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The Future of Ethereum Protocol

The Future of Ethereum Protocol Features

Ethereum continues to be one of the most talked-about digital assets in the crypto space. This is because of the aggressive developments that the network has been doing in the past months. In detail, the Ethereum 2 protocol is one of the hottest topics right now in the crypto world. Furthermore, this upgrade that ETH is constructing promises a lot of great things, including energy and gas issues in the network.

It is these achievements that made Ethereum notable in the crypto world. As a result, the crypto community’s eagerness to know more about ETH upgrades continues to rise. In addition, there are firms in the crypto world that can have the chance to talk directly with the ETH tech team. For instance, a podcast by Into the Bytecode showcases a conversation between ETH1 and ETH2 lead coordinators Tim Beiko and Danny Ryan.

In this article, we will discuss more about the future of the Ethereum protocol and its users’ benefits.

What is Merge

By now, we all know that Ethereum is on its way to completing its ETH2 upgrade, and it is massive. In fact, the ETH2 is composed of three separate phases: The Beacon Chain, The Merge, and The Shard Chains. In this article, we will focus more on the second phase, which is the Merge upgrade.

The Merge upgrade is the phase where the Ethereum chain will officially switch to the Beacon Chain as its consensus mechanism. Furthermore, this upgrade will enable staking on the entire network. In other words, Merge will swap-out the current proof-of-work (PoW) consensus mechanism with a more eco-friendly proof-of-stake (PoS) consensus mechanism.

ethereum staking

In terms of energy consumption, the Merge upgrade might find a solution to end this problem. For instance, Ethereum’s proof-of-work energy consumption today is almost equivalent to the energy used by the country of Denmark. However, with the ETH2 upgrade, the network’s energy consumption will be reduced by at least 99.95%. Based on the graph above, the current PoW energy consumption is like the Leaning Tower of Pisa, while the ETH2 PoS would be a little as a .025m screw.

As of the launch date of Merge, there is still no exact date.

What is Mev

Miner Extractable Value (MEV) or Maximal Extractable Value is also one of the hottest topics in the Ethereum network. In fact, MEV plays an important role in ETH2. In detail, the ETH2 validators stand to earn as much as 1.93 ETH per year. This is 70.9% more than they are currently earning from network rewards alone, with the addition of MEV income.

Furthermore, MEV can only be extracted by validators who are proposing blocks. Through this,  the income between validators with block proposal activities versus validators with other responsibilities will increase greatly. Indeed, ETH2 brings many changes to the ETH network.

Last but not least, we will discuss the staking derivatives and its benefits to their users.

Staking Derivatives Explained

From the podcast, Beiko and Ryan also discussed staking — staking operators, staking derivatives, and the like. To understand deeply, allow us to take you through this concept step by step.

In the crypto space, you will encounter primary assets and staking rewards. To put it simply, staking rewards refers to the ‘yields’ or actual shares that a network grants to its validators. In contrast with this, primary assets are the native assets that capitalize and coordinate with PoS Networks ( e.g. XTZ, ATOM)

These two are important to note in order to comprehend the concept of staking derivatives. Going further, we can now differentiate between crypto derivatives and staking derivatives. Crypto derivatives are simply the products directly linked to primary assets. On the other hand, staking derivatives are the products linked to the amount of staking rewards. More so, these awards are distributed to network validators and participants by the network.

Classification of Staking Derivatives

There are three classifications of staking derivatives. Staking derivatives by product, domain, and nativeness.

1. Staking derivatives by product

This refers to legacy products and staking crypto primitives.

  • Legacy Products refer to those products that the financial market lends.
        Example: swaps, futures, options, repo, etc.
  • Staking Crypto Primitives are the variety of products that aim to evade a certain ‘risk’, which is included in the PoS protocol.
         Example: “on-chain DAO insurance product for downtime slashing on blockchain”

2. Staking derivatives by domain.

To note, there are economic risks related to staking. These risks have a multi-dimensional form. Stakeholders could experience losses depending on the interaction on the crypto network. Therefore, each domain has a list of instruments to avoid such losses. Namely: Security and Operability,  Economics, Governance, Network Peculiarities.

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3. Staking derivatives by ‘nativeness’

There are three main categories in this.

  • Ad-hoc risk / Ad-hoc network – It is one of the easiest products to create and adopt. Also, this protects one single event on a single network.
         Example: an ETH on-chain futures on gas return
  • Cross risks / Ad-hoc network – This hedges multiple economic risks in a network.
        Example: “a short position in a certain parachain lot future”
  • Cross risks / Cross networks – This has the highest level of complexity and sophistication.
       Example: a derivative hedging a staking reward in a network while selling the right to perform in another network.

Conclusion

To sum it up, the crypto market, even in its culmination stage, is still transforming. The concept of staking derivatives may even be futuristic but some experts say “staking is the quiet giant of the crypto yield”. In addition, when Ethereum 2.0 launched the Beacon chain last year, staking became more popular in the crypto space.

Furthermore, now that MEV is on ETH 2.0 and the Merge is in progress, the Ethereum community keeps a close watch. Some are confident that this will bring drastic changes to the entire network. To add on, experts say this can maximize the returns for holders and node operators while also broadening Ethereum’s anticipated success.

So, is this the future of Ethereum Protocol? We are yet to find out but for now, we can watch as the Merge ensues.

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Cho Amisola is a passionate writer for both creative writing and digital publishing. She’s been featured and published in both areas and is now focusing on blockchain news.