One Year of the Ethereum Beacon Chain
Dec 22, 2021 - 6 min read
In conversation with Ian Simpson
Michael Gauckler is Head Product Development at Bitcoin Suisse.
Gzim Zimberi is Product Owner Staking at Bitcoin Suisse.
1. Let’s start with a recap – why should we even be talking about the Ethereum Beacon Chain right now? What happened and what does (or did) it really mean for Ethereum?
The Ethereum blockchain network is currently in a transition from proof-of-work (PoW) to the proof-of-stake (PoS). This transition is very complex, includes various intermediate steps and takes months until all phases have been successfully completed. The first step was launching the beacon chain, which handles the consensus in PoS. Now preparations are underway for “the merge” to move Ethereum entirely to PoS, which brings many advantages. One of them is a reduction in energy consumption.
One could argue that this moves the network from places with plenty of cheap electric energy to places with plenty of crypto assets and hence closer to the Swiss Crypto Valley.
2. Bitcoin Suisse played a part in the launch of the Beacon Chain – how significant was that?
The Beacon chain serves as the basis to secure and stabilize the blockchain. To participate in staking, one is required to set up and operate so-called validators, i.e., servers running Ethereum blockchain software. In addition, exactly 32 ETH tokens must be locked in these validators. For the Beacon Chain genesis, i.e., the launch of the new Ethereum Blockchain, 16,384 validators were needed. This happened on 27 November, which means that the Beacon Chain started producing blocks on 1 December 2020. Bitcoin Suisse participated in the launch of the Beacon chain genesis and at the time provided 17% of the locked assets needed for the launch of the chain. Block number two was proposed to the blockchain by Bitcoin Suisse.
The trust by the ETH token holders and the crypto community into this launch was tremendous: for the launch to happen, tokens valued at 320mUSD (16’384 * 32 ETH * 612 USD) needed to be locked for an unknown length of time, because it is unknown by when the functionality to transfer tokens will become available.
3. How has the Beacon Chain performed over the last year? What have you observed?
How do you define performance? The beacon chain so far only had “technical transactions”, i.e., there are no transactions moving value from one account to another. Only transactions required to operate the chain have happened so far.
Still the average reward rate of 5.5% is seen as reward for participating in this network and locking the funds on staking validators. However, this reward rate is created by a dilution mechanism, i.e., only the ETH that are staked maintain their relative share of the total supply whereas the non-staked ETH are diluted.
Such a change in economic incentives is an experiment. And this experiment has certainly proven to be successful in the sense that the trust has further increased as can be seen by the staking participation, which has grown from 16k validators at launch to 270k validators as of December 2021.
4. Have there been any anomalies or events observed on the Beacon Chain over the last year that are of particular interest?
We haven’t observed any anomalies or developments which we deem worrisome. However, there is one interesting aspect about our Ethereum staking setup: As a distributed system the blockchain relies on diversification to create stability and robustness. Obviously, this relates to geographical decentralization and distribution of assets at stake. An aspect easily overlooked is a concentration in the software implementation: the most dominant validator software runs on around 60% of all validators. The data formats, interfaces and algorithms that need to be implement for a validator are well defined and there are multiple software implementations available. A robust network is based on multiple implementations of the protocol to ensure that a single software, through a bug or a particular interpretation of the protocol, can destabilize the network. Bitcoin Suisse intentionally runs a non-dominant version of the protocol implementation and therefore actively contributes to the diversification of validator software.
5. Now that the Beacon Chain has launched – and been running for a year – where do we go from here?
Looking at the Ethereum roadmap we see the merge which will establish PoS as the next step. We then expect that the Ethereum chain will transition from an execution layer to a consensus and data availability layer for which optimistic or zk-rollups will be the techniques that allow for scalability. Further along the roadmap we expect data sharding to add another level of scalability.
6. Some people have been skeptical that Ethereum can manage to make the transition to PoS – are there reasons to be concerned or not?
Ethereum is the first smart contract blockchain and it was originally built on PoW. In the meantime, we have seen multiple block chains which were designed as PoS from the ground up. Examples of this would be Solana or Avalanche, which also support smart contracts.
Like the first mover disadvantage described above, the Ethereum blockchain needs to change its design while millions of users are actively using it 24/7. We haven’t seen such a transition yet, but we believe that the team is able to deliver on the presented multi-year roadmap and with it addresses the main challenges, which we believe to be:
1. Continuous operation and stability during the entire upgrading process
2. Increasing transaction throughput
3. Maintaining robustness and decentralization
7. Bitcoin Suisse was very fast to bring a service to clients for Ethereum2 staking – what are some of the challenges (but also opportunities) that come with being such a “first mover”.
Operating a staking business in Switzerland certainly gives our clients a clear advantage over the staking businesses run by competitors domiciled in less reputable and often changing jurisdictions. However, even in Switzerland the specific blockchain regulations are very young: the Distributed Ledger Technology Act was passed by parliament in September of last year and came into effect first of February, respectively first of August, of this year. While this law clarifies certain aspects, key questions relating to staking products remain unclear.
As a first mover, we had the advantage of attracting many clients and many of the early crypto adopters with their significant amounts of assets to our staking products.
The uncertainty of the regulatory environment demands that we are able to quickly adapt our products which is obviously more difficult for us as first movers with hundreds of clients and billions in AuM than for a follower that can observe and learn before launching and scaling a product.
8. The Beacon Chain is obviously part of a huge transition in Ethereum, from PoW to PoS Like many things in the blockchain space, it is new territory. How does Bitcoin Suisse work with such new and rapidly developing technology?
The blockchain space is indeed moving at a tremendous speed. The entry barriers for the brightest and most creative brains to participate, be creative and also earn a living are very low. There is no formal qualifications you can have or need to have to master the world of blockchains and crypto. There are no limitations based on your gender, sex or age. As a company we are well aware of the situation and must not only create equivalent opportunities for talent joining our organisation but on top of this offer ”something more”. This “something” can certainly be found in the company’s culture, team spirit and concentration of talent.
9. On a more personal level – Gzim, you recently joined Bitcoin Suisse from a major Swiss insurance company. But you were personally working with blockchain for quite some time – how does that translate into your new role at Bitcoin Suisse?
Viewed from the outside, blockchain is a very complex construct and is developing at an extraordinarily rapid pace. On the other hand, it is a freely accessible environment that allows any person to explore it in depth. I have a strong ‘learner-attitude’ and am very keen on tricky, digital and especially disruptive technologies and new challenges. I have personally become very familiar with blockchain technology by reading and trying it out and testing it myself. On the other hand, I was able to gain a lot of professional experience in corporate business and learned how to work in interdisciplinary teams in a structured and agile way to get projects to the ground. Together with my academic degree, this was the perfect combination to join Bitcoin Suisse and quickly get into the day-to-day business, take the lead for the staking business, and set up a clear vision. With the help of my extremely dedicated and efficient team and the thoroughly professional management, we can do a lot more at Bitcoin Suisse.
10. And for Michael – have you ever developed products as interesting and innovative as here at Bitcoin Suisse?
Thank you for the charming question. Indeed, I haven’t -despite having developed interesting products at the intersection of technology and finance in the past. I could not have dreamt that finance and technology join at such a fundamental level like we are seeing right now with blockchain technology and the resulting crypto currencies. Fortunately, we are still at the beginning, maybe like the internet was in 1997, and there will many more products and innovation ahead of us.