The next major upgrade on the Ethereum blockchain, Ethereum 2.0, allows users to stake. It would change the way transactions are validated on the Ethereum network from a proof of work to a Proof of Stake. What is a Proof Of Work or Proof Of Stake? How do you stake? Well, this full guide will explain everything you need to know about how to stake on Ethereum.
What is Ethereum 2.0?
Ethereum 2.0, also known as Serenity or eth2, is an upgrade to the Ethereum blockchain. The upgrade is to make Ethereum more scalable, more secure, and more sustainable. That is, to make applications faster and cheaper by using technology that requires lesser power and energy and increases security against all forms of attack.
Ethereum 2.0 would be different from the existing Ethereum in several ways. It introduces an improved Ethereum virtual machine, called (eWASM), sharding, and a different consensus mechanism known as Proof-Of-Stake (POS). More on that will be explained later in this guide but first, what is this consensus mechanism?
A consensus mechanism is a method of validating transactions on a blockchain without a need for a centralized authority. This helps to prevent fraudulent transactions and attacks. The major consensus mechanism used on the blockchain is the Proof-Of-Work (POW) and Proof-Of-Stake (POS).
What is Proof-Of-Stake (POS)?
Proof-Of-Stake (POS) is a new consensus mechanism. Proof-Of-Stake (POS) performs the same function as Proof-Of-Work (POW) but uses a different process. In Proof-Of-Work (POW), miners run computer hardware that can run complex computations to verify new transactions. Miners compete to solve complex puzzles to produce blocks. This process is also known as mining.
Mining is creating blocks of transactions that are added to a blockchain, such as the Ethereum blockchain. Miners process and approve pending transactions, and they are rewarded for doing so.
In Proof-Of-Work (POW), miners use computation power to add blocks to the blockchain. However, in Proof-Of-Stake (POS), instead of using computation power, users are required to stake an amount of ETH for the right to verify a transaction. These users are called validators, and they are similar to miners in Proof-Of-Work (POW).
Proof-Of-Stake (POS) works similarly to mining but with some advantages. Miners compete for who will verify, but validators don’t; instead, an algorithm based on how much they stake and how long they’ve held it for chooses them randomly. It is also more energy-efficient because it uses less computing power to add a block to the blockchain.
Why is Ethereum moving to a Proof-Of-Scale (POS) after five years?
One may wonder why Ethereum is moving to a Proof-Of-Scale (POS) after five years. However, Proof-Of-Scale (POS) has some benefits to Ethereum. Such benefits are:
It is more sustainable
Unlike miners that use POW, validators don’t need energy-intensive hardware to validate transactions. This will be more sustainable as it requires less power and energy and it is good for the environment,
It is more accessible.
First, you don’t need to buy expensive hardware to solve complex computations or pay for electricity, which can be very expensive. You only need to stake a minimum of 32 ETH to become a validator. And if you do not have up to that amount, you may still be able to contribute through staking pools.
It unlocks sharding
With sharding, everyone can run a node because its hardware requirement will be low. Sharding allows the network load to be spread into what is known as shards. That means the validator only need to run the data that they are validating and not the entire network. This reduces congestion and increases speed and the number of transactions that can be carried out per second.
Reduced chance of 51% attack
It may be impossible to defraud a decentralized network from attack if a group gains control of over 50% of the nodes. They would be able to prevent confirmation of new transactions, giving them access to control the network. This may be impossible in a Proof of Stake (POS) mechanism because it would be too expensive to own a 51% stake, and if a group owns up to 51%, they wouldn’t want to attack the network. It would affect them too.
What is Ethereum staking?
In the new Ethereum 2.0 upgrade, users will be able to deposit a certain amount of ETH to validate transactions on the blockchain and obtain rewards in return. Anyone can participate in staking. The process involves the users locking up an amount of ETH. The minimum ETH you can stake to participate is 32 ETH. If you are interested in staking but don’t have up to 32 ETH, there are still ways to participate, explained later.
In Proof-Of-Scale (POS), users are incentivized to validate blocks. Users who are selected to validate a block and earn staking rewards are selected randomly. They are selected based on their Stake’s value and the length of time that their Stake has been locked up. To ensure that the users do not act maliciously, a program called “slashing” will be implemented to take away the portion of such a validator’s Stake.
What are the predicted profits of staking on Ethereum?
Ethereum is not the only blockchain that will run on Proof-Of-Stake (POS) consensus as there are other blockchains such as Tezos, Algorand, and Qtum running a Proof-Of-Stake (POS) consensus already.
One of the things to consider before investing in anything is whether the investment will be profitable or not. Comparing the return on blockchain running on a similar consensus, we may predict the outcome for staking on Ethereum.
The return rate for staking on Tezos is currently around 7%, while the rate of return for Algorand is around 5%. Qtum also has a similar rate of return with Tezos at around 7%. On the other hand, ETH 2.0 is expected to be between 4% – 10%. Buterin, the co-founder of Ethereum, proposes a reward as high as 18%. However, Drake, a lead developer at the ETH project, thinks the profit would be somewhere around 5%.
How to earn with less ETH
You would need a minimum of 32 ETH to become a validator. However, you can still participate even if you do not have up to that amount. You can take advantage of stacking pools, which are similar to mining pools, to participate. Some examples are RocketPool, stakingether.com, and many others.
Risks and benefits of staking on Ethereum
The major benefit of staking on Ethereum is the opportunity to earn passive income. When you become a validator, you can earn a reward for validation transactions on the blockchain. However, there are risks attached to staking on Ethereum too. You can lose ETH for validating malicious transactions or going offline and failing to validate transactions.
Steps to staking on ETH 2.0
Your journey to staking on the ETH 2.0 begins with meeting the hardware and software requirement, staying online, and staking a minim of 32ETH for a validator node.
Another step to stake on Ethereum is to choose between running a validator node yourself, using a staking pool, custodial or non-custodial staking services that allow users with less than 32ETH to stake.
If you are running the validator node yourself, start your journey with the procedure on the launchpad. However, it looks somehow technical, and you are required to run some command lines.
By non-custodial services, you are not hosting the nodes yourself, but you use services that help you do that while you control the funds. You are the one in charge of your private keys to access the funds, but you don’t have any node set up by yourself.
Examples of non-custodial staking pools are: Blox, Attestant, Stake.capital and so on.
On the other hand, a custodial staking service allows you to stake with a third party who has access to your private keys. It gives full control to a staking service, and all you have to do is deposit your Ethereum and start accruing rewards. This is very easy because you don’t have any work to do, but it is also riskier as the account can be exposed to hacking. Such services are Binance, Coinbase, Staked, and many others.
Future of Ethereum
The upgrade to Ethereum 2.0 would influence the value of Ethereum. There are different benefits of the upgrade, such as increased speed, which may attract more use cases and hence, the value of Ethereum. If the full implementation happens, more use cases and projects will be built on Ethereum. Hence, increasing the adoption, market cap, and price.