During the second annual global DeFi summit, Rivet founder and CXO Greg Lang moderated a session on Ethereum 2.0, where speakers discussed the updates expected and the benefits and risks they bring.
Bankless founder David Hoffman began defining some of the key updates expected with Ethereum 2.0. He says the upgrade will “increase access to the Ethereum protocol on two fronts”.
Importance of proof of work
First, it will provide a more accessible consensus mechanism. While the current proof-of-work is very competitive and resource-intensive, the proof-of-stake will bring back the consensus on “small consumer laptops”. This is beneficial to get more people involved in security and decentralization. Next, he mentioned sharding, which Hoffman said scales how much trusted block space there is, allowing more people to use it at cheaper rates.
Alex Wearn, CEO of IDEX, is following up and emphasizing the importance of proof-of-stakes. With proof-of-work, the investment in their hardware and the reward of Bitcoin encourages miners to create valid blocks. With the proof-of-stake, instead of capital and energy, users are now investing staked assets that serve as a form of deposit. Wearn compares this to a deposit deposited when renting an apartment, which is forfeited if the tenant acts irresponsibly.
Benefits and Risks
With the changes expected from the Ethereum 2.0 upgrade, there are certainly many benefits, but the speakers at the session also highlighted some potential risks. First, Wearn highlighted that because of the lower transaction costs, more people can use Ethereum.
He points out that most of Ethereum’s success can be attributed to decentralized finance (DeFi) and non-fungible tokens (NFTs). However, both tend to generate higher quality transactions. Users with smaller amounts of money are usually priced out due to the high transaction fees. He describes the upgrade as a “dial-up-to-broadband moment” and hopes that more people who can use Ethereum will lead to new types of applications.
However, one of the biggest risks of moving to a proof-of-stake consensus mechanism is that governance can consolidate in the hands of a few who accumulate the most Ethereum. Alex Gluchowski, CEO of Matter Labs, said that Ethereum distribution is one of the most decentralized Layer1 protocols as it stands. However, he noted that such wealth accumulation would become a security concern.
Meanwhile, Wearn also pointed out that exchanges are becoming validators too. This means that involvement in them could potentially become a centralization risk. For example, if influenced by outside forces, many less tech-savvy users would have difficulty moving their funds elsewhere.
Hoffman also noted that liquidity pools could offer users “redeemable notes” representing their deployed tokens. With many DeFi protocols doing this, users would likely focus on what turns out to be the most fluid. Hoffman said this could potentially lead to liquidity centralization as well.
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