally, the participation should be in the upper 90s% already today, Ryan said. The second epoch saw 85% participation, and well above the 2/3rd threshold, as Eric Conner, a product researcher at blockchain startup Gnosis, noted, rising possibly due to some attestation from epoch 1 being included a bit later in epoch 2, said Blockchain Protocol Engineer at PegaSys Adrian Sutton during the livestream.
Twenty minutes in, epoch 1 was finalized, epoch 2 was justified, and “the key launch success metric” is finalizing epoch 3, Ryan reiterated – which happened some six minutes later, with 87% participation. The team said that clients are working well, and that now it’s all about more validators coming online.
As reported previously, Phase 0 is just one of three phases leading to the full ETH 2.0 launch. This phase introduces staking – it launches the Beacon Chain, which establishes and maintains the proof-of-stake consensus mechanism.
The staking has already begun with the launch of the deposit contract in November. It has ETH 880,545 (USD 549.5m) staked at the time of writing. The team in the livestream said that those who didn’t stake by now “didn’t lose anything,” and can start staking at any time.
The exchanges have already started offering their solutions. Per the emailed announcement, Gate.io offers what it calls “a flexible ETH staking solution,” where users can earn a staking reward without needing to lock their ETH in ETH2 for a long time or incurring ETH2 penalties. Kraken, Coinbase and Huobi have also made their moves.
Staking means depositing ETH 32 to activate validator software and become a full validator who is responsible for storing data, processing transactions, and adding new blocks to the blockchain. Each time a block is set to be proposed, at least 4 and up to 64 random committees of 128 validator nodes will be selected from the entire pool of validators to attest the block, wrote ConsenSys. They added that there will be no new ETH token made, but users will deposit their ETH instead, which is, for now, a one-way, non-reversible transaction.
“The crypto-economic incentives for PoS are designed to create more compelling rewards for proper behavior and more severe penalties for malicious behavior,” they said further.
Rewards and penalties
Rewards are given for actions that help the network reach consensus, said ethereum.org, such as batching transactions into a new block or checking the work of other validators. Validators can also lose ETH for performing malicious actions, going offline, and failing to validate. Penalties for being offline are “relatively mild and equate to about the same as the expected rewards over time,” ConsenSys said. “As long as you are currently participating for at least 50% of the time, you will not lose your stake,” they said.
There is also a more severe penalty called “slashing” – the burning of some amount of validator funds and immediate ejection from the active validator set. This will happen if a validator, for example, creates two beacon blocks in one epoch, or if they try to attack or compromise the network. “The amount slashed is between 1 ETH and the entire stake amount, depending on other factors,” ConsenSys said.
Per a document provided by ConsenSys, which also contains an ETH 2.0 reward calculator, rewards are calculated based on the state of the network upon the end of each epoch, and they will be “highly variable by design”, so “you will only know exactly what your reward is once it is received.” Rewards minus the penalties are transferred every epoch (385 seconds, or c. 6.5 minutes)”.
“Network level reward issuance rates are a function of the total amount of ETH staked and average % online of validator(s),” ConsenSys further explained. Individual validator reward rates depend on the number of validators run and % uptime of the validator.”
Those who don’t have enough ETH to stake can stake their rewards through a staking provider or join staking pools by adding a smaller stake. Staking allows for secure sharding, and shard chains will allow Ethereum to create multiple blocks at the same time, increasing transaction throughput, said ethereum.org.
Signs of optimism and taxes
Just prior to the Phase 1 launch, crypto analytics firm Santiment noted that ETH’s price rising in the past 24 hours suggested “early signs point to optimism over this event.” The firm also stated that ethereum daily active deposits have dropped significantly, which they called “a solid sign for bulls,” as well as that ethereum exchange inflow normalized after last week’s “frenzy of exchange activity.”
Also prior to the big event, a discussion was led online, if not an argument, over taxes. Popular crypto researcher Hasu stated that he doesn’t think “locking ETH in the deposit contract necessarily constitutes a sale,” but that he “won’t be shocked if the IRS [US Internal Revenue Service] argues that it does.” He continued, saying that most exchanges will have two ETHs listed, with “many versions of ETH in the market as a whole,” and that the beacon chain shouldn’t have been launch as is creates way more problems than it solves.” He concluded that “If you receive such a liquid staking token, that is most likely a tax event.”
Bitcoin evangelist at the Kraken exchange, Pierre Rochard, argued that selling ETH 1 for ETH 2 on an exchange, and earning interest on the latter, are taxable events, adding “US Treasury is going to love this “upgrade”!” He added in the comments that this is “not an argument against ETH, it’s an argument against taxation.”
Yes, revenue from mining BTC is generally taxable income.
Yes, revenue from trading fees and selling derivatives are generally taxable income.
Yes, trading ETH1 for ETH2 is generally taxable income.
Yes, earning yield on ETH2 is generally taxable income. https://t.co/0wdJgzh0Uy
— PierreRochard.com (@pierre_rochard) November 30, 2020
The ETH camp disagreed, with some seeing the statement as some kind of a Bitcoiner agenda. User ‘cyber_hokie’ tweeted that “Bitcoiners love tax law when it suits them. Just like they loved Securities laws before that pathway to having the government do their dirty work to Ethereum dried up there as well.”
Ethereum core developer Hudson Jameson also reacted to Hasu’s comment on different ETH versions:
Remember the coin that was created before the Ethereum genesis block that promised you ether if you bought their coin? If you think Coinbase’s Eth2 IOU thing is a different “version” of ether, then you must think that pre-launch, third party IOU token is also a version of ether. https://t.co/Yda8jDfyNv
— Hudson Jameson (@hudsonjameson) December 1, 2020
Learn more: Ethereum 2.0 Journey in 3½ Phases Is About to Start With Phase 0