Ethereum is currently the second-largest blockchain network. In an attempt to improve transaction speed, and make it energy efficient it is upgrading to a new mechanism. It will move from PoW (Proof of Work) consensus mechanism to PoS ( Proof of Stake) mechanism. In order to do so the network requires Ethereum staking.
What is Ethereum Staking?
Ethereum staking is the act of depositing 32 ETH to activate validator software. A validator is responsible for storing data, processing transactions, and adding new blocks to the blockchain. This will keep Ethereum blockchain secure for everyone and earn some new ETH in the process.
Why is Ethereum Staking Required?
Ethereum staking is required by the network for three main reasons:
1. Better Security
To control or attack on the ethereum network majority of ETH is required, so as more ETH is staked the network becomes more resistant to attacks. To present a threat, you need to own the majority of validators, which entails holding a sizable quantity of ETH in the system.
2. More Sustainable
ETH stakers do not need powerful computers to participate in a proof-of-stake system, instead, they can use a home computer or even a smartphone. Thus, negating the need for sophisticated equipment. And by doing so, Ethereum will be more ecologically friendly and sustainable.
3. Earn Rewards
Rewards in ETH are given for actions that help the network reach consensus. You’ll be rewarded for running software that properly batches transactions into new blocks and verifies the work of other validators, as this is what keeps the chain secure. If any validator misbehaves or tries to alter the blockchain, their stake/rewards would be slashed.
How does Ethereum Staking Work?
Unlike the PoW consensus mechanism, the PoS-powered ETH blockchain will bundle 32 blocks of transactions during each round of validation, which will last for an average of 6.4 minutes. These block bundles are referred to as “epochs”. When the blockchain adds two more epochs after it, an epoch is considered finalized – that is, the transactions contained within it are irreversible.
The Beacon Chain randomly groups stakers into “committees” of 128 and assigns them to a specific shard block during the validating process, also known as the attesting process.
Each committee has a “slot” for proposing a new block and validating the transactions contained within it. Each epoch has 32 slots, which means that each epoch requires 32 sets of committees to complete the validation process.
Once a committee is assigned to a block, one member at random is given the exclusive right to propose a new block of transactions, while the remaining 127 members vote on the proposal and attest to the transactions.
Once a new block has been attested by the majority of the committee, it’s added to the blockchain and a “cross-link” is created to confirm its insertion. Only after that a staker who was chosen to propose the new block receives their reward.
How can you get involved in Ethereum Staking?
Those who are interested in staking on the new Ethereum network need to set up a staking node by running Ethereum 1.0 and Ethereum 2.0 clients. Some of the compatible software clients for staking nodes include:
- Prysm
It is a Go language variant of the Ethereum software.
- Nimbus
This is an Eth1 and Eth2 lightweight version written in the Nim programming language.
- Teku
This is an enterprise-focused Eth2 software client written in Java.
- Lighthouse
This software client uses Rust programming language.
- Lodestar
This software client was created by Chaincode Labs and uses JavaScript/ Typescript.
Requirements for ETH nodes
- Internet
Ideally, your internet connection should be reliable and as close to 24/7 as possible without any interruptions.
Ensure your bandwidth can’t be throttled and isn’t capped so your node stays in sync and will be ready to validate when called.
You need enough upload bandwidth too. Currently, the required bandwidth is ~700-800 MB/hour and is likely to increase.
- Storage
As of February 2021, you’ll need ~400GB for the mainnet execution chain data alone (growing at ~1GB/day).
The Beacon Chain had its genesis on December 01, 2020. It is growing in size over time, and the introduction of sharding will also increase storage, memory, and bandwidth requirements.
Furthermore, you’ll need SSD storage to consistently handle necessary read/write speeds.
Various ways to Stake your ETH
Ethereum staking can be done in a variety of ways. Each of these ways eventually targets a different user group, varies in terms of risks, incentives, and trust presumptions, and is unique. Some of them are more decentralized, tested in battle, or hazardous than others.
- Solo Home Ethereum Staking
According to the Ethereum developers themselves, “Solo staking on Ethereum is the gold standard for staking.”
Due to solo staking’s complete participation benefits and enhanced network decentralization, you will never have to entrust anyone else with your money.
Anyone thinking about solo staking needs at least 32 ETH and a dedicated computer that is always up and running.
Although some technical knowledge is required, simple tools are now available to aid in the simplification processes.
- Ethereum Staking as a Service
If you don’t want or aren’t comfortable dealing with hardware but still want to stake your 32 ETH, staking-as-a-service options allows you to delegate the difficult part while earning native block rewards.
These options will typically walk you through the process of creating a set of validator credentials, uploading your signing keys to them, and depositing your 32 ETH.
However, do remember that by doing this you are giving the service permission to validate on your behalf. This method of staking requires a lot of trust in the provider. To reduce counterparty risk, you should always keep the keys to withdraw your ETH in your possession.
- Pooled Ethereum Staking
Users who don’t have or don’t feel comfortable staking 32 ETH can now choose from a number of pooling methods.
One of the most popular types of staking is liquid staking, which includes utilizing an ERC-20 liquidity token to symbolize your staked ETH.
Staking is as straightforward as a token swap with liquid staking since it allows for quick and convenient exits. With this choice, users can also maintain their assets in their personal Ethereum wallet.
- Centralized exchanges providing Ethereum Staking
If you are not yet comfortable holding ETH in your own wallet, many centralized exchanges offer staking services. They can serve as a backup option for earning a return on your ETH holdings with little oversight or effort.
The trade-off here is that centralized providers pool large amounts of ETH in order to run a large number of validators. This is risky for the network and its users because it creates a large centralized target and point of failure, making the network more vulnerable to attack or bug.
If you don’t feel comfortable holding your own keys, these options will always be available to you. Though this requires complete trust on the centralized exchange, while staking ethereum.
Is Ethereum Staking Profitable?
Yes, ethereum staking is profitable. The current APR for ETH 2.0 staking is 5.2%. The APR is inversely proportional to the amount of ETH staked. If more and more people stake their ETH the APR decreases and vice versa.
For example, when there were only around 500,000 ETH staked last year, the annual percentage rate of interest (APR) was a little over 20%. Today, there are more than 6,800,000 ETH locked on the blockchain, meaning the APR has dropped to about 6.0%.
The interest rate will fall as soon as the pool of stakers is large enough to promote a decentralized ecosystem. Right now, it is impossible for stakers to withdraw staked funds and accrued rewards, at least not until the Ethereum 2.0 and Ethereum 1.0 merge.
What are the possible risks of Staking ETH?
Every action has a reaction of its own. Some of them are constructive, while others enable us to learn from experiences or even give us a lesson. Some of the possible risks are:
- Even if Ethereum 2.0’s value is very high, this might not be an issue in the long run, you should be aware that it fluctuates and will almost probably be different from Ether.
Hosting a validator node is advantageous if you believe Ethereum 2.0 will be successful.
- Another major issue is lack of liquidation. You cannot withdraw your earned or staked ETH until Ethereum 2.0 is released, which could take up to two years or more.
If you are not a long-term holder and intend to sell Ethereum during this or the next bull run, this may not sit well with you. - The risk of losing your staked assets or “primary funds” due to slashing is an important risk to be aware of. Slashing is a protocol-level penalty imposed in the event of a network or validator failure.
Read more about Ethereum Merge
