Ethereum 2.0 PoS Economic Analysis: Three variables determine network security

Ethereum 2.0 PoS Economic Analysis: Three Variables Determine Network Security

Original authors: Tanner Hoban, Tom Borgers, Knowledgesys

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Tanner from ConsenSys Hoban and Tom Borgers economic problems for the etheric lane 2.0 networks for independent research, they think that the etheric lane 2.0 network security depends on the amount of ETH pledge, ETH price volatility and the three key variables, and in the ETH loan-to-value ratio of 13.8%, the etheric fang network can provide 2.0 and fang 1.0 similar safety to defend against a potential attack, in the end, They also suggest increasing the base reward factor for Ethereum 2.0 to at least 128 from the current 64 to ensure network security.
Ethereum co-founder Vitalik Buterin praised the study, but he was concerned that the researchers' analysis overestimated the cost of PoW attacks. Therefore, he believed that even if ethereum 2.0 had a less than 13.8% ETH guarantee rate, the network would be more secure than expected, so he did not see the need for additional rewards.

The following is the translation:

We would like to thank Molchdao, the stakeholders we spoke with, and the Ethereum Foundation for their support throughout the project. Special thanks to Danny Ryan, Barnabe Monnot, Trent Van Epps and Vitalik Buterin for their comments and Suggestions on this draft report.

While we strongly recommend that you read the entire report, in order to save your valuable time, here is a summary of the highlights of the report:

The Ethereum 2.0 network upgrade is an ambitious and gradual transition to a PoS consensus algorithm and incentive system that has profound implications for the economic nature of the network. The system is designed to be complex, with incentives that reward honest network participants for verifying transactions and determining the historical state of the network, while punishing offline and malicious verifiers. This paper defines, measures and analyzes the cryptoeconomic security of Ethereum 2.0 using a detailed network economy model and a new economic assessment tool.

First, to support the economic assessment, we built an economic model in Excel to explain the system output and selected scenarios under the current specification. In building this project, we gradually developed and leveraged this model to clarify expectations and to form data-driven conclusions about verifier revenue, costs, benefits, and network distribution. The Ethereum 2.0 system relies on nearly 100 variables that have a substantial impact on these outputs. With this model, we dynamically demonstrate the profitability of the verifier at different ETH prices and total ETH pledges, highlighting the variability of the impact on network security.

We defined the level of economic security required in Phase 0 of Ethereum 2.0 using a set of assumptions around the cost of cyber attacks. The goal is to make the cost of the attack higher than the potential benefit of the attack and achieve a level of security similar to the current ETH1.0 block chain. We identified two main economic Attack vectors, each with different variants and different levels of risk :(1) Supermajority attacks, and (2) Finality attacks. In phase 0, we focused on attacks designed to disrupt the network, found that the network was at risk of such attacks, and focused more on the next phase. According to our estimates, with a 13.8% ETH rate of taofang 2.0, it can provide similar security to Ethereum 1.0 against potential attacks.

In other words, Ethereum 2.0's security is highly dependent on the PLEDGED ETH. We developed a model to understand the motivations of capital efficient investors, which we call the demand Quiet Active Validator return (RSAVY) model, to address the risk and cost of collateral and the corresponding required rate of return (RRR). Based on our results, we expect that at an annualized rate of return of 3.3%, verifiers will consider participation (which we use as a proxy for the minimum rate of return). In a more pessimistic but stable scenario, the annualised yield would rise to 11.6 per cent.

The RSAVY model can be used not only to calculate the required rate of return, but also to form a network diagram in selected scenarios. We applied different parameters in these scenarios to support our conclusions and recommendations, which are summarized as follows:

Conclusion:

Ethereum 2.0's proof of equity (PoS) is more complex than the Proof of Workload (PoW). Ethereum 2.0 is a highly complex and well-designed system that is elegant in structure and thoughtful in design, but can be difficult to master from a validator's perspective, resulting in uncertainty and unpredictability that create practical and narrative barriers for potential validators of capital efficiency.

The security of ethereum 2.0 network depends on three key variables: ETH pledge volume, ETH price, and ETH volatility. Each of these variables has a direct or indirect impact on the cost of an attack on a network. Relatively speaking, the total pledge amount of ETH is the most controllable variable, while the price of ETH has a direct and potentially huge impact on network security, but it is beyond the control of the system. The volatility may come from different sources and indirectly affect the ETH pledge volume and price.

Attacks on Ethereum 2.0 are much easier to scale than attacks on Ethereum 1.0. In Ethereum 2.0, the hardware and power burden of participating networks is basically minimal. Moreover, the boom in DeFi and eventual connection to Ethereum 2.0 could greatly accelerate and amplify this trend.

Capital efficiency testers are more predictable. While the participation of ethereum enthusiasts was important for the successful launch of the beacon chain, it was ultimately not enough to achieve sufficient levels of security. Attracting capital efficient verifiers will lead to an accuracy in the amount pledged against a sufficient level of ETH.

Targeting 13.8% ETH pledge volume, the Ethereum 2.0 network will achieve ethereum 1.0 security based on historical prices. We calculated the ETH target collateral rate at 13.8 per cent for historical price fluctuations.

There are proven economies of scale, but they decrease as ETH prices rise. Unlike the PoW environment, where profitability can only be achieved through increasing scale operations, the cost of Eum 2.0 validation will gradually decrease as ETH prices rise. We generally find that the network economy is very conducive to more decentralized network participation, which meets the design goals of Ethereum 2.0.

77.7% of ETH supply is currently stored in the verifier's "qualified" wallet (the address above 32 ETH). Some 86.6 million ETH (77.7 per cent of the total supply) are in the non-exchange wallet and another 18.7 million are in the custody of the exchange and may provide collateral services. This is a compelling, serviceable addressable market, and a key goal of the incentive plan is to maximize web engagement by turning these wallets into active validators.

Ethereum 2.0 offers a much lower reward for security than Ethereum 1.0. Using the current beacon chain specification and the required 15.5 million ETH pledges (13.8%), we estimate an annual network inflation rate of 0.55%, well below ethereum 1.0's current annual inflation rate of 4%-4.5%.

Network security depends heavily on THE price stability of ETH. With regard to the economic stability and security of Ethereum 2.0, our primary concern is the resilience of Ethereum 2.0 at low ETH prices. Coupled with the ability of the adversary to rapidly expand its attacks, we consider this a matter of concern.

Lack of liquidity in phases 0 and 1 can lead to unpredictability and centralization. Given the lack of a two-way bridge between Ethereum 1.0 and Ethereum 2.0 and the lack of trading capacity in phases 0 and 1, we expect derivatives and centralized secondary trading markets. The use of these platforms by highly centralized verifiers creates centralized risk and unpredictability.

Beware of derivatives attacks. The Ethereum ecosystem is growing rapidly, as is ETH as an asset class, the number of options is increasing and unique financial instruments such as "lightning loans" can be exploited maliciously. Given this momentum, derivatives could become the preferred route of attack for counterparties.

Advice:

Increase the basic reward coefficient to at least 128: We believe that for the sake of network security, it is reasonable to increase the payment, and in the current case of the basic reward factor of 64, network payment security is not enough. Caution should be exercised in the phased migration to proof of Interest (PoS).

Explore a more dynamic approach to changing the reward in the event of an impact (such as ETH price collapse) (i.e., explore the implementation of the safety net). We suggest exploring a more dynamic approach to adjust the reward or change the basic reward coefficient in the case of network shock. This may include the use of threshold triggers, step functions, or functions directly related to the ETH price.

For complete disclosure, seeThe original report.

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