You have probably heard time and time again that 2020 is a big year for cryptocurrency innovations. If not, just know that this is certainly the case in the Ethereum world. The latest version of Ethereum, which we will refer to as Ethereum 2.0, is looking to switch from a Proof of Work to a Proof of Stake protocol. That’s right! Ethereum Staking will be more than just something to hope for.
With this change about to overtake Ethereum, there are a couple of things you’ll need to know including how to potentially use “ethstaking” as a common everyday occurrence. Okay, we might not be sure the name ethstaking will stick. Regardless of what we will call this new process, the implications should be on our radar.
For staking to be enacted, Ethereum will be using it as a replacement for the current consensus algorithm (this is just a fancy way of saying mathematical formulas that help us to achieve decentralized consensus). Don’t act too surprised. We knew this was coming. Afterall, staking has been on the Ethereum 2.0 roadmap for quite some time.
But, what exactly does this transition actually entail? As a quick reminder, the Proof-of-Stake concept suggests that you can only mine in direct correlation to how many coins of a given cryptocurrency you currently hold. This means that a crypto enthusiast who owns 42% of all Ethereum available could mine 42% of the blocks. While this might sound promising for those who currently hold Ethereum coins, this phenomenon is believed to bring the mining process to a 2.0 level by addressing many of the weaknesses of the Proof-of-Work algorithm. It could also benefit those who don’t hold the coin as well.
What is Ethereum Staking?
Alright, enough with all of this staking background. Ethereum staking is the process that allows us to mine based on our stake. But, more important than the what is the how. How exactly do we start staking on Ethereum? To ensure that this process is handled as efficiently and securely as possible, there are a couple of pieces to consider. These pieces include:
- Managing those who are creating the blocks
- Ensuring the rules of the blockchain are being followed
- Penalizing those who aren’t following these rules
Becoming a Validator
First things first, let’s consider those who create the blocks. Validators have the unique duty to make themselves available to be selected for a random vote on the next block. If selected, the weighting of the vote is dependent on the size of their stake in Ethereum coins (how many coins they own). Other validators will then have the opportunity to agree or disagree with the result of the vote. The goal is to achieve a consensus.
To become a validator, you will need to run something we’ll call a validator node. This can only be done if you lock up your Ethereum tokens into a deposit. Once you do this you can proudly knight yourself as a noble validator.
Validator Selection Process
To determine how each validator is selected and will receive rewards, the Proof-of-Stake algorithm can actually be further broken down to include chain-based and BTF-style consensus algorithms. In a chain-based algorithm, each validator is selected for each time slot. When the time slot approaches, the validator must then create one block. This block must be created with some connection to the previous block. By adding a block to the end of the chain, the intention is that all the blocks will eventually converge to create a network.
On the other hand, a BFT-style PoS means that validators are randomly assigned the right to add a new block. However, agreeing where the block is put is open to a vote. All validators must then agree if the proposed block should be added to the chain.
When considering the Ethereum model, the PoS can be classified as a hybrid of both the chain-based and BFT model. Once a block is validated, validators will then be compensated with a reward. This reward will also include a small portion of the network transaction fees. This rate has yet to be determined and will likely fall between 1.5% and 18%. The development team suggests this will be closer to 5%.
Like anything that occurs on the blockchain, security is always considered with the utmost importance. Since validators have such an important role in ensuring security and being online throughout this process, penalties will be put in place by the Ethereum team to ensure that validators are online as much as possible.
Other rules and regulations can be referred to as slashing conditions. These conditions must be followed by each and every validator, to ensure they are not losing their deposit. If a validator fails to abide, they may have some of their stake “slashed”. By slashing these returns, Ethereum intends to force evil validators off of their network.
Requirements to Stake
The last question you should be asking is how much you should be putting up for stake. While this decision is up to you, keep in mind the amount of ETH in your staking wallet will determine how large your crypto dividends will be.
However, you will need a minimum amount according to certain plans if you want to take part in staking. Ethereum 2.0 determined this to be 32 ETH. CoinMarketCap states that each Ethereum coin is currently worth $281.81 which means you will be putting up approximately $9017.92. This amount will be necessary for each validator.
Staking will also require that you have a sufficient computer and stable internet connection. Your computer will be required to have the software, including validator clients and beacon nodes (hubs for your validators). Consider that while there are still some requirements, they are significantly less than that of the existing Proof-of-Work algorithm which requires special hardware (ASICs) and a powerful computer.
Risks of Staking
We don’t want to be the bearers of bad news, but with anything new in the tech world, we are subject to risks.
One you might have figured out is the advantage that those who are investing large amounts of Ether will already have. Consider that if you have tons of Ethereum in your wallet already, you will have a more stable income from the creation of new coins, than someone who doesn’t currently have a lot of Ethereum in their wallet. While this might not necessarily be the case, it should be flagged as a potential risk of this transition.
A secondary risk that we should also consider is that of your Ethereum coins being tied up. As a validator, you might have to face something that we like to call the withdrawal queue. This means in addition to the minimum time it takes to receive your coins back (18 hours), you might be placed in a line of people who are also waiting to withdraw. You would then have to wait in this queue.
Finally, consider as a validator you need to be online always. This means that if your validator disconnects you are at risk of losing the coins that you have at stake. That said, according to the Ethereum founder Vitalik Buterin, if your validator is up more than 66% of the time, you will still be in a position to profit.
Who can stake?
With staking pools, ETH holders can pool together their resources. Once these resources are locked down, pool members will then work together and then earn a proportion of dividends equal to their contributed funds. Thanks to this provision and a variety of options for staking, just about anyone can begin staking. That’s right, we mean anyone.
Okay, we might have gotten a little excited there. Perhaps you are wondering what to do if your time and/or money are limited or if you are a bit confused about this process (believe us, we’ve been there). If any of these scenarios describe your situation, know that we haven’t forgotten about you. For those who find the process complicated, there are actually some opportunities to practice using fake ETH. If you are just in it for the learning and don’t mind the lack of rewards, Nimbus testnet is a great option to get you started. That way, when ETH is ready to be staked you’ll already be somewhat of an expert in this department.
Alternatively, to lower the stakes (see what we did there) you could also join a pool. One example is RocketPool, which will do your staking for you. As a member of a pool, the minimum staking amount, as well as the time commitment, is lower. The only thing you will need to keep in mind is that with less risk comes less reward. Additionally, when someone is doing the staking on your behalf, whether it is in the form of a pool or a staking-as-a-service company, some of your profits will be eaten away.
When can we stake Ethereum?
We know this process does touch the unfamiliar. With that thought in mind, there is some time before this proof of stake update goes through. The team behind Ethereum 2.0 (which you might also see referred to Eth2 or Serenity), shares that this process will be rolled out in phases rather than occurring at a single point in time. This means that in its initial 2020 roll out, you will be able to stake or mine Ethereum. However, over the course of this multi-year project, staking will then become the predominant consensus algorithm. Mining will then be phased out slowly by offering lower and lower rewards as time passes.
That said, current efforts have been slightly postponed. Initially, we were expecting Ethereum 2.0 to be released in the second quarter of 2020. With that initial deadline quickly approaching, researchers have assured us while it won’t be completed by that time, the initial network parameters will still deploy in 2020.
A Better Ethereum
If you have been loyal to Ethereum from the get-go, you will likely love this model. Why can we say this? Your mining experience would typically have been to prove that you had done the necessary work to receive compensation. However, if you hold Ethereum in your wallet, you show that you already have a stake in ETH and should receive a share of new coins, without proving anything. After all, you’ve already proven that you are a loyal investor by having some of these coins on hand already. We like to reward loyalty, and it looks like Ethereum will too with this new model.
Additionally, the backing protocol prioritizes both efficiency and security. This suggests a move towards stronger blockchains within the industry as competitors continue to build off of and improve the innovations of others.
Ethereum strongly believes that allowing for the staking of Ethereum will attract a new generation of Ethereum users, including those who haven’t been Ethereum enthusiasts just yet. This provides us a gateway into a large user base that will also work to increase crypto’s global adoption and the faith the world has in cryptocurrencies.
Ethereum will also continue to maintain its place on the crypto leaderboards. Although we mentioned that prices could likely stabilize, that does not mean they won’t increase. This means that now may be as good of a time as ever to get involved. Why can we say this? Remember the laws of supply and demand? As supply decreases, demand INCREASES. When more and more of these coins will be held in staking deposits, less of the coin is available for purchase. This could very well drive up the price. This gives investors some nice profit potential, and may even give Bitcoin a run for their money (MAYBE).
Stay on the Watch
While these aspirations may or may not sound overly promising to you, consider that there are still some unknowns. We still lack specifics about what the rewards actually will look like, and how mining will be phased out. Additionally, the phase 0 launch has also been postponed. This means being early to the game requires some diligence on your part, staker.
Although there is still some debate as to what this new system will look like, it doesn’t hurt to start your learning now. After all, you could be one of the first in the potential future of Ethereum 2.0.