We are at the forefront of PoS blockchain research. We work with carefully selected networks and help them launch and operate seamlessly. Our technical input has been vital in adding value to blockchains such as Solana, Cosmos and Ethereum.
The Chorus One infrastructure and surrounding processes are highly specialized to guarantee reliable and fault tolerant operation of our nodes as well as safekeeping of associated cryptographic key material.
Both institutional and retail investors trust our staking services. Our engineers work around the clock to ensure your stake is safe. Moreover, we safeguard all investments with our delegator protection pool of $250k, refreshed each quarter.
We keep our community updated through regular posts, engaging podcast episodes, and in-depth research articles. We provide 24x7 support to our delegators via Telegram, email and chat.
Frequently Asked Questions
Will Eth 2.0 be a new token?
Is Ethereum 2.0 a new cryptocurrency? Ethereum 2.0 is not a new coin, and your holdings of ETH will remain unchanged. In terms of Ethereum vs Ethereum 2.0, Eth2 is merely an improvement to the Ethereum blockchain.
What is Ethereum 2.0?
Ethereum 2.0 is a new version of the Ethereum blockchain that will employ staking to validate transactions using a proof of stake consensus process. The staking method in Ethereum 2.0 will replace the proof of work approach, in which cryptocurrency miners utilize powerful computers to fulfill difficult mathematical computations known as hashes. In proof of stake validators secure the network, in proof of work, miners.
Are Ethereum transactions anonymous?
The blockchain is a public record of every transaction made by every address. An address, on the other hand, is just a number; it does not reveal anything about the identity of the person using it, like a street address can. The Ethereum user is safe as long as this number is never tied to an identity.
What is Ethereum?
Ethereum is modeled after some of the design principles of Bitcoin, the world's first decentralized cryptocurrency, but with numerous improvements. On a peer-to-peer shared record, a decentralized cryptocurrency maintains track of all transactions by all addresses. The Blockchain divides the record of transactions into blocks, each of which is cryptographically linked to the preceding one. Smart Contracts, code scripts recorded on the blockchain that run when certain circumstances are satisfied, are one of Ethereum's breakthroughs.
The Shapella Upgrade was completed in April, marking a significant event for both Ethereum and the entire crypto industry. This upgrade combined changes to both the Execution Layer (Shanghai upgrade) and Consensus Layer (Capella upgrade), allowing for the withdrawal of staked ETH and any accumulated staking rewards.
Shapella was a major stride towards greater flexibility and accessibility in staking on the Ethereum network. With the ability to withdraw staked ETH and rewards, the pivotal event galvanized institutional interest in the second-largest cryptocurrency by market value.
In this article, we’ll explore how the Shapella upgrade has sparked increasing interest in ETH staking among institutional investors, and why this trend is expected to continue.
A look back…
Let’s start by examining how we arrived at the current situation and why withdrawals were not enabled during the Ethereum transition from Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism.
The Ethereum network transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism in two stages, starting with the launch of the Beacon Chain, followed by the Merge. During this time, staking withdrawals were not enabled to ensure network security and reduce the risk of failure. Validators were able to exit, but customers could not unstake their staked ETH.
Despite knowing they would be unable to withdraw their ETH for some time, the initial network participants contributed millions of ETH to secure the Ethereum PoS network.
To ensure the upgrade went smoothly, it was implemented without any downtime. And the focus was solely on making this transition as seamlessly as possible. As a result, no other features or changes were added at that time. The goal was to minimize the chances of anything going wrong and to keep the Ethereum network running smoothly for all its users. ETH withdrawals were not enabled, until Shapella.
Why Institutions hesitated to stake ETH before Shapella
Prior to Shapella, staking ETH involved significant risks due to uncertainty surrounding withdrawals. This made institutions hesitant to stake their assets, as they needed quick access to them if necessary.
Another reason for the lack of institutional participation in ETH staking was the general unclear regulatory stance regarding digital assets globally.
For instance, in late 2021, the SEC sent Kraken, one of the largest US exchanges, a Wells notice regarding its staking services. According to the SEC, Kraken's staking service constituted a security offering and required registration with the Commission. Kraken disagreed with the SEC's position and argued that staking fell outside its jurisdiction and was not a security offering. Despite its stance, Kraken suspended its staking services for US customers due to concerns over the regulatory environment and uncertainty surrounding the SEC's position on staking.
As a result, institutions feared that what happened to Kraken would apply to all staking providers, although Kraken's situation was a one-off and would not affect someone who staked their assets through a trusted non-custodial staking provider like Chorus One.
Here's why a situation like this is unlikely to happen to a non- custodial staking provider or validator like Chorus One:
Rewards are determined by the network: Unlike centralized exchanges, staking with a provider like Chorus One ensures that you receive rewards that are determined dynamically by the network whereas some custodial staking providers may not fully disclose information about network rewards and the rewards delegated to users.
Users are always in complete control of their funds: Unlike custodial exchanges, where users’ private key is held by a third party, non-custodial staking providers allow you to own your keys and have full control over them. Thus, your funds are safe with you, even in the case of an unforeseen event affecting your staking provider.
No co-mingling of user funds: Another advantage of staking with a trusted staking provider or validator is that your funds are not mingled with other user's funds or with the staking provider's own funds. This ensures that your assets are always secure and accessible to you. With a non-custodial staking provider like Chorus One, you retain full control over your assets at all times.
Validators have a deep understanding of the networks they support: Validators are responsible for securing the network and ensuring its smooth operation. To do this, they must have a deep understanding of the network's architecture, consensus mechanism, and other technical aspects. Validators like Chorus One have extensive experience supporting various networks and hence are able to provide high-quality validation services.
The Silver Lining: Why ETH staking is more appealing to Institutions post-Upgrade
Since Shapella, the level of staking is on an upwards trajectory, despite shaky grounds.
The amount of ETH being staked has been steadily increasing, with large amounts of capital being locked up to earn 4 to 5% yields in ETH.
At the time of writing, there are approximately 19M staked ETH, and deposits continue to surpass withdrawals.
The growing amount of staked ETH is a promising indicator for the adoption and security of Ethereum. Now that yields are available, institutional investors are likely to be even more interested in staking ETH. In fact, there has already been a strong influx of institutional interest in ETH futures following the upgrade, indicating positive staking momentum among larger investors who are looking to increase their revenue.
Additionally, the first week of May 2023 saw a surge in staked ETH deposits as investors raced to stake their tokens with validators. According to Nansen, over 200,000 ETH was deposited into the network, marking the first time since Shapella that deposits outpaced withdrawals. This recent surge has resulted in over 19 million ETH being locked for staking, which accounts for about 15% of the total circulating supply of ether.
Shapella benefits institutions by providing them with the opportunity to get liquidity on their staked ETH and earn a yield of 4% or more while participating in securing the network. It essentially derisks staking, which increases the intrinsic value of the asset and makes Ethereum even more attractive to institutions. This reduction in perceived risks associated with staking makes it more likely for risk-averse holders to consider staking, which could bring more institutional investors to Ethereum staking.
In conclusion, the Shapella upgrade sparked significant positive changes to the Ethereum network - particularly in terms of staking - and paved a secure way for institutions to get involved in supporting the growth of the network.
As a leading staking provider, Chorus One is dedicated to making the staking process easier, secure, and compliant for our customers. Our multi-chain staking solution, OPUS, is safe, secure, and compliant, making it easy for institutions to start staking with a few simple clicks. Learn more about OPUS here and contact us at email@example.com to learn more about how we can help you get started.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
Withdrawals are imminent. This March, Ethereum will be undergoing its first hard fork of the year, bringing much anticipated withdrawals to the mainnet. As developers move into the final pre-launch sequence, by upgrading the public testnets (first Sepolia, then Goerli), we wanted to get you up to speed on this coming Shapella (Shanghai + Capella) upgrade.
1. Withdrawals mark the end of the Proof-of-Stake transition cycle
If you look at Ethereum’s Beacon Chain today, the way to participate as a validator means you must send at least 32 ETH to the Deposit Contract, or “stake” your ETH. The Beacon Chain follows the contract, querying for changes so that it can process any new deposits. The entire validator lifecycle consists of different states that determine what you can or can’t do as part of the network.
Ethereum only allows a small number of validators to start or stop validating at a time to maintain the stability of the validator set. Once you are part of the “Active” set, you start accruing rewards by voting (”attesting”) every six minutes with the occasional proposal. The majority of these rewards are added to the balance of the validator.
At any point, you might want to stop validating and take out your ETH, in which case you would want to join the voluntary exit queue. On the other hand, you might have been a validator for some time and want to utilize the excess ETH, considering the average validator balance is ~34 ETH.
Withdrawals close the validator cycle and mark the end of the PoS transition that started with the Merge in September 2022. Before then, the two chains were unaware of each other. Specifically, the Execution Layer didn’t communicate at all with the Beacon Chain until they merged. Withdrawals stand opposite to the deposit process, crediting your ETH from the Beacon Chain on the Execution Layer to finally close the cycle.
2. About the Ethereum withdrawal process
There are 2 requirements for withdrawals to be processed:
You must have a 0x01 credential, which represents the Ethereum address where the ETH will be credited. If you don’t have this type of credential, you must sign a message to change it, which will take effect at the time of the fork.
You must have a balance above your 32 ETH (partial withdrawals), or have fully exited the validator according to the validator lifecycle (full withdrawals).
For every block, the network scans the validator set for the first 16 validators that satisfy those two requirements. Then, those withdrawals get processed as part of the block in a gasless transaction.
According to the most recent estimate, ~300,000 validators are on the old credentials, meaning the majority of validators will need to change them (it involves digging for those mnemonics created over 2 years ago). This change can only be done once.
Chorus One developed a tool called “eth-staking-smith” that enables the user to generate those signed messages and easily update their withdrawal address.
The process after that is fully automatic. Meaning, you don’t have to do anything else to start spending those rewards, they will be credited to the withdrawal address without your intervention. If all of those validators properly change their credentials, a complete run through the active validator set would take about 4 and a half days. Meaning, you can expect to receive your rewards to the withdrawal address in that cadence.
Please check the official ETH Withdrawals FAQ to learn more about withdrawal mechanics and enabling withdrawals for your validator.
However, the inability to withdraw staked assets on Ethereum has been a risk consideration that stakers had to make before committing to the task for the past years. Not anymore. This massive unlocking of liquidity is sure to make big waves in the coming months and impact the staking panorama of Ethereum. Staking has also made the news with the recent news of regulations in the United States. As a non-custodial staking provider, we continue to believe in this thesis.
With an increasing number of ETH being staked post-Merge, along with growing adoption of the Ethereum network and a rising ETH price, we believe that 2023 will be an even stronger year for Ethereum staking post-Shanghai. However, we must get ready for some changes.
The Shanghai Upgrade de-risks ETH staking as it improves liquidity and reduces lock-up requirements by initiating the withdrawal process, making it increasingly attractive to institutions wanting long-term bets on the blockchain ecosystem.
In terms of Liquid Staking Derivatives (”LSD”) you will be able to redeem them and unstake your ETH directly on the protocol. This means unlocked liquidity to compound, which might push the APY slightly. Some stakers might choose to migrate to other providers altogether.
Staked ETH held by the Deposit Contract and active validator counts continue to grow with new momentum after the Merge, and even pre-Shanghai where some narratives called for sell-pressure on ETH.
4. How Chorus One prepares for Withdrawals
We made our bet on the Ethereum staking ecosystem last year, when we finally unveiled OPUS: our API and Portal solution to significantly speed up institutional staking operations.
Since then, we have been working on many exciting features, including enabling MEV rewards, with more in the pipeline to be rolled out in the coming months. We plan to support withdrawals in our infrastructure as soon as it's safe after the upgrade, and we are working to create the simplest staking and unstaking process in the market for all kinds of institutional clients.
We have been testing this process and will continue to do so on the available testnets for increased security. We also provide a suite of options including the mentioned update of validator withdrawals addresses and a full Portal to consult all rewards accumulated.
Reach out to firstname.lastname@example.org to know more about how OPUS can help you start staking or offer staking to your customers with minimal setup.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 35+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
One of the most important events of 2022 in the crypto community was The Merge upgrade of the Ethereum protocol, which switched Ethereum from a Proof-of-Work legacy chain implementation to a Proof-of-Stake Beacon chain. It has proved that principal innovation is possible for the oldest and largest decentralized systems, without any disruption to the protocol users.
At Chorus One, we worked on securing next-generation Ethereum since the Beacon Chain took off in 2020, and we operate multiple thousands of validators on the mainnet today. Our new product OPUS — an Ethereum Validation-as-a-Service API — is designed to enable any organization and individual to run staking validator clients on Ethereum Beacon Chain, with a non-custodial, permission-less approach where we require customers to specify their own withdrawal and fee recipient addresses, so they remain in possession of both their stake funds and rewards. This post focuses on the technology implementation of validator keys provision and storage approach within our Validation-as-a-Service API product and shows off some challenges we faced and solutions we created in the process.
Ethereum Staking Keys
The Merge has introduced two new types of keys involved in securing the Ethereum chain, in addition to legacy chain wallet keys that are remaining unchanged within Beacon Chain . These keys are composed of the Signing (Validator) key pair and the Withdrawal key pair. In addition to new key functionality, the Signing key is also using a new cryptographic signature scheme, called BLS, which stands for Boneh–Lynn–Shacham. This means older key generation tools will not work for creating Signing keys. BLS signatures, specifically those over the BLS12–381 curve are used in Beacon chain block signatures and attestations. This makes it possible to aggregate multiple signatures and verify them in a single operation, which is an outstanding improvement in scalability .
Like most other Proof-Of-Stake blockchains, next-generation Ethereum depends on the functioning of validators for securing the transaction flow. Validators are members of the network who lock a portion of their Ethereum coins (with a minimum amount of 32 ETH) to become responsible for proposing new signed blocks of transactions, and verifying such signatures of other validators, which is called attesting. Normally, every Ethereum validator should attest signatures for a slot once per Ethereum epoch (around 6.4 minutes); and for every slot, in every epoch, one validator is pseudo-randomly chosen to produce a block of transactions to be attested by others. Validators are being rewarded for both block proposals and block attestations. The mechanism of signing the blocks and verifying the signatures of others relies on the Signing key pair. The verification mechanism works because every public part of a Signing key (Public Signing Key) is published on-chain, so every signature done with the private part of the Signing key (Private Signing Key) can be verified by every other validator. Despite having the power for creating blockchain content, the Signing keys can not be used to move any funds including staking funds, and they only listen for and sign the transaction content provided by the peering network of Ethereum nodes.
The Withdrawal key pair is neither used for blocks nor for attestations, but it has control over staked funds. After the Shanghai fork, withdrawals will be activated, which will enable the funds to be moved to an owner-controlled withdrawal address specified in the deposit contract. With EIP-4895 withdrawals will be enabled in a push-based fashion , such that funds that were previously locked on the consensus layer on depositing are automatically pushed to the execution layer as a system-level operation. This means users won’t have to pay any gas for a withdrawal transaction. For users who have specified a BLS withdrawal address in their deposit contract, they would need to broadcast a BLS_TO_EXECUTION_CHANGE message to the beacon chain to update their withdrawal address to an execution address.
Finally, when the validator successfully proposes a block, a special Fee Recipient address receives the accumulated gas fees from the block. Since the Fee Recipient is not directly involved in staking, we will largely omit it in this post.
More information about different types of keys involved in Ethereum staking can be found in the following resources: , 
Managing Validator keys for OPUS Validation-as-a-Service API
As part of the OPUS Validation-as-a-Service API, we require customers to retain ownership of Withdrawal keys, so that staked funds can never be controlled or accessed by Chorus One. A Signing key, however, is different: since Chorus One is a responsible party for hosting and maintaining the Ethereum validator, the inner workings of the Validation-as-a-Service API require us to generate, load, and store Signing keys. Thus, a robust solution for key management is an essential part of our Validation-as-a-Service API.
Early into the project lifecycle, we used the staking deposit command line interface (CLI) provided by the Ethereum Foundation (https://github.com/ethereum/staking-deposit-cli). While the staking CLI is a great tool for solo/home stakers, we realized that it was not designed for our use case. First of all, staking-deposit-cli by default stores the newly generated keystore into a filesystem, posing a potential security threat from leaking key material. While it is possible to use infrastructure-specific workarounds like ramdisks to mitigate the threat, such workarounds would add complexity and failure points to the platform. The open-source nature of staking-deposit-cli allowed us to fork the source code and modify it to cater to our needs, but the lack of thoroughly automated test suites meant we had a hard time syncing our changes with upstream updates. Finally, all of our codebase is Rust, and having to support Python CLI within the infrastructure, including keeping a good security track record by timely patching all the Python dependencies, puts an additional burden on the development team. In the end, we decided to pursue an alternative approach to generating keys, which we describe in the next paragraph.
Having endured even more difficulties with staking-cli when generating Ethereum keys on a large scale, our Ethereum Team decided to tackle the problem during our company-wide engineering hackathon where we built an MVP for an Ethereum key generation tool written in Rust. This was the birth of the Eth-staking-smith project.
Eth-staking-smith can be used as a CLI tool or as a Rust library to generate Signing keys and deposit data derived from a new mnemonic or to regenerate deposit data from an existing mnemonic. These use cases were implemented, in order to provide the same functionality as the staking-deposit-cli whilst avoiding all problems mentioned above.
Example command to generate keys from a newly generated mnemonic:
Example command to generate keys from an existing mnemonic:
eth-staking-smith existing-mnemonic --chain mainnet --keystore_password testtest --mnemonic "entire habit bottom mention spoil clown finger wheat motion fox axis mechanic country make garment bar blind stadium sugar water scissors canyon often ketchup" --num_validators 1 --withdrawal_credentials "0x0100000000000000000000000000000000000000000000000000000000000001"
For both use cases, Eth-staking-smith will generate the following key material:
Private Signing keys
Mnemonic (existing or newly generated)
Deposit data smart contract properties
Let’s zoom into the generated key material
Private Signing keys
As mentioned above, the Private Signing key is the key used to provide a signature to any action taken by the validator. The Eth-staking-smith Signing key output is done without encryption because in our use case, we use remote API to store the key material immediately upon the generation. Remote API implements encryption for both data transfer and data at rest. We decided to make keystore use optional, but Eth-staking-smith can still generate encrypted keystores for the users who need that.
The keystore is an encrypted version of the private Signing key in the specified format . When generating keys with eth-staking smith, a keystore password can be specified and in that case, the keystore data will be output. Using a key derivation function (e.g. <code-text>scrypt<code-text>, or <code-text>pbkdf2<code-text>), a decryption-key is derived using the given passphrase and a set of strong built-in derivation arguments. The example below highlights the field <code-text>function<code-text> that shows the key derivation function used. The keystore is a useful alternative that is less vulnerable to an attacker than storing the private Signing keys in a plaintext file, since they would need the keystore file, as well as the passphrase to decrypt the file.
Finally, the deposit data is returned, which is used to make the deposit of 32ETH using the Ethereum deposit contract to activate the validator. One of the most important fields in the deposit data is the withdrawal credentials.
By default, withdrawal credentials are BLS addresses derived from the mnemonic, however, there exists a use case where a user might want to overwrite the derived withdrawal credentials with already existing ones.
The BLS address format is called <code-text>0x00<code-text> credentials, and is actually set to be deprecated sometime after withdrawals will be enabled. Another alternative way to provide withdrawal credentials is to use a legacy Ethereum wallet address, prefixed by <code-text>0x01<code-text>. Ethereum will be pivoting from using <code-text>0x00<code-text> (formerly eth2) to <code-text>0x01<code-text> execution (formerly eth1) addresses. To learn more about this, we recommend watching the panel from Devcon 2022  and looking into the Ethereum specification . Eth-staking-smith, therefore, allows the user to pass in a <code-text>0x00<code-text>, <code-text>0x01<code-text> execution withdrawal credentials, as well as an execution address to overwrite the withdrawal credentials.
Example deposit data with BLS credentials (<code-text>--withdrawal_credentials 0x0045b91b2f60b88e7392d49ae1364b55e713d06f30e563f9f99e10994b26221d<code-text>)
Since writing key material on disk was a major security vulnerability for us, Eth-staking-smith removes this issue entirely by not writing any files on disk.
To avoid heavy-lifting and re-creating crypto primitives from scratch, we’re re-using functionalities from the lighthouse client implementation  for key generation, which builds on top of blst — a BLS12–381 signature library , which is currently undergoing formal verification.
For entropy collection, one customization was made: Eth-staking-smith defers entropy collection to the operating system by using <code-text>getrandom()<code-text> on Linux and thereby making use of Linux’s state-of-the-art randomness approach.
Tweaking Security <> Performance parameters
Finally, since key generation at scale was notoriously slow for us with staking-deposit-cli, we took initiative to add additional arguments for our users to tweak performance <> security parameters depending on their specific use case.
As per our use case, our API does not require the keystore file, but only the private key in raw format. We, therefore, enable the user to opt-out of keystore generation in order to improve performance. This can be done by omitting the <code-text>--keystore_password<code-text> argument as follows:
We measured that omitting keystore speeds up the key generation process by 99%. The key generation performance we experience with Eth-staking-smith is consistently sub-second, with slight variability depending on hardware and platform.
In case the user requires the keystore file for redundancy, there’s another option to speed up the keystore generation process by choosing a different key-derivation function. By default, Eth-staking-smith will use <code-text>pbkdf2<code-text> to derive the decryption key to achieve better performance. There’s also the option to use <code-text>scrypt<code-text> which offers better security, however, consequently, worse performance. This can be done by choosing the key-derivation function using the <code-text>--kdf<code-text> argument as follows:
As mentioned above, users who had previously specified a BLS (0x00) withdrawal address, will need to make a request to the beacon chain to update their validators’ withdrawal address to point to an execution address. To perform this operation, the user will need to have the BLS withdrawal key mnemonic phrase. Once done, withdrawals will be automatically funded on the execution address.
Eth-staking-smith enables the user to generate a signed <code-text>BLS_TO_EXECUTION_CHANGE<code-text> message which they can send to the beacon chain to update their withdrawal address.
eth-staking-smith bls-to-execution-change --chain mainnet --mnemonic "entire habit bottom mention spoil clown finger wheat motion fox axis mechanic country make garment bar blind stadium sugar water scissors canyon often ketchup" --validator_index 0 --withdrawal_credentials "0x0045b91b2f60b88e7392d49ae1364b55e713d06f30e563f9f99e10994b26221d" --execution_address "0x71C7656EC7ab88b098defB751B7401B5f6d8976F"
Users can use the response to make the request to the beacon node as follows:
Throughout this post, we explained the basics of Ethereum Beacon Chain block validation, the key material involved in the process, and walked through an automation tool we created at Chorus One for Proof-of-Stake key management.
We hope the tool can be useful to some of our readers, especially those who use Rust for their blockchain automation work. It is also open-source, and we will welcome bug reports and pull requests on Github.
If the reader is interested in using OPUS Validation-as-a-Service API which builds upon that automation, you are welcome to join the wait-list for private beta, contact via email@example.com.
Will Ethereum become a deflationary cryptocurrency, now that The Merge has happened? The answer to this question, in short, can be given in two words: “it depends!” Its long form, however, would offer you a better understanding of whether Ethereum will indeed remain inflationary (albeit only slightly as miners have packed their bags) or become a deflationary asset as time goes on.
If you’re confused by all the information floating around and can’t quite grasp all the terms related to it, read on as this article simplifies the topic at hand. In this piece, we’ll take you by the hand and walk you through the following:
The Merge — what is it?
Back to the drawing board: What is inflation? What is deflation?
Inflationary vs deflationary vs disinflationary crypto assets
Explaining Ethereum’s issuance mechanism and inflationary state before The Merge
How Ethereum could go from a nearly Net Zero inflation rate to becoming deflationary after The Merge
The Merge — what is it?
At 6:42 AM UTC (2:42 AM EDT / 8:42 AM CEST) on Thursday, September 15, 2022, Ethereum’s long-awaited transition from Proof-of-Work to Proof-of-Stake, dubbed “The Merge”, was finally completed. As Chorus One and the rest of the ecosystem could confirm, the operation — after years of blood, sweat, and delays — was successful.
We can confirm that the ride post #TheMerge has been a smooth affair and we have faced no issues till now.
Having started out as a network relying on Proof-of-Work, thus fast shaping into the “hub” of miners as Bitcoin’s biggest competitor, Ethereum soon encountered scalability issues with its Execution Layer. Too much energy consumption between competing miners to process transactions and not enough security for the network, after all.
The Beacon Chain was, therefore, introduced in December 2020 as the network’s Consensus Layer. This innovation could be seen as Ethereum’s spine, master coordinator, or watchful lighthouse tower, with its key functions set to store data, and manage the network’s validators. Functionalities also included scanning the network, validating transactions, collecting votes, distributing rewards to performing validators, deducting rewards of offline validators, and slashing the ETH of malicious actors.
This Proof-of-Stake blockchain ran alongside the PoW network with the objective to — one day — merge and transform Ethereum into a Proof-of-Stake only network. A win for decentralization and the environment!
That day happened on September 15th, 2022. But before that, Ethereum was inflating at roughly 3.67% — with a ~ 4.62% issuance inflation rate. We will break down the calculations behind this inflation rate, shortly. But first, let’s go back to the drawing board to remind ourselves about the definition of inflation and deflation, in the first place.
What is inflation? What is deflation?
Inflation happens when more bills are printed (FIAT money) or more tokens are minted (cryptocurrency) for circulation in the system. The value of the currency then decreases. In FIAT, this means that more bills would be needed to afford things. In certain cryptocurrencies, this means that the price of the currency goes down.
Deflation, on the other hand, happens when tokens are removed or destroyed from the system through “burning”. By logic, the value of the currency is supposed to increase. There are, however, much more complicated dynamics to this. Those won’t be our point of focus, today.
Explaining Ethereum’s issuance mechanism and inflationary state before The Merge
Before The Merge, Ethereum rewarded the capital-intensive mining activity with up to 2.08 ETH approximately every ~ 13.3 seconds. This rounded up to roughly ~ 4,930,000 ETH/year in miners rewards. The network also had around ~ 119.3M ETH in total supply. (Source: Ethereum.org)
We can find the inflation rate by summing up the Executive Layer and Consensus Layer inflation rates.
Let’s calculate the figure for the Execution Layer by dividing the amount of PoW issued rewards with the total amount of ETH in circulation, to be:
~ 4.93M ETH/ ~ 119.3M ETH = ~ 0.0413 = ~ 4.13%
Then, we move to the Consensus Layer issuance, based on the amount of ETH staked. We’ll round up that number to 13,000,000 of staked ETH presently.
If 1,600 ETH/day is issued, that’s 584K ETH/year in Consensus Layer issuance, amounting to an inflation rate of:
~ 584K ETH/ ~ 119.3M ETH = ~ 0.00489 = ~ 0.49%
That’s almost Net Zero!
Summing both figures, we had an issuance inflation rate of ~ 4.62%, pre-Merge. In other words, miners made approximately ~ 89.4% of issued ETH whilst stakers got ~ 10.6% of the pie as ETH’s issuance inflated at ~ 4.62%.
Goodbye miners. Stay on, stakers!
Through The Merge, Ethereum has therefore addressed:
Issuance reduction (up to 88%!)
PoS security, among other things
Among what it hasn’t addressed, however, are:
High gas fees
Slow transaction speed
We’ll get to understand how not addressing high gas fees could actually be a plus for “Deflationary Assets” or “Ultra Sound Money” advocates.
Inflationary vs disinflationary vs deflationary crypto assets
As we go back to the drawing board for the second time in our walk-through, let’s revisit the difference between inflationary, deflationary, and disinflationary crypto assets.
Some cryptocurrencies’ tokenomics are set-up to increase token supply over time. From the start, they are “programmed” to be inflationary. Other cryptocurrency projects, which propose unlimited coin supply, are inflationary as well — as unlimited supply is bound to outweigh demand, decreasing the currency’s value over time. An example of a coin with unlimited supply is DOGECOIN.
With its halving mechanism until the last 21 millionth Bitcoin is minted, Bitcoin is a disinflationary cryptocurrency. It is set up for a chronological decrease in its issuance. A disinflationary cryptocurrency can, in other words, be described as “an inflationary cryptocurrency with disinflationary measures” in the sense that the demand may, over time, become greater than the diminishing issuance of new tokens.
A good example of a deflationary cryptocurrency is the Binance Coin. BNB’s initial supply saw 200,000,000 tokens in circulation. At the end of Q3, nearly 40 million BNBs had been burned as part of the plan to halve the initial supply from 200 million to 100 million.
Look at tokens in circulation as a balloon and issuance as air: BNB’s mechanism is to deflate the balloon till 50% of air in it remains whilst Bitcoin’s mechanism is to keep inflating its balloon with a set maximum air supply, but doing so with a little less air at every pump.
How Ethereum could go from a nearly Net Zero inflation rate to becoming deflationary after The Merge
So what about Ethereum, now that The Merge has basically rendered a close to Net Zero inflation rate? Why is it touted as a potential deflationary coin?
Enter EIP-1559, the mechanism that burns a portion of ETH gas fees during transactions on the network. With the inflation rate already dropping to 0.49% as explained above, EIP-1559 has the potential to decrease ETH supply — but only on the condition that the gas prices are above 15 Gwei.
Consequently, it is no surprise that ultra sound money advocates would plead users to set their ETH transaction fees to a minimum 15.1 gwei.
Ultrasound.money tracks Ethereum’s supply in real time. A negative figure reflects how many ETHs have been burned since The Merge. In other words, a negative figure showcases deflation, whilst a positive figure showcases inflation.
32 hours into The Merge era, Ethereum had issued over 376 more ETH. Inflationary.
A month on and the figures keep rising…
Or maybe not… a wider perspective shows us that there has actually been a decrease since October 8th, when the issuance peaked at over 13,000 ETH.
Ethereum — Deflationary or not?
Ultrasound.Money projects gas fees to be above 70 Gwei, registering a -3.40% supply decrease across the next two years.
As we’ve witnessed now, four weeks since The Merge, we’re bound to see periods of a deflationary ETH and periods with a low but healthy inflation — both of which would be vital for an economic equilibrium.
At Chorus One, we pride ourselves in being a full-stack partner to the protocols we choose to operate and support. This goes beyond the highly available infrastructure we provide to secure and maintain networks. It includes assisting in ecosystem-building via our ventures and business development teams, as well as participating in network governance and — most notably — deep research. Since our inception, we have been at the forefront contributing to core topics of interest in Proof-of-Stake such as liquid staking.
In recent months, we have shifted a big part of our research focus onto a complex topic that underpins the core fabric of any crypto protocol: MEV (Maximal Extractable Value). This emerging field deals with the value that can be extracted through reordering transactions in the block production process. (A collection of resources on MEV can be found here).
MEV has become an ubiquitous topic for many ecosystem participants. Primarily being a validator, our position in the network places us at a spot within the MEV supply chain that comes with great power, thus also great responsibility. Generally speaking, our mission is to maximize freedom for crypto users and to contribute to the creation of long-term sustainable, user-owned decentralized network infrastructure. Since MEV is a crucial domain that — if not adequately dealt with — might threaten the mission we are set towards; we recognized that we should leverage our expertise and resources to contribute to the MEV space in a way that ultimately benefits networks and their users.
The goals we want to contribute towards in the MEV space are two-fold. On one hand, we aim to make visible and help minimize extraction of value from users through e.g. front-running, sandwiching, and other exploitative practices. On the other hand, we strive to redistribute revenues from non-exploitative MEV that comes into existence from market inefficiency to our delegators that contribute security to the underlying network.
The rest of this article lays out the core pillars of our approach to MEV providing examples of our existing and planned engagements in the area.
What is MEV and how does it impact networks and their users?
Before deciding how we should engage with MEV, we seek to understand what we are dealing with. We are proponents of the open-source crypto ethos and don’t want to keep the information we are gathering to ourselves, but rather share it with the wider ecosystem. Thus, the first pillar of our MEV policy is Transparency. We are actively researching, building dashboards, and publishing other materials to create a shared understanding and to help lighten up the “dark forest” that is MEV.
How can we help to minimize negative externalities of MEV?
As a result of our research effort, we deeply understand MEV in the context of the ecosystems we are a part of. We recognize that MEV can pose negative externalities to users and ultimately the protocols they are trying to utilize. We are actively engaging to help minimize negative externalities in various ways, depending on how deep our engagement in the respective ecosystem is. This can include creating awareness and participating in the dialogue around MEV, research on related problems, as well as supporting and building solutions seeking to minimize exploitative MEV and to decentralize MEV extraction.
Our work in the Network Sustainability domain:operating and participating in public discourse and communities of block building solutions such as Flashbots, investments in projects seeking to minimize front-running (including e.g. Anoma and Osmosis). We have additional projects in this domain in the pipeline and are looking into operating infrastructure to help decentralize block building and relayer infrastructure.
How can we optimize and distribute MEV rewards to our delegators?
It would be hypocritical to say we are in this for the good of it only. There are clear incentives associated with engaging in MEV. Practically speaking, we are looking to optimize the return we can achieve through MEV and pass it through to our delegators creating a differentiated service while helping to improve network usability, security, and ultimately sustainability via the first two of our MEV pillars (see also Phil Daian’s early post “MEV wat do?” on this topic).
Collaborate with us on MEV
For institutional clients that want to offer staking to their users, we are happy to assist in navigating the space and finding the optimal solutions as part of our white label staking services.
If you are building in the MEV space, are trying to understand how MEV will affect your protocol, or are interested to work with us on research topics, feel free to reach out to us through the appropriate channels:
The Ethereum Merge is one of the most anticipated events in crypto history.
The transition, meant to take Ethereum from its current Proof-of-Work consensus mechanism to a Proof-of-Stake model, has been in the works since Ethereum’s inception. However, it took its first step in December 2020, when the Beacon Chain was successfully launched. And now, with the consensus mechanism running unimpeded for a year and a half and over 13 million staked ETH, developers feel confident enough to move to the second step. This requires joining the consensus layer of the Beacon Chain with the execution state of the main Ethereum chain, the process known as “the Merge”.
This new era to the Ethereum protocol brings better security, greater energy efficiency, and sets the stage for future scaling efforts meant to take Ethereum to the moon.
Chorus One prepares for the Merge
Chorus One has been closely following the development efforts to bring Proof-of-Stake Ethereum to reality. As a trusted staking provider in the ecosystem, we are participating in testing the Merge at this critical point with our Prater/Goerli nodes ready for transition. We are particularly aware of the risks associated with such a significant change of operations in a blockchain that has captured a major part of the economic activity in the crypto ecosystem. For that reason, our goal remains to support decentralised networks to promote the security and availability of our services, and to increase the rewards of our clients under such a standard.
As we think of the future for both our operations in the Ethereum ecosystem and the existential threats that can compromise the integrity and stability of the network, we have devoted a lot of effort into understanding MEV and clarifying our position towards it.
On our path to support a more decentralised, democratic and fair distribution of MEV rewards for our stakers, we would like to announce our support for MEV-Boost.
Although MEV continues to be a controversial and cutting-edge space for research, we believe that this can be an interim solution as we wait for more sophisticated in-protocol upgrades. On a high level, MEV-Boost is an implementation of proposer-builder separation (PBS) built by the Flashbots team for Proof-of-Stake Ethereum. As a free, open-source and neutral software, we believe it embraces the values of the Ethereum community and can be a valuable asset for all validators, big or small.
Why run MEV-Boost
By participating in the fair extraction of MEV, we believe we are unlocking the real value of the networks we support, as well as increasing the value of staking to promote higher rates of participation, and an increase in the security of the PoS protocol.
As staking providers, running MEV-Boost allows us to maximize the staking rewards of our clients while protecting Ethereum decentralization, with an estimated increase of 60% in the rewards we can share.
Unlike previous Flashbots’ offerings, this software is compatible with all client implementations of the Ethereum protocol, making it a big step towards further client diversity, a topic that has been the subject of research at Chorus One in the past year.
Finally, we are committed to evaluate and continue to monitor different approaches to our MEV implementations, and to the risks of single-relay and single-block producers, working with different teams to find the most balanced system. Fair MEV extraction continues to be something we iterate on going forward.
The way forward
In the coming days we will be getting ready to test MEV-Boost on our Goerli infrastructure to best prepare in time for the mainnet Merge. We have been working closely with Flashbots and collaborating with other node operators to ensure that the product is ready and tested by the time it goes live.
MEV is an inevitable part of participating, not only on blockchains, but in all ordered economic systems. Our intent is to be responsible participants of Ethereum and beyond, with MEV research spanning Solana and Cosmos, there is more to come. For the time being, follow our node readiness for MEV-Boost here.
About Chorus One
Chorus One is one of the largest staking providers globally. We provide node infrastructure and closely work with over 30 Proof-of-Stake networks.