An independent report by two ConsenSys researchers this week explored an economic review of ETH 2.0 “Serenity,” the upcoming shift to a proof-of-stake mechanism for Ethereum.
Among the many takeaways was that “attacks on Eth2 are easier to scale than on Eth1” and that “network security was heavily reliant on the price stability of ETH.”
Researchers Tanner Hoban and Tom Borgers work in Corporate Development at ConsenSys, but their report on the network economics of Ethereum 2.0 was an independent review.
@thomasborgers and I have been working on an Eth2 economic review in response to a @MolochDAO RFP. We’ve created a detailed economic model and developed frameworks for measuring Eth2 security and validator required rate of returns. More in our report: https://t.co/qXa6IcmDcK
— Tanner Hoban (@tehoban1) July 16, 2020
Here’s why DeFi is vulnerable
Researchers noted the physical and hardware-driven burdens of network participation “recede to essentially minimal hardware and power consumption.” They referred to the minimum requirements to run an ETH node compared to the current, elaborate, mining rigs.
The trend is amplified as DeFi advances. The researchers also cautioned that flash loans, derivatives, and other ETH-linked financial products could have adverse implications for the network.
In April this year, MakerDAO was hit with such a scenario. Ethereum fell 45 percent over two trading sessions, leading to zero-bid auctions for ETH on Maker. Lenders lost their funds — over $4 million — within minutes as buyers grabbed ETH for free.
A similar exploit was exposed last month as hackers drained Balancer pools of $500,000. As CryptoSlate reported, attackers took advantage of a deflationary token available on Balancer by taking flash loans from other protocols, swapping between tokens, and ultimately making away with LINK, Wrapped ETH, and other alts.
Our investigation of $500k hack from @BalancerLabs multi-token pools with deflationary tokens ?️♂️ https://t.co/yCuYWpBAzM #DeFi
— 1inch.exchange (@1inchExchange) June 29, 2020
ETH 2.0 relies on 100 variables
The researchers constructed an economic model built in Excel and ran varying outputs of the system under recommended specifications “for select scenarios.” As the experiment progressed, they formed a conclusion on factors like validator revenues, costs, yields, and network issuance — all featuring prominently in Serenity.
ETH 2.0 relies on over 100 variables, the report noted. All of those have a significant impact on system outputs. Based on simulations of these, the model was able to capture validator profitability on different ETH prices and total ETH staked.
“We define a required and sufficient level of economic security in Eth2.0 Phase 0 using a set of assumptions around the cost to attack the network,” said researchers. They added:
“The objective is to make attacks costlier than the potential benefits of an attack and to achieve a similar level of security to the current Ethereum blockchain (Eth1).”
Meanwhile, the researchers said ETH 2.0’s security is fully dependent on the total ETH staked, which, in turn, is itself a function of yields.
A minimum yield of 3.3 percent is required by validators to consider participation, under an optimized network. If the market’s “more bearish yet stable,” yield requirement increases to 11.6 percent, the report said.
Ethereum 2.0 is a much-awaited development in crypto-circles. The update is shaky in terms of its exact launch — Ethereum foundation developers said shipping can be expected only in 2021, but co-founder Vitalik Buterin is sticking to a 2020 launch.
We can only just wait.
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