The Data Behind Ethereum 2.0

The Data Behind Ethereum 2.0

Ethereum 2.0 is a set of distinct upgrades with different ship dates. It is best to think about it as a process that attempts to scale Ethereum, while maintaining security, decentralization, and sustainability. 

What is Ethereum 2.0?

Ethereum 2.0 is a set of distinct upgrades with different ship dates. It is best to think about it as a process that attempts to scale Ethereum, while maintaining security, decentralization, and sustainability. 

As of today, the major milestones of Ethereum 2.0 include:

  1. The launch of the Beacon Chain which has been live since December 2020
  2. The merge of the Beacon Chain into mainnet, which marks Ethereum’s transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism
  3. The implementation of shard chains, due sometime in 2022

PoS blockchains are designed to feature greater decentralization. In Proof of Work, users would need computational resources (and some technical capability) to generate blocks and verify transactions. In Proof of Stake, anyone owning above a threshold level of ETH can participate in this process. This encourages more nodes verifying transactions on the Ethereum network, leading to reduced risk of a majority attack. 

The Ethereum 2.0 deposit contract has been live since November last year. Ethereum addresses intending to stake Ethereum must deposit at least 32 ETH which will be locked up until the Beacon Chain is merged. This presents a barrier to stakers who have less than 32 ETH or prefer to hold liquid assets. Hence, some users may prefer to stake ETH through a centralized entity like Binance and Kraken, or liquid staking protocols like Lido and Ankr

Decentralization in Ethereum Stake

Interested in tracking ETH 2.0 staking deposits? Check out our publicly available ETH2 deposit dashboard!

While centralized entities like Kraken and Binance continue to command a significant share of the Ethereum 2.0 stake, they appear to be losing share to alternative staking solutions like Lido Finance and non-entities. Just recently, the share of the top 4 entities (Lido, Kraken, Binance, Staked.us) stake in the deposit contract totalled to around 36.6%.

The Nakamoto Coefficient is a statistic used to quantify the extent of decentralization in various blockchains, and represents the number of operators who can collude to shut down a network. 

Assuming a 34% threshold, that is estimated to stand at 12 today, given that Lido has 9 Ethereum nodes. Assuming a 51% threshold, that number should be much bigger.

Still, the rise of Lido marks a vast improvement in the distribution of network control. On 1st March 2021, Kraken (14%), Staked.us (8.2%), Binance (12.9%) collectively controlled over 34% of total stake. 

The Herfindahl–Hirschman Index (HHI) was used by Vitalik alongside the Nakamoto Coefficient for measuring decentralization. We can calculate HHI by squaring the share of each source address in the total stake of Ethereum 2.0, and summing the resulting numbers. 


Though it is clearly not the case that all deposit addresses are independent, the trend does indicate a gradual decrease of the HHI over time. Still, it’s important to remind ourselves that centralization risks exist on every layer of the blockchain technology stack. According to data from Ethernodes, more than 21% of Ethereum nodes run on Amazon Web Services.

Profiling Deposit Activity

Number of deposit counts by date, starting 1st November.

Interest in staking for Ethereum 2.0 spiked during November 2020, hitting a peak of 4,788 daily deposits before dying down through early 2021. During the first quarter of 2021, peak daily deposits never exceeded 1,500. Activity began heating up in May 2021. 

Deposit activity is curiously irregular, and doesn't seem to correlate with Ethereum prices at all. Number of deposits began falling from 5th May onwards, just as Ethereum was inching towards its high of $4,000 USD. The number of deposits then rose significantly from 15th of May to 

June as the value of Ethereum almost halved. After that, we see odd spikes in deposit counts on various days in June. 


Slicing the data by day of week and hour of day (UTC) might reveal a thing or two about the geographical concentration of ETH 2.0 stakers. The unevenness of the distributions deserves a closer study.

Conclusion

Ethereum 2.0 represents a marked change in the security and economic model of Ethereum, with multiple ramifications that could change participant behaviour. For one, Ethereum transforms into an inherently yield-generating asset. Lido, for example, offers 5.4% APR on staked Ethereum, far higher than the interest offered on money markets like Compound and Aave. 

As both retail and institutional interest in staking for Ethereum 2.0 continue to rise, controversy has been raised regarding the centralization of Ethereum stake around Staking-as-a-service providers and custodians. This is not a trivial issue, as concentration of stake within large providers may destabilize the network and incentivize bad behaviour among nodes. Non-technical users looking to choose a provider should and must factor this into their decision. Every deposit pushes the chain towards or away from decentralization.

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Disclaimer

The authors of this content and members of Nansen may be participating or invested in some of the protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Nansen does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Nansen at any time without notice. Nansen accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.

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