Or, how we can possibly move a multi-billion dollar public network, used by thousands of developers and hundreds of projects, smoothly to a new chain.

Balance is a tricky thing….

Everyone is excited about Ethereum 2.0 (or Serenity, as Vitalik prefers). There are already validator testnets being run by the multiple teams working on the next iteration of the Ethereum network, and talk has already started about the “Road to #Interop”. This means a public testnet for the Ethereum of tomorrow gets closer by the day. How exciting! It also means we are getting closer to needing an answer to a fundamental question:

How much is Ether on the Beacon Chain worth?

At the outset, this seems like a pretty simple question. Isn’t it just worth the same as Ether on the current mainnet? I’m inclined to argue that in reality this is not a very simple question, and if we don’t take steps to ensure the value aligns with what we currently have we may end up in a scenario of market confusion and possibly even Ether devaluation.

Ethereum 2.0, unlike the current mainnet, has an issuance schedule instead of a block reward (the current block reward is 2 Ether per block). This means that the issuance of new Ether on the new chain isn’t tied to how many blocks are published, but rather how much Ether is backing those blocks. This seems a little strange, but we can bound this for simplicity’s sake: Ethereum 2.0 will issue between 100k to 2m new Ether a year to pay for Validators to secure the chain. This is down more than 50% from the current mainnet issuance of approximately 4.2m new Ether a year.

If Ethereum derives its security primarily from incentivization through issuance, then we must ensure the value of both chains’ tokens align.

You might be asking yourself how we connect the two together. We want that! We want to make it clear to outsiders and investors that purchasing ETH now is purchasing ETH for the future, and that upgrading will account for both the present and the future of Ethereum in the value of the Ether token. We have a solution for this, and that is to construct a bridge between the current mainnet and the Beacon Chain, when it becomes active OR is launched.

The Bridge

First, a little bit about the Bridge. This is how the Bridge will work:

Users who want to be Validators will deposit Ether into the Bridge contract that is deployed on the current mainnet at a known address. The 2.0 Beacon chain mainnet will process deposits for those Users (after a delay to ensure no “double spends” occur) and make them Validators. The Validators will validate blocks on the Beacon chain, earning rewards solely through new issuance (at least until transactions are allowed).

Once the Beacon Chain is launched, the community can activate a new tool, often called the finality gadget. This works by having the Beacon chain store small amounts of data pulled from past blocks in the legacy chain. Data is signed and voted on by the Beacon chain validators, which means that current Ethereum mainnet will be economically finalized with higher security than what we currently have. Cool right?

Economic finalisation of blocks enabled by the Beacon chain will provide greater protection against deep reorganisations. This protection against deep reorgs is one of the reasons why issuance must be so high on Proof of Work chains. If the rewards were too low, we’d have a larger incentive for miners to revert or double-spend transactions all the time, and we’d have to wait longer and longer to ensure our transactions were final and considered settled. This issuance can be lowered over time as the token’s value grows, but not too much otherwise we risk rampant reorgs destroying the value of the network.

With our new “Finality Gadget” toy however, we can ensure economic finalization of transactions at much lower cost because there is negative incentive at stake. This savings can then be realized by reducing the issuance on the current mainnet, since we no longer need the deep reorg protection that higher issuance provides. Hooray! Lower inflation! Much value! Wow!

HANG ON A SECOND!

That’s all well and good, but how are the Validators getting paid? If the Beacon chain is creating new tokens as rewards, where do they get their value? How does this all work in practice? What value do my tokens have?