Valid Points: What to Expect When Ethereum 2.0 Undergoes Its First 'Hard Fork'

Eth 2.0 is looking at its first hard fork this year.

The Ethereum Foundation-backed research team is currently organizing schematics for a mid-2021 backward-incompatible change to the Beacon Chain, according to a Jan. 14 developer’s call.

This hard fork is really not a hard fork in the traditional sense, Teku client project manager Ben Edgington pointed out. Rather, it’s a warmup before sharding and a merge of the Eth 1.x and Beacon Chain.

“The word ‘fork’ is heavily overloaded in blockchain usage. In fact, there shouldn't even be a fork when this upgrade is done, in the sense of the network ending up with multiple competing chains,” he wrote in his Eth 2.0 blog post on Jan. 15.

The upgrade is likely to include the following code changes, although these changes have yet to be fully agreed upon:

• Infrastructure for light client support through sync committees. Light clients enable verification of the chain without needing as much overhead as a typical validator rig.
• A new function, called balance_denominator, changing in-activity penalties against non-participating validators. The current penalty method is a denial-of-service (DOS) vector while the new function increases the chain’s efficiency, Eth 2.0 researcher Danny Ryan wrote on GitHub.
• Rewards will be calculated over an epoch (similar to a block) instead of after the epoch closes as is currently done. Egington notes the change should help limit the number of incorrect attestations.

Ice Age on Eth 2.0?

One additional feature that is being considered is the inclusion of the difficulty bomb, also known as the “Ice Age.” The difficulty bomb – which kicks into gear at pre-set block heights – is a mining adjustment mechanism originally added to the Eth 1.x blockchain in 2015. It makes mining incrementally more difficult over time in an effort to keep developers motivated to build Eth 2.0.

To date, the Ice Age has been postponed three times on the proof-of-work (PoW) Ethereum blockchain in the Byzantium (2017), Constantinople (2019) and Muir Glacier (2020) hard forks.

The difficulty bomb is a staple of Ethereum as it pushes economic incentives on developers to keep innovating on the baselayer. Yet, it’s unlikely to be included in Eth 2.0 as there’s already an economic force pushing Beacon Chain development, Ryan told CoinDesk in a yet-to-be-released Mapping Out Eth 2.0 podcast.

“There is no Ice Age on the Beacon Chain, but it essentially has a forcing function because right now there is 2.5 million ETH locked into the system,” Ryan said. “There’s no way developers in the community at that order of magnitude would allow it to live in parallel and not have it do anything more.”

The decision to include or not include a difficulty adjustment feature like the Ice Age into Eth 2.0 itself comes down to how you see the Ethereum blockchain progressing after Eth 2.0 is complete, he said. Some want further innovation while some think ossification similar to Bitcoin’s blockchain is the way to go.

“Some want to continue to upgrade and iterate and bring in the latest cryptography into Layer 1. I’m sure the debate whether an Ice Age should exist in Ethereum 2.0 will center around some of those ideas of ossification versus continual upgrades,” Ryan said.

Eth 2.0 reaches all-time high for network participation

The Ethereum 2.0 network continues to grow at a steady pace and at near-perfect user participation levels. On Saturday, Jan. 23, Eth 2.0 reached its highest daily average network participation rate at 99.46%. This indicates that, despite a growing number of participants, validators on Eth 2.0 are largely engaged in securing the network and earning rewards.

As background, the economics of Ethereum 2.0 operates on a sliding scale of rewards that adjusts dynamically based on the total number of active validators. The larger the number of validators staked on Eth 2.0, the lower the total amount of rewards issued on the network. (Read more about Eth 2.0’s monetary policy here.)

The daily average of rewards earned per validator dipped to a seven-week low on Thursday, Jan. 21, at 0.007235 ETH. However, due to the bullish price activity of ether in the crypto markets, the value of rewards earned on the network has increased 81.47% over the same time period. In other words, because the ETH price has risen, validators are earning more on average per day in U.S. dollar (USD) terms.

Breakdown of Eth 2.0 user deposits

One other useful metric for evaluating ongoing network health and decentralization is the breakdown of user deposits on Eth 2.0. According to a tool still in beta testing by blockchain explorer Etherscan, roughly 50% of all ETH deposits are made by cryptocurrency exchanges and staking pools.

This suggests an equal balance between individuals choosing to stake using their own hardware and software and those who choose to rely on a service provider to do it for them. Shifts in this distribution over time will indicate growing advantages as well as disadvantages, swaying users towards one method of staking on Eth 2.0 versus another.

For now, the even distribution of Eth 2.0 depositors is a strong indicator that running hardware independently versus relying on a provider to do it for you are both equally attractive options for users.

Validated takes: Further reading from the past week

• The bull case for cryptography by Justin Drake (Podcast, Bankless)
• Big investors stacked up ether as price rose to record high (Article, CoinDesk)
• Ethereum-based ConsenSys Quorum partners with China’s BSN blockchain (Article, CoinDesk)
• Minority mining pools threaten to collude against contentious Ethereum upgrade (Article, CoinDesk)
• More institutional investors are buying ether and seeing it as a store of value (Article, CoinDesk)
• Ethereum NFTs are getting merged with augmented reality (Article, Decrypt)
• Smart contract platforms and DeFi are outperforming in 2021 (Blog post, Into The Block)
• Ethereum 2.0 client team Prysmatic Labs’ summary of 2020 (Blog post, Prysmatic Labs)

Factoid of the week

We’ll soon be incorporating data directly from CoinDesk’s own Eth 2.0 validator node in our weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.