Staking on Ethereum 2.0 – What You Need to Know

Staking on Ethereum 2.0

Ethereum’s long-awaited scalability upgrade is set to kick off this year. ETH 2.0, also dubbed Serenity, will be the biggest change in its five-year history. The implementation will take place over several years, in three separate phases. While full scalability will only come with the final phase, the first phase is no less important. It will mark the rollout of Ethereum’s Proof of Stake Beacon chain, laying the groundwork for the next phase to introduce scalability through sharding. Eventually, the two versions of Ethereum will merge into a single chain.

The implementation recently achieved a significant milestone with the rollout of the Eth2 Validator Launchpad on the Medella testnet. This is a critical final step before rolling out the Beacon chain, as it allows those interested in becoming validators to participate in a test run and learn more about what to expect from the live launch.

So, what can we expect from the move to Proof of Stake?

1. About Proof of Stake

Proof of Stake emerged in 2012 as an alternative to the Proof of Work consensus model that Satoshi Nakamoto had chosen to implement in the Bitcoin network. Despite Bitcoin’s growing popularity, it had quickly become evident that the Proof of Work consensus was limiting its ability to scale and would ultimately become a ravenous consumer of energy.

As things stand, Bitcoin consumes more energy than the entire country of Switzerland. This is because the nodes on the network are required to solve complex calculations that require a large amount of electrical power, otherwise known as work. The work involved represents an investment that ensures the nodes will act in the interests of the network.

Proof of stake operates differently. In a Proof of Stake consensus, the nodes provide a financial stake in the form of network tokens to demonstrate their skin in the game. In the case of the Ethereum 2.0 Proof of Stake, nodes will be penalized by having part of their stake removed if they act against the interests of the network, for example, by validating invalid transactions

Many decentralization advocates maintain that Proof of Stake is more decentralized than Proof of Work due to the prevalence of mining pools and farms. As Proof of Stake doesn’t require any special machinery, the barriers to entry are lower.

2. How To Stake on Ethereum 2.0

In principle, anyone can get involved with staking once Ethereum 2.0 implements the first phase. In reality, stakers need to meet some basic requirements.

Firstly, there’s a minimum staking threshold of 32 ETH. If the price were ever to recover to its January 2017 all-time high of $1,400, the minimum stake would be worth close to $45,000. However, it’s also worth considering that in return for validating blocks, stakers will receive rewards paid in ETH, as well as a share of the transaction fees paid by users.

Aside from the financial stake involved, you must also be willing to operate a node, which means having a computer that meets the minimum hardware specifications and is online continuously. The computer must also run the Beacon node software.

An algorithm will randomly determine which validators get to validate which blocks, so your chance of being chosen to confirm a block depends on the number of validators online at any given moment. ConsenSys estimates that if there are 100,000 validating nodes online, then you’ll validate a block once every two weeks.

Ethereum 2.0 is not yet live, but once it is, there may be an opportunity to get involved with staking without meeting the hardware requirements or staking the full 32 ETH via staking services or staking pools. Staking services will offer the necessary hardware and run a validating node if someone is willing to provide the minimum stake and pay a fee.

Staking pools allow users to pool their ETH until they collectively reach the minimum threshold to run a node, and then they share the staking rewards proportionately.

3. Pros and Cons of Staking

The pros of staking are very similar to those of mining, in that stakers can earn rewards for their participation in the network. Currently, the returns on Ethereum 2.0 staking are anticipated to be around 4-10%.

The less tangible benefit is that of participating in a blockchain network such as Ethereum and becoming part of the large community that supports the ecosystem and its development.

The most significant risk of staking is “slashing” – when the algorithm penalizes you for not acting in the interests of the network. This could happen without you realizing you’re doing anything wrong. For example, if you accidentally validate an invalid transaction, or if your computer goes offline for any period of time. If your stake falls below 16 ETH, you’ll be booted off the network entirely.

The other risks of staking are similar to those of investing in cryptocurrency. If there’s a market crash, and your ether is tied up in a stake, then the value of your holdings could decrease significantly, in the time it takes to withdraw your funds. Any gains you made through staking rewards may not cover the value of the losses.

As with any instance where you hand over control of your private keys or cryptocurrencies, take care to ensure that your chosen staking service or pool isn’t being run by scammers. Only use established firms with a sound reputation if you want to make sure your funds are as safe as possible.

Ethereum’s 2.0 implementation is one of the most hotly-anticipated events in the history of blockchain. However, the shift to Proof of Stake is only the beginning. Nevertheless, it represents a significant change for the world’s first smart contract platform, and one that will lay the path for future scalability. Furthermore, with so many people eager to participate in staking and thus locking up the supply of ETH, it could spell the beginning of a long bull market for the second-biggest cryptocurrency.

Share now if you like the article!