Six Things We Learned At Devcon VI

Crypto and Web3 enthusiasts congregated in Bogotá, Colombia, last week for Devcon VI — arguably one of the most important conferences in the industry.

Shayan Eskandari, CTO of Ether Capital, at Devcon VI    Ashley Stanhope, Director of Communications, Ether Capital at Devcon VI    Vitalik Buterin, co-founder of Ethereum, at Devcon VI

Ether Capital CTO Shayan Eskandari and Director of Communications Ashley Stanhope went to connect with the Ethereum community and hear about the latest developments in the space. The conference returned after a three year hiatus due to the pandemic, so there was a lot of catching up to do. Here are six things we took away from Devcon VI:

  1. The staking landscape

 Lido speaks at Devcon VI about the bull case for liquid staking    Panel at Devcon VI about supporting solo and independent stakers

Now that the dust has settled following the Merge, many of the talks focused on the different ways to stake ether (ETH) and earn rewards. The switch to Proof of Stake (PoS) levelled the playing field by allowing more people to participate in validating transactions and securing the network.

Lido’s co-founder Vasiliy Shapovalov made a case for staking with a liquid provider explaining there’s no minimum requirement to stake and users can rehypothecate their assets to participate in DeFi and other on-chain activities. Lido and alternative liquidity providers like Rocket Pool offer an ERC20 staking token (essentially an IOU) on a 1:1 basis for every ETH a user deposits. However, there are a couple things to consider when it comes to liquid staking. 

The risk of centralization

Concentration of staking validators

More than 65% of Ethereum nodes are hosted on centralized servers and Lido has the lion’s share of staked ETH deposits (29%). There is growing concern that centralization harms the network by making it less resilient and introduces single points of failure. Stakers also do not have control over infrastructure so they are subject to slashing penalties if something goes wrong with a liquid staking provider’s validators.

Other options include using a service provider like an exchange or staking independently. Both have their pros and cons. Staking with an exchange requires you to stake ETH and keep it locked up until the Shanghai upgrade takes effect (expected in the next six to 12 months). Service providers are easy to use, but they do take a percentage of your staking rewards (i.e. Coinbase takes a 25% cut). 

Solo or independent staking is important to the decentralization of the ecosystem, something we atEther Capital strongly believe in and support, but it requires technical knowhow and a proper infrastructure setup. Although users are able to keep all of their rewards, a hard upfront cost of 32 ETH is required in addition to consistent software upgrades and a reliable Internet connection. Solo stakers can also be targets for denial of service (DoS) attacks, which is why many people opt to go with staking service providers.

Here’s a link to a panel that took place during the conference on small and independent stakers that’s worth checking out.

2. Breaking down ETH supply since genesis  

Christine Kim from Galaxy speaks at Devcon VI about ETH supply since genesis

One of the more difficult things to grasp is exactly how much circulating supply of ETH there is. For years investors have said that Ethereum’s native token does not hold up as a store of value because unlike bitcoin there is no finite supply. When it comes to BTC there will only ever be 21 million in existence, but Ethereum has always been a mystery. During one of the talks, Christine Kim, Research Associate at Galaxy Digital, took us back to the early days of Ethereum’s ICO and explained how much ETH has been in circulation since the network launched in 2015:

  • Approximately 120 million ETH has been created on Ethereum since genesis (the first block to be added to the blockchain).
  • 12 million ETH (10% of total supply) went to early project contributors and founders before the network launched (also known as a pre-mine). A portion of this also went to Ethereum Foundation, which holds approximately 0.3 per cent of total ETH supply as of March 31, 2022.

Kim also touched on the reduction of ETH issuance since the network shifted to PoS. She emphasized the biggest winners of PoS are large ETH holders who are in the best position to profit now that the Merge upgrade is complete. “If you’re not staking your ETH, you’re essentially getting diluted,” Kim said.

Considering only 12% of total ETH supply is staked on Ethereum, developments need to take place at the protocol level for confidence to grow. Kim believes we’ll likely see staking deposits increase once the Shanghai upgrade is enacted.

3. What’s up with MEV post-Merge?

Talk about PBS  Phil Daian, founder of Flashbots, speaks at Devcon VI

Maximal Extractable Value (MEV) is a hotly debated subject because of the concerns around censorship and the fact end users can be vulnerable to things like sandwich attacks or frontrunning. MEV refers to miners or validators orchestrating which transactions to include in blocks to maximize profit based on the more expensive transactions that are in the mempool (where all pending transactions exist before they are verified).

Under Ethereum Proof of Work, MEV was controlled by an opaque, smaller group of people known as miners. They not only validated transactions, but proposed (built) blocks that were added to the blockchain. The benefit of MEV under PoS is that it takes Ethereum one step closer to network modularity by introducing the Proposer-Builder Separation (PBS).

The PBS helps decentralize the process by introducing a new group of participants called “builders” who submit an ordered list of transactions that become the main payload of the block. The proposer’s job (i.e. validator) is only to accept the block with the highest bid. The idea is that the proposer (and everyone else) does not learn the contents of any block body until after they select the header of the block that wins the auction. This eliminates the possibility of validators cherry picking transactions based on the more expensive transactions to receive a higher reward. To find out more about PBS, make sure you check out the Updates on Proposer-Builder Separation talk — it was a good one.

4. Zero-knowledge proofs: What are they and why do we care?

Vitalik Buterin talks about ZK Proofs at Devcon VI  Talk about security characteristics in ZK Proofs

Scalability is paramount if Ethereum is to go from processing 13 transactions per second to 13,000. Enter zero-knowledge proofs (ZK proofs) — a way for users to prove or submit information including transactions that become verified without having to disclose private information or have it be revealed to the verifier. ZK proofs also compress data off-chain to take pressure off mainnet and improve throughput.

The concept is popular among cryptographers and was first introduced in a 1985 paper, “The Knowledge Complexity of Interactive Proof Systems.” Fast forward to 2022, ZK proofs are front and centre as companies and developers try coming up with new ways to scale Ethereum. Vitalik Buterin, co-founder of Ethereum, also believes that in the next 10 years, ZK SNARKs (a type of ZK proof) will be as important as blockchain.

We recommend checking out “ZK Proof Performance and Security Metrics” to learn about the different types of proofs and how they operate.

5. The state of regulation

Devcon VI talk on advocating for regulation    Talk at Devcon VI about crypto regulation

One of the biggest concerns to those in the industry is legal clarity when it comes to DeFi and how regulation could have a far-reaching impact. Connor Spelliscy, co-founder of the Canadian Web3 Council, spoke about why advocacy matters in shaping new policies and frameworks that can help guide the market. Western governments are accelerating the pace at which they are regulating crypto and Spelliscy said within the next three months, we could see a bill passed in the United States that could ban much of DeFi.

It’s important for developers to keep regulation in the back of their mind during the R&D phase of their projects or risk a bifurcation of the space, something we emphasized during our talk at ETHNewYork. It results in time and effort being placed on products that have legal ramifications and could eventually be deemed offside.

6. Things to consider when building a DeFi product 

Talk about product design in DeFi

Developing a DeFi product isn’t so different from the Web2 world. A roadmap is essential and teams need to not only focus on R&D but commit to an experimentation process, according to Alim Khamisa, Product Manager at Element Finance.

A pipeline of research can guide the development of a decentralized application (dApp) or lead to new products and/or services. Total Value Locked (TVL) is a common metric when evaluating dApps, but Khamisa said it shouldn’t be the only source.  Like in the traditional world, anonymized data collection and feedback can be vital to product development in DeFi.

Keeping up with the pace of change

If you feel a bit lost, don’t worry — you’re not alone! The industry moves at lightning speed, and we want to help. Please reach out to us if you have any questions about Ethereum or staking. You can also sign up for our corporate updates and newsletter where we cover the latest industry news and developments. While we can’t provide specific investment advice, we are here to help guide you in the right direction. 

#WAGMI

Everything You Need to Know About the Merge

It has been one of the most talked about events in crypto for years now. The moment when Ethereum changes the way it validates transactions resulting in a more secure, eco-friendly and soon-to-be scalable blockchain. Here’s the breakdown on the critical upgrade that has been dubbed “the Merge” and what investors need to know:

What is the Merge?

Ethereum currently operates under a Proof of Work (PoW) consensus mechanism, which means individuals, also known as miners, operate powerful computers worldwide and compete to solve cryptographic puzzles. The first miner to propose a solution creates a new block filled with transactions that gets added to the blockchain. Once the Merge takes effect, Ethereum will abandon PoW and opt for a Proof-of-Stake (PoS) consensus mechanism. As a result, ether holders become validators and stake (lock up) their assets as collateral in exchange for the ability to verify transactions.

Are there two separate chains?

The short answer is yes. There is the PoW chain where all activity currently takes place and a PoS chain that was launched in late 2020 that only has staked ETH deposits. In order to successfully merge the PoS chain with the PoW one, it needs to be done in stages and requires lots of testing and research. More than US$37.5 billion in ETH has been deposited on the PoS chain since December 2020 — a sign of faith that ETH holders are bullish on the Merge that’s expected to take place in a matter of weeks. Validators can also expect to withdraw their staked ETH in a future upgrade that will be implemented roughly six to 12 months following the Merge.

Source: https://beaconcha.in/charts

Why the delay?

We believe the target date for the Merge is less important than developers taking time to get it right. Ethereum is a ~US$200 billion protocol at the time of writing, with a thriving economy of users and builders. Some other blockchains have had the advantage of using PoS from the beginning, where Ethereum is about to undergo arguably one of the most complex transformations in the history of crypto. Years of research and testing have gone into making this possible without sacrificing security and user experience. There will be no downtime during the transition to PoS — and as Tim Beiko from the Ethereum Foundation recently told us — it will happen in a matter of 12 seconds.

What does it mean for ETHC shareholders and ETH investors?

The switch to PoS changes Ethereum’s monetary policy that will ultimately benefit investors in two primary ways.

First, Ethereum will be secured with capital rather than energy. For validators’ contributions to the network, they are rewarded in newly-minted ether. This transforms ether into a yield-generating instrument that will democratize the validation process allowing more people to participate by staking their assets. The current APY is ~4.06%, which will vary at times post-Merge depending on many factors including network usage.

Second, there’s expected to be a 90% reduction of ether issuance. This is because there’s no longer a need to compensate miners for the significant overhead cost involved in running their computers (i.e. electricity bills). Under PoW, there’s approximately 13,000 ETH issued per day to Ethereum miners vs. the expected 1,600 ETH that will be issued to validators under PoS. Validators will still receive an attractive return by staking their assets, but since there are fewer hardware requirements under PoS, the network is able to reduce issuance.

The switch to PoS will also cut energy usage on Ethereum by 99.95%, making it much more attractive to users and investors with environmental, social and governance (ESG) issues top of mind. Under the current PoW model, the energy consumption of Ethereum (~112 TWh/yr) is comparable to that of the Netherlands, with a carbon emission similar to Singapore (53 MT/yr). Running a validator can be done on a modern desktop computer and adds up to an estimated ~2.6 MWh per year.

Source: Ethereum Foundation

What does Ether Capital think about the Merge?

To sum it up, we are very bullish on Ethereum’s switch to PoS and believe there’s significant upside for both ETHC shareholders and ETH holders.

When we started Ether Capital in 2018, we bet that Ethereum would be one of the greatest assets of our generation; something we still believe to be the case. The move to PoS will further solidify Ethereum’s position as a global clearing house and settlement layer for a wide-range of activity.

This is an inflection point for the entire industry and we expect more institutional capital to enter the space that has been sitting on the sidelines. This factors into our decision as a company to focus on staking more of our ETH and building infrastructure to support Ethereum’s robust ecosystem. Our shareholders will also benefit from having direct access to cutting-edge developments taking place on the network with a board and management team made up of traditional finance executives, crypto natives and venture capitalists to guide the decision making process.

As we mentioned above, another key benefit of the Merge is that long-term ETH holders will be able to put their assets to work by staking. Despite currently needing 32 ETH and sufficient technical knowledge to run an Ethereum validator, ETH holders can join a staking pool and capture a yield without having to fork out US$52,000 (calculated at today’s price).

ETH will also become a deflationary asset post-Merge as issuance drops significantly. Bitcoin’s 21 million supply cap has long been a selling feature for the cryptocurrency that investors have put their weight behind because of supply transparency. With a drop in ether issuance, increased staking deposits and a portion of transaction fees being destroyed (introduced in an Ethereum upgrade called EIP-1559 that was implemented last year) we could see upward pressure on the price of ETH. Some analysts also predict we are not far off from the “flippening”, when Ethereum surpasses Bitcoin in terms of market capitalization.

The eco-friendly curb appeal that Ethereum will soon offer under PoS is also likely to lead to more institutional and retail adoption, especially by those with strong ESG mandates. Not to mention, security enhancements as a result of the Merge will help prevent attacks that spam and crash the network — something Ethereum’s co-founder Vitalik Buterin highlighted during a crypto conference in Paris in July. This alone could lead to more use cases and developer activity based on the security properties of Ethereum once the Merge is enacted.

Competing PoS blockchains will also have the added challenge of trying to find new ways to steal the spotlight away from Ethereum that end users and developers have already decided is the platform of choice. With the addition of roll-ups and other scaling solutions that could lower the cost of transactions, it makes it more difficult for rival Layer-1 blockchains to maintain their value propositions.

What comes next?

Continual upgrades including staked ETH withdrawals and scalability will be the primary focus for Ethereum developers over the next several months. The community has a knack for adopting peculiar terms for projects or events that take place in the cryptosphere. The “Surge”, “Verge”, “Purge” and “Splurge” are future upgrades and part of Ethereum’s long and complex roadmap to Ethereum 2.0 — an enhanced blockchain that will have a secure base layer and the functionality to support a wide-range of activity. Infrastructure quality and security are two things that Ethereum developers have never compromised on.

If you’re looking for more written content on the Merge and other topics related to Ether Capital or Ethereum, we recommend you sign up for our newsletter! (we promise not to spam you)

This blog post has also been published on our Medium page that you can access here: https://medium.com/ether-capital-blog/everything-you-need-to-know-about-the-merge-61515b32203d

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