Despite the enthusiasm and enthusiasm of the Ethereum community, many people still do not fully understand the importance – and desirability – of the second largest blockchain for large institutions and businesses.
The nature of participation in the network is radically changing as well as the incentive mechanisms for securing open protocols without permission, as evidenced by Ethereum’s shift to a radically new consensus mechanism.
This article is part of CoinDesk’s 2020 Year in Review – a collection of opinion pieces, essays, and interviews on the year in crypto and beyond. Evan Weiss is Chief Commercial Officer at Bison trails.
Anyone with Ether (ETH) as an asset can participate in securing the network and earn rewards. With the growing growth and use of the protocol, now is the time for large companies to consider the Eth 2.0 opportunity.
The future of Ethereum
Ethereum, currently the second highest market capitalization network with a value of over $ 40 billion, aims to be a globally distributed computer for the execution of peer-to-peer contracts. In other words, it is “a global computer that you cannot turn off”. More importantly, Ethereum has become the most widely used blockchain protocol in the world, at over $ 6 billion per day.
Eth 2.0, the next iteration of this distributed system, represents years of research and coordinated efforts by teams around the world. A primary goal of Eth 2.0 is to enable the protocol to continue to grow with our industry and support billions of dollars in value transfer in a decentralized manner.
See also: The risks and benefits of betting on Eth 2.0
Prior to the launch of its backbone system on December 1, more than 835,520 ETH were put into play in the Eth 2.0 depository agreement, far exceeding the minimum ETH required to trigger the “genesis” of the new network.
Not only is this launch a big milestone for the crypto community, but the transition also represents a significant change in how the protocol will be secure, as the network shifts from mining (proof of work or PoW) to staking ( proof of -stake, or PoS).
Ownership of Tokens and Rewards
In decentralized protocols, mining and staking seek to achieve the same goal, determining network consensus. Reaching an agreement on the “state of the chain” ensures the accuracy of the currency balances of blockchain stores. But networks based on mining and those based on staking work 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 players with great track records. They optimize access to cheap equipment and electricity, but do not always fill the margins necessary to remain profitable. PoW miners face significant risks from price fluctuations of the native protocol assets they hold and from depreciation of their assets – a risk greater than some investor appetites.
Much of this PoW mining takes place in China and is controlled by a few large mining companies. These large mining companies are not known for their operational transparency and, as such, are not an attractive option for established companies or institutions with fiduciary responsibilities.
In proof of stake, on the other hand, token holders are responsible for validating blocks. By helping to secure the network, these holders earn rewards. PoS protocols have a built-in inflation mechanism that increases the supply of coins, distributing them proportionally to the coins that have been staked.
Most importantly, with PoS networks, large-scale token holders and businesses don’t have to navigate intensive hardware requirements, find locations with cheap electricity access, or rely on minors. international organizations in order to actively participate in supplying the network.
At least, everything you need to participate in Eth 2.0 is 32 ETH and an active validator. For large-scale enterprises and token holders, active PoS network participants may also consider managing internal infrastructure, as well as the time investment and opportunity cost of capital.
In the five years since Ethereum’s inception, a number of new PoS protocols have been released, including Polkadot, Celo, NEAR, and Flow. There has also been a commensurate increase in “infrastructure as a service” businesses. These companies allow token holders and institutions to earn rewards as network validators securely and easily.
These enterprise-grade, cloud-based blockchain infrastructure providers can harden the network by geographically distributing network nodes, without introducing the costs associated with proof-of-work mining.
In addition, we are seeing a trend towards professionalization of the staking industry as new products are brought to market that provide liquidity for staked tokens and additionally provide insurance protections against reduced penalties – a major concern for institutions.
As the use of Ethereum continues to grow similar to that of a hockey stick, staking represents an opportunity to own a small part of the growing Web 3.0 ecosystem. A distributed web based on blockchain technology is a radical departure from the internet we know today, where there is no way to own or monetize your use.
Policymakers understand that this is a clear move to empower users to own a small portion of the next generation Internet. As Ethereum grows to generate billions of dollars in daily settlements, owning a part of this next-gen web will become a once-in-a-lifetime opportunity.
Finally, the taxation of assets is an important consideration for institutions. Promising work is underway to advance the idea that staking rewards should be treated as “created goods” so that rewards are imposed when they are sold, not when they are first created. . These “fixed assets” would give token holders the ability to keep their staking rewards for more than a year, and then receive long-term treatment of capital gains under current tax rules.
The clarity here would give even more assurance that participation in PoS networks will not come at the cost of an excessive tax burden.
See also: U.S. lawmakers don’t want proof of stake networks overtaxed
Eth 2.0 represents a fundamentally new type of business opportunity. It offers non-technical market players the opportunity to own a portion of the Ethereum protocol and the fees associated with its use. Although it is still in the early stages of its deployment, there is already a well-established ecosystem of professional companies to support institutional investors with cloud-based infrastructure.
It’s experimental, but the rewards are there for the brave new adopters.