Discussion Post: The Future of Ethereum Post-Merge

CTA: “In these threads, we attempt to further the discussion of a key problem in this category and evolve our understanding of the domain space where research work has not yet answered the specific problem or question being considered. These posts are living documents, and it is our hope that the community will continue to contribute to their structure and content.”

Key Problem / Topic Area

Ethereum’s transition to Proof-of-Stake (PoS) introduces several changes to its security model, especially as it relates to Maximum Extractable Value (MEV), but these dynamics are poorly understood.

Specific Question or Problem Statement

What intrinsic changes did The Merge introduce to Ethereum?

Approach / Methodology

The author provides technical background on the key changes introduced by The Merge, evaluates its potential implications to security, as well as the game-theoretic principles underpinning the new system.

Background

  • Proof-of-Work (PoW): a mechanism introduced by Bitcoin to solve the coordination problem that distributed, permissionless networks face. This problem has been formalized as the Byzantine General’s Problem (BGP) and Bitcoin was the first network to solve it in a decentralized setting. PoW involves allocating computational resources to effectively “brute-force” the solution to a puzzle. Successful parties receive a reward for solving the puzzle and are granted permission to add a new block to the blockchain. Entities involved in this activity are called miners.

  • Proof-of-Stake (PoS): a mechanism that borrows the key coordination dynamics of PoW, but instead of brute-forcing the creation of new blocks, it coordinates block production on the basis of bonded participants. These are users that have locked up capital, or stake, and that synchronize on block production. If they misbehave, their stake is destroyed, or slashed. As such, relative to PoW, PoS is substantially less energy intensive.

  • The Merge: Ethereum was launched as a Proof-of-Work (PoW) network and was home to the world’s second-largest mining ecosystem. Some estimates suggest that this activity on Ethereum consumed 0.05% of the world’s total electricity consumption. In order to change that dynamic, the Ethereum team has been working on a Proof-of-Stake implementation for nearly 8 years, even predating its mainnet launch in 2015. That implementation went live in December of 2020 as a separate network called The Beacon Chain, which ran in parallel to Ethereum’s legacy PoW. This was done as a way to test PoS functionality before the full shift to PoS. The Merge is the moment where these 2 networks converge and Ethereum becomes a PoS system.

Source: Coin Metrics

  • Slot: in PoS Ethereum, the concept of “blocks” in a blockchain changes. In turn, that alters how the system measures time. Instead of blocks, time is measured in increments called slots. These can be defined as opportunities to create a block. At every slot, a stake is chosen to propose a block. This staker is called the Proposer and that entity has full control over the content of that block. Slots vary in time, but they are more predictable than blocks given the increased coordination in PoS. Roughly speaking, each slot takes an average of 15 seconds.

  • Attester Committee: once a block has been proposed by the Proposer, the network needs to agree (reach consensus) on whether this was a valid block. This is performed by another group of stakers called Attesters, whose role is to vote or attest to the validity of the block that was just proposed. This is done via a consensus mechanism called LMD-Ghost. This mechanism is similar to how blocks are agreed upon in PoW systems, but instead of computational power (hashrate) the attesters look at voting power (how many votes has the proposer’s block achieved).

  • Epoch: the Attester Committee uses LMD-Ghost to decide which blocks are valid, but there is another level of consensus required in order for a set of blocks to be deemed final. Simply relying on the Attester Committee would not offer strong guarantees that the blocks on the blockchain will persist, a property called finality. In order to provide stronger finality guarantees, Ethereum’s PoS uses another protocol to reach consensus on a wider set of blocks: Casper-FFG. This is done in set intervals of 32 slots which are called Epochs.

Source: cipherix

  • LMD-Ghost + Casper-FFG: Combined, these two protocols are the backbone of Ethereum and they intend to provide strong finality guarantees to network participants. Nevertheless, this system is more complex than PoW and stakers need to have a level of technical expertise, in addition to a balance of 32ETH, in order for them to be able to participate in this process.

  • Liquid Staking: Given the aforementioned challenges and complexities associated with participating in Ethereum’s consensus process, many users have preferred to delegate their stake to third parties. These third parties are exchanges and staking services that stake on behalf of users. Fundamentally, staking involves posting a bond, or capital, which assures that there are financial consequences if the staker misbehaves. However, the advent of Liquid Staking has changed that dynamic. These are ERC20 tokens that reflect ETH that is staked, which effectively “unlocks” staked assets. The most popular liquid staking provider is a project called Lido, which now controls over 33% of ETH that is staked.

Source: Coin Metrics

  • Maximum Extractable Value (MEV): the dynamic depicted above has interesting implications with regard to Maximum Extractable Value (MEV), which is the economic benefit extracted by block producers (miners in PoW, staker in PoS) from ordering transactions in a block. Often, MEV serves an added revenue overlay that can drastically improve total revenues of block producers, especially in times when there are a lot of arbitrage opportunities on-chain.

  • Safety Considerations Post-Merge: the centralization seen in Ethereum staking closely mirrors the previous centralization seen in Ethereum mining. The top 5 stakers contribute to 65% of staked assets, much like the top 5 mining pools contributed roughly to 65% of the hashrate prior to the Merge. However, the attack threshold in Proof-of-Stake is lower than in Proof-of-Work. In PoS, that threshold is 33% and a single entity controlling 33% of staking is able to break consensus, whereas in PoW that threshold is 50% in order for consensus to break via a so-called 51% attack.

Conclusions / Key Takeaways

The primary goal of the Merge was to transition to PoS and the ultimate result of that is a considerable reduction in electricity consumption. However, it can be argued that under the existing set of stakers the system is less secure. Applications and users must treat it accordingly and potentially wait longer (2 epochs) before considering large transactions final.

CTA: Future Work / RFP

Much remains to be evaluated in this new system. In order to counter the centralization seen in the set of stakers in the network, it might be required to separate stakers from those that are composing blocks: a new system called Proposer Block Separation (PBS). This might be the only way that the attack vector introduced by centralization can be addressed.

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@cipherix, does this mean that the original PoW network was more secure than the present PoS considering that there was a drop in the attack threshold? Pre merge, I read an article which argued that the new PoS network would be more secure (can’t find the link now). Can you straighten this out a bit?

It is also important that you pointed out the reduction in electricity consumption as the primary aim for The Merge. By the way, that’s a significant amount of power. There have been a lot of misconceptions on the reasons for The Merge and the possibilities that it directly brings.This article goes a long way to highlight some of the misconceptions.

For instance, some argue that The Merge will instantly cause a reduction in gas fees on the Ethereum network. The image below shows the gas fee for the first NFT mint on the new PoS network which renders this argument of automatic gas fee reduction invalid.


Source: Blockworks

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Almost two years ago there was a research summary posted about Robust Proof of Stake. It appears that paper was trying to solve alternative security concerns than are being raised here by @cipherix, but it seemed potentially interesting to explore how the RPOS solutions might help us think about the current Ethereum POS protocol.

The Truth, the Whole Truth, and Nothing But the Truth

99.9%? Is it Real? Or is it Memorex?

“Pilate said to Jesus, ‘So you are a king, are you?’ Jesus answered, ‘You say that I am a king. For this I was born, and for this I have come into the world, to bear witness to the truth. Everyone who is of the truth listens to my voice.’ Pilate said to him, ‘WHAT IS TRUTH?’” John 18:37-38

The merge has saved the planet. We can all go home now. Climate change is over!

Of course, I’m joking. But, according to reports, Ethereum’s merger was a truly astounding feat, instantly reducing its energy consumption by a whopping 99.9%, especially when you consider it was consuming as much energy as the Netherlands.

Like Star Trek’s Captain Kirk, Vitalik Buterin faced and beat his own Kobayashi Maru test–thrashing it soundly.

It was a remarkable achievement, shaming the doomsdayer’s who were predicting the end of the crypto world, predicting possible proof-of-work Forks, Dapp malfunctions, exchange outages and other volatilities.

But what I found most interesting, after reading the SCRF’s Thursday community call recap (9.16.22), and in the wake of the merge’s crowning achievement–its environmental impact, was this line:

The so claimed 99.9% decreased use of electricity is unconfirmed because validators need redundancies to operate.

Nuzzi is right. Maybe, we need to be a bit more skeptical about what we see and hear.

After all, we’ve all been lied to before by the powers that be: the press and other so-called trusted entities.

Not to say, that this is the case here. That we should poo-poo this number. But it’s always good to verify what you see or hear, especially these days.

So, back to Nuzzi’s inferred questions. Who validated this claim? And how do we know that that figure is accurate?

And I might also add–with a tone of a pseudo-authority–did this rate account for possible redundancy? I got your back, Nuzzi.

I’m new to the game, so I have no idea, but those in the know, like Nuzzi, may have some insights that haven’t been taken into account, insights that should have been considered when the powers that be made these calculations.

Who knows? Maybe the true figure was 97%. Which is still good…I’m not complaining.

I just thought it was interesting that Nuzzi was skeptical of the data for, what appears to be, a good reason.

The stakes are high for the validators. And I would think in the name of self-interest that these validators would do whatever was necessary to preserve their stake, within the law and within the protocols of their agreement.

Redundancy makes sense to me, giving the fact that simple, dumb mistakes can result in your investment getting either slashed or depleted.

Going offline, for example, or miscasting a vote, or failing to validate, could cost you. So I can see the importance of such a strategy.

However, with all that said. The real questions is, would this strategy have made any real difference in the calculus? This is a questions that I’m not qualified to answer. I’m clueless.

I’m assuming buying a few computers wouldn’t make much difference compared to mining. But I guess it depends on the number of validators.

So, Is the 99.9% figure accurate? Is it true? Or is this synthesis a sick tribute to Seinfeld? All about nothing.

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After the Etherem merge which refers to when the current proof-of-work (PoW) Ethereum mainnet protocol will “merge” with the Beacon Chain proof-of-stake (PoS) blockchain system and continue as PoS, Many have wondered ‘Where does Ethereum stand in the aftermath of the Merge?’. Most people have considered the Merge to be the network’s grand finale. Vitalik Buterin (co-founder Ethereum Blockchain) claims that Ethereum will now focus on combating "the Surge, the Verge, the Purge, and the Splurge.

Surge:
The “Surge” refers to Ethereum introducing mechanisms that will enable the production of layer 2 or companion products, such as sharding and rollups, and so make it simpler for users to function on the Ethereum network. These systems will make the network more extensible (scalable).
On Ethereum, the implementation of sharding is anticipated to occur at this phase. To improve the network’s scalability, sharding would divide Ethereum’s whole network into smaller chunks known as “shards.”

Verge:
Verkle trees, which will also address the issue of scalability in the ethereum blockchain, and this will be introduced in this phase. Buterin claims that Verkle trees offer a “strong enhancement to Merkle proofs that allow for substantially reduced proof volumes.” The so-called Verge will lower node sizes and optimize storage. In the end, this will increase the scalability of Ethereum.
Verkle trees let you store a lot of data by demonstrating a brief proof of every given piece of it, which is then confirmed by someone who only has access to the tree’s root. Proofs will become significantly more productive as a result of this procedure.
As a relatively recent concept, verkle trees are still not as well-known or utilized as other cryptographic techniques. Therefore, the Surge’s handling of sharding and rollups will have an impact on how the network handles scaling and Ethereum proofs after that.

Purge and Spurge:
The Purge tries to “purge” or “reduce” unnecessary historical data. Under the new proof-of-stake consensus method, validators will be able to validate the blockchain with more efficiency by reducing the quantity of historical data. This should reduce network traffic and enable the blockchain to execute many more transactions. The spurge on the other hand attempts to ensure that the network continues to function normally and that the protocol modifications in the preceding sections do not result in any problems. This last phase is still decades away, and there will undoubtedly be bumps in the road as with every technological advancement. Given that the Merge has taken far longer than anticipated, when the Splurge does occur, the Ethereum network will enter a much-deserving period of celebration.

In conclusion,
It will need far less energy to verify transactions, which has long been a significant issue for the cryptocurrency industry. This is the hallmark of Ethereum’s great merging. Cutting energy use by over 99% will also significantly decrease the entrance hurdle for institutional investors, who have been wary of seeming to be a part of the climate catastrophe.

Despite the new dynamics brought about by the merger, the cryptocurrency market is still likely to be influenced to some extent by pure speculation and unrelated events that have nothing to do with the underlying principles of tokens or blockchain networks.

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