As Ethereum continues to lay the groundwork for its highly anticipated transition to Proof-of-Stake (PoS), the network reached a major milestone on Tuesday with the launch of the Beacon Chain on the Ropsten testnet.
The Beacon Chain is a proof-of-stake network that runs in parallel with Ethereum's main proof-of-work network. It serves as a kind of training ground for Ethereum's upcoming change to its consensus mechanisms, which will "merge" the two chains into a single PoS network (hence "the merge").
Developers expect the update to reduce network energy consumption by 99% and help Ethereum scale. According to the latest estimates from Ethereum co-founder Vitalik Buterin, the much-delayed merger is currently scheduled for sometime in August.
Ropsten, Ethereum's longest-running PoW test network, is used by developers who want to experiment with and test new smart contracts.
The launch of the PoS beacon chain on Ethereum's oldest testnet sets the stage for what Ethereum core developer Tim Beiko calls the "first dress rehearsal" for the merge.
Within the next few weeks, Ropsten will undergo a merge identical to the merge that will eventually take place on the main Ethereum network. This will be followed by additional merges on other Ethereum test networks.
If these tests are successful, it would be the best sign yet that the merge is finally around the corner.
A hiccup in the beacon chain
Ethereum may finally be in the home stretch of its race (or jog) toward merge, but a security issue last week dubbed "reorg" briefly called the network's readiness into question. While the incident did not have serious consequences for users, it did highlight the complexities of running a network without centralized control.
Blockchains work by organizing transactions into a series of individual "blocks. The blocks are "proposed" to the network by a distributed community of workers - so-called "miners" in the case of proof-of-work networks or "validators" in the case of proof-of-stake networks like the Beacon Chain.
When enough workers conclude that a particular block is valid - that is, it contains only legitimate transactions - that block is added to the chain, and the process repeats.
Reorgs occur when some of the validators (or miners) on a network have a different opinion about which block was last added to the blockchain. This leads to a situation where the network branches into two parallel chains, each adding new blocks in parallel with the other.
Ethereum's most recent "reorganization" took place on the Beacon Chain. Although users can "deploy" Ether to become validators on the Beacon Chain, the chain will not process user transactions until it merges with the main Ethereum network. For this reason, the incident did not have a significant impact on users.
Reorgs can happen for a variety of reasons. In this case, some beacon chain validators used updated software that allowed them to process blocks faster than other validators. This caused some confusion among validators about which blocks had been added to the chain, leading to a brief split in the network.
Eventually, the validators agreed on one "correct" chain and abandoned the other. The discrepancy was quickly resolved - but only after seven blocks had already been added to the rogue offshoot of the beacon chain.
Once the validators agreed on the correct chain, everything went as usual: new blocks were issued on the correct, canonical chain, and any transactions that ended up on the other chain were relegated to new blocks.
What's the harm in that?
No harm, no foul, right? Not so fast. Reorgs can be exploited by malicious actors to engage in malicious activity such as double spending. They can also cause transactions to be rejected, which is a major annoyance for users. Blockchains actively try to avoid reorgs, and last week's Beacon Chain reorg was the longest Ethereum has experienced in years.
Fortunately, last week's reorg doesn't seem to have meant much for Ethereum in the long run. Had all validators updated their client software as recommended (as will be required at the time of the merge), the reorg kerfuffle would not have happened at all.
Nonetheless, the incident was a stark reminder of what is at stake if the Ethereum merge goes awry. With so many participants expected to participate as validators in the Ethereum proof-of-stake chain, the incident also underscored the coordination issues facing the Ethereum core development team as it works to deploy an update to thousands of individual network operators.
Pulse Check
The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information on the metrics listed in this section, see our 101 Explanations of Eth 2.0 Metrics.
Disclaimer: All profits from CoinDesk's Eth 2.0 staking venture will be donated to a charity of the company's choice once transfers are possible on the network.
Validated Stakes
Uniswap has processed more than $1 trillion in trading volume.
- WHY IT MATTERS: Uniswap has the largest volume among decentralized exchanges. While the centralized exchange Binance has a trading volume of nearly $15 billion every 24 hours, Uniswap has only $1 billion. Uniswap has seen a $500 billion increase in trading volume since Q4 2021 and is used by more than 83% of DeFi users. In a tweet, Uniswap Labs CEO Hayden Adams said he "never expected Uniswap to grow the way it has." Read more here.
Wall Street doesn't want the Fed to launch its own digital dollar.
- WHY IT MATTERS: Wall Street bankers argue that the Federal Reserve's introduction of its own digital dollar could shake the foundations of banking and hurt consumers. In a letter, the American Bankers Association pointed out that a possible central bank digital currency would mean that "deposits, which account for 71% of bank funding, are at risk of migrating to the Federal Reserve." Read more here.
Polkadot adds Lido liquid staking to its blockchain network.
- WHY IT MATTERS: Polkadot's Moonbeam, a connectivity layer between the Ethereum blockchain and services built on Polkadot, works in tandem with derivatives staking platform Lido. The integration allows DOT holders to deploy their assets in the form of xcDOT (cross-chain DOT) and receive stDOT (staked DOT) in return. With stDOT, holders not only support the proof-of-stake network, but also get the opportunity to earn additional revenue in decentralized finance (DeFi). Read more here.
Binance has registered Binance Italy as a virtual asset service provider.
- WHY IT MATTERS: As recently as last year, Binance Group was not authorized to provide investment services and was not allowed to offer new futures and derivatives positions to Italian citizens. Following its recent authorization by Italian regulator Organismo Agenti e Mediatori, which manages lists of financial agents, Binance can now offer crypto services in Italy, signaling its recent foray into the European market. Read more here.
PoolTogether, a DeFi startup, is using non-fungible tokens (NFTs) to crowdfund its legal defense against a lawsuit filed by a former employee of Elizabeth Warren.
- WHY IT MATTERS: PoolTogether is an app-based, no-loss savings game where users can win prizes for depositing funds on the platform using DeFi protocols. Joe Kent, a former staffer for Senator Elizabeth Warren (D., Massachusetts), sued PoolTogether last October for alleged violations of New York state gambling laws. Funds from the company's "Pooly" NFT collection will help PoolTogether Inc. "defend itself against the class action lawsuit," according to the company's website. Read more here.
Fact collection of the week
Open communication
Valid Points incorporates information and data about CoinDesk's own Ethereum validator into its weekly analysis. All profits from this staking project will be donated to a charity of our choice once transfers are activated on the network. For a full overview of the project, please see our announcement post.
You can check the CoinDesk Eth 2.0 validator activity in real time via our public validator key, which is:
0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.
Search for it on any Eth 2.0 block explorer page.