Despite the excitement and enthusiasm in the Ethereum community, many people don’t yet fully understand the significance – and the opportunity – of the second-largest blockchain for large institutions and enterprises.
The nature of network participation is changing dramatically as well as the incentive mechanisms for securing open permissionless protocols, demonstrated by Ethereum’s shift to a radically new consensus mechanism.
This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Evan Weiss is head of business operations at Bison Trails.
Anyone holding ether (ETH) as an asset can participate in securing the network and earn rewards. Given the increased growth and utilization of the protocol, now is the time for large enterprises to take a look at the Eth 2.0 opportunity.
Ethereum, currently the second-highest market cap network with over $40 billion in value, aims to be a globally distributed computer for executing peer-to-peer contracts. In other words, it’s “a world computer you can’t shut down.” More important, Ethereum has become the most utilized blockchain protocol in the world, settling over $6 billion per day.
Eth 2.0, the next iteration of this distributed system, represents years of research and coordinated effort from teams across the world. A primary goal of Eth 2.0 is to enable the protocol to continue to grow with our industry and scale to support trillions of dollars in value transfer in a decentralized manner.
See also: The Risks and Rewards of Staking on Eth 2.0
Before the launch of its skeletal system on Dec. 1, more than 835,520 ETH was staked to the Eth 2.0 deposit contract, far exceeding the minimum of ETH required to trigger the new network’s “genesis.”
Not only is this launch a huge milestone for the crypto community, the transition also represents a significant change in how the protocol will be secured, as the network moves from mining (proof-of-work, or PoW) to staking (proof-of-stake, or PoS).
Token ownership and rewards
In decentralized protocols, mining and staking seek to accomplish the same goal, determining network consensus. Coming to agreement on the “state of the chain” ensures the monetary balances the blockchain stores are accurate. But networks based on mining and those based on staking operate very differently in the real world to achieve this consensus.
In PoS, mining to secure the network is a separate activity from holding tokens. Many bitcoin miners are sophisticated actors, with large balance sheets. They optimize for access to cheap hardware and electricity but don’t always meet the necessary margins to stay profitable. PoW miners face the significant risks of price swings of the native protocol assets they hold and depreciation of their assets – a risk greater than some investor appetites.
A large portion of this PoW mining happens in China and is…