Where will reward money on Beacon chain come from?

I was trying to figure out where the ETH rewarded to validators on the ETH 2.0 will come from. Can someone explain this to me?

Will their be additional ETH printing on the main net specifically for ETH 2.0 rewards?

It’s a new coin, colloquially called “BETH” (beacon chain ether). The beacon chain is a side chain with a one-way bridge, so it can do whatever it wants, including having its own native coin. Funds are never bridged back to the PoW chain.

  1. But people will presumably be able to convert 1 ETH to 1 BETH by one-way bridge - correct?

  2. And this 1 ETH will presumably be burnt in the process of transfer - correct ?

  3. And then, if I deposit 32 ETH but I get paid in BETH, how do I calculate ROI? How is it determined how much BETH I get for my ETH ?:slight_smile:

  1. Yes.
  2. Yes.
  3. Transfers are disabled in phase 0, so you’d have a pretty hard time selling your rewards without simply giving all your coins to a centralized exchange unfront. As such your ROI in terms of fiat is zero—for now. Your rewards (denominated in BETH) are described here.

John - I am still a bit lost on what the table means. The table says 18% return - but the return is in BETH and the deposit in ETH. What does 18% return mean. If I deposit 32 ETH do I get 5.76 BETH?

It has nothing to do with the one-way bridge of ETH -> BETH, which is always 1:1.

The table is annual return of being a validator. In the scenario of 1M BETH actively being staked, each active validator would get ~18% of their stake as rewards per year.

I am a bit lost … I thought what was staked was ETH. Is staking done on main net or on beacon net? If staking is done on beacon net, you kind of effectively staking ETH anyway, since you are converting 32 ETH into 32 BETH ? Correct?

ETH is sent to a smart contract on the Ethereum 1 mainnet. This ETH is locked away in the smart contract and doesn’t come out again.

Separately, the Ethereum 2 nodes are listening to events from the Ethereum 1 smart contract mentioned above. When it sees that someone has made a deposit it creates Ethereum 2 ETH (called BETH above) and expects the validator mentioned in the deposit contract to start validating the Ethereum 2 beacon chain.

As long as the validator does a good job validating the Ethereum 2 beacon chain the amount of BETH held for the validator increases (as the validator is given rewards for its work). At some stage the validator can decide they don’t want to validate any more, at which point they receive whatever BETH they staked plus the rewards.

(note that there are various delays and complications in place in reality, omitted for brevity).

It is worth noting that although you can swap 1 ETH for 1 BETH through the deposit contract this does not lock in the value of BETH because you cannot swap BETH to ETH. They may remain close to each other or may diverge, but there is no peg because the transfer is one-way.

It looks like the first validators will need to assume huge risk.

32 ETH is $6000.

Why would I want to take $6000 dollars and burn them in exchange for something with unclear value?

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Regarding the 1:1 peg, at first I thought it may likely diverge if the beacon chain has its own issuance rate independent of the main chain. But if this becomes so, then I suspect the likelier outcome will be 1 ETH : more than 1 BETH, thus allowing ETH holders to indirectly gain from validating reward without the need to be validators. To prevent this “exploit”, further thoughts lead me to believe the peg will be made not to diverge, in other words, it will permanently be strictly 1:1.

Well … how do you think 1:1 peg will be enforced ? I am not sure I see any mechanism for this.

The beacon chain will not be usable much until the shards will run, which will presumably happen many years after. So you have a token, BETH not really usable much and not convertable back to ETH.

Then arguably you will have a strong discount of BETH vs ETH, unless there is an altruistic party that purposefully converts ETH to BETH.

So what is probably going to happen at the start is that ETH foundation and other parties connected to it will altruistically

Enforced by the smart contract for a strict peg. Since this will be a one way street, it should not be hard to get done. If the model will eventually be fully Proof of Stake, then the total supply of the Beacon chain will take precedence over the total supply of the main chain.

Any situation where there is a discount or premium in the peg would allow exploits to be possible. So only a strict 1:1 peg hard coded into the system can prevent any potential opportunity of exploit.

Because the Beacon chain will have better scaling, thus its money velocity will be much higher, thus this will result in much higher issuance of BETH. There may be a situation where the total supply of main chain may be 140 mil (example) while the total supply of beacon chain may be at 170 mil (example).

If the peg will be such that 1 ETH get more than 1 BETH, then there is no need to join the beacon chain so early to be validators along with the potential risk of things may go wrong and you lose everything. And smart people may not participate early until things are proven flawless. If the peg will be such that 1 ETH get less than 1 BETH, then it makes no difference because a loss of ownership by having less than 1 BETH per 1 ETH is balanced out by the deflation from the beacon chain.

The most ideal situation is to maintain a strict 1:1 peg, by hook or by crook.

But of course this is just my speculation on how things can be done most effectively.

ETH1 and ETH2 are for all intents and purposes separate currencies, you just happen to be able to purchase 1 ETH2 for 1 ETH1 (although even then it isn’t that simple because your purchased ETH2 is going to be locked in to a staking contract for a while so you need access to a validator if you don’t want to lose a chunk of it, time value of money, utility of ETH2 in the next year or two, etc.).

Under the current proposals ETH2 will be less inflationary than ETH1. For example, if 50 million ETH2 are staked then ETH2 issuance will be around 1.1million per year. This is far less than the ~7 million ETH1 per year at current issuance rates. However, because the deposit contract ETH1 can be swapped for ETH2 at a flat rate you would expect a continual flow of ETH1 to ETH2 to keep the inflation rates roughly balanced (and hence ETH1 and ETH2 would keep close to 1:1 in value).

If the ultimate goal is to move ETH1 to ETH2 it makes sense for there to be two actions. First, an ongoing reduction in ETH1 issuance, most likely based on the amount of ETH1 outstanding i.e. as the amount of non-staked ETH1 decreases the issuance decreases likewise. Second, a reduction in the value of ETH1 compared to ETH2 over time i.e. the deposit contract should decrease the amount of ETH2 issued per ETH1. Both of these would result in ongoing pressure to move ETH1 to ETH2.

Alternatively, the ETH1 issuance could just be reduced to be below ETH2 issuance at a selected expectation of ETH2 staked. However that would result in the per-block issuance of ETH1 going down to something around ~0.4ETH1 and would be a bit of a system shock. But attempting to keep a 1:1 peg over time when the two systems have different issuance models would prove difficult.