Staking refers to storing crypto coins in a cryptocurrency wallet to support the blockchain network with its processes. And you will get rewards for doing the same. By staking the Ether token in the Ethereum ecosystem, you are contributing to securing the network. But when it comes to getting rewarded, the stakers will be chosen randomly. As a staker in the Ethereum network, your job is to store information, process transactions, and add blocks to the blockchain. If you can actively and successfully complete these tasks, then the rewards will be all yours. By staking Ethereum, you can earn passive money every month, and also strengthen the Ethereum blockchain network. But how is this Ethereum staking process done? Let’s find that now.
What is Ethereum?
Ethereum is a blockchain network like bitcoin where you can mine cryptos, send them to anyone, and use them whenever you need them. In the Ethereum network, the most popular token is ETH which you get as a reward for staking on the blockchain network. Ethereum blockchain has introduced smart contracts and also other services like games, NFTs, decentralized finance, and more. By staking ETH, you can join its market capitalization of $379.10 B, which puts ETH in the second position after bitcoin. The Ethereum blockchain was not scalable and secure enough when it was released. But now, it has moved to Proof-of-Stake (PoS) consensus mechanism from Proof-of-Work (PoW) and has introduced a new phase called Beacon Chain. Since December, the Beacon Chain has attracted many investors in the ecosystem to stake money.
As an investor, you will have to stake the ETH token for a certain period of time, and by doing so, you will get rewards. This will secure the Ethereum 2.0 network that is using the new PoS model. Now, to proceed further with the ethereum blockchain’s staking process, you will have to understand how this PoS model works.
What is the Proof-of-Stake Model?
To create faster and more secure transactions in the Ethereum blockchain network, the Ethereum protocol developers have switched from PoW to PoS. And as the name suggests, this consensus mechanism requires the users to stake an amount to be a validator in the blockchain. PoW, on the other hand, was using hardware equipment to stake cryptos on the blockchain, which you can still see in the bitcoin blockchain. In the bitcoin blockchain system on the PoW mechanism, the validators or miners have to complete a set of mathematical puzzles to add new blocks to the blockchain and validate the transactions. By doing so, the miners get bitcoins as rewards.
But on the PoS mechanism, you will have to stake ETH to the Ethereum blockchain. The more coins you gamble, the more promising your odds will be to get the reward. The stakers can also authorize a third person to perform the job roles in the blockchain as a validator, and in that case, the rewards will be shared. But if the bitcoin blockchain network is still using the PoW mechanism, then why did Ethereum switch to PoS?
Why Did Ethereum Switch to PoS?
The biggest reason why ethereum developers switch to PoS from PoW is to reduce the energy level required to create new ETH coins and validate transactions. It is also foreseen that the energy consumption needed to validate a transaction and create new ETH coins in the blockchain will be reduced by 99.95% after implementing the PoS mechanism. Also, the minimum essential for running a PoS validator node is way cheaper than that of PoW. Therefore, anyone with the minimum requirement can join in the staking process and earn passive income. And you can stake every day using your laptop or computer, and for that, you won’t require a lot of electricity either. So, if you compare staking to mining, staking has a lot of advantages.
Moreover, the more affordable the process, the more nodes will be added to the network, securing the blockchain further. There is also a “sharding” technique in the Ethereum blockchain brought by the PoS mechanism. The technique allows more than one parallel chain to combine for data sharing and loading transactions reliably. The shard chains can also allow the ethereum network to handle 100,000 transactions per second by merging it with rollups. Rollup combines a myriad of transactions outside of the main chain and creates cryptographic proof as to the validity and delivers that proof to the main chain.
How Ethereum Staking Works?
In the PoS blockchain, there are 32 blocks of simultaneous transactions. One round of validation takes around 6.4 minutes to complete. The bundle of blocks in the Ethereum ecosystem is also known as “epochs”. Epochs is the final stage in the staking system where the transactions made will not be reversible, and the blockchain system will add two more epochs after the first one. The validating process that occurs before the epochs is also known as the attesting process. In the Beacon chain system, this validation process clusters the stakers into a group which is known as committees in the blockchain system. One committee has 128 stakers who have the job of completing a particular shard block. Every committee of 128 members will be assigned time for completing a block and validating the transactions inside of that block.
The unconfirmed blocks in the Beacon system are known as slots, and there are 32 of them inside of an epoch. 32 groups of stakers will have to validate the transactions in each epoch. Among 128 members in the group, one person will have the exclusive right to propose new blocks to the system. The rest of the members will vote for which block to add to the system. Once a block gets the most number of votes, it will be created to the blockchain, and a “cross-link” will be made to verify its entry. And then, if the staker of the block with a new block proposal is able to add the block to the system, he will be rewarded. Cross-linking is the method of connecting individual shard blocks with the main Beacon chain. The final stage of the shard blocks needs to be shown in the Beacon chain after using the cross-linking process.
Please note that the proposers of the blocks and the attesters are rewarded differently on the blockchain. The proposers of the block will be awarded ⅛ of the base reward and the attesters will be awarded ⅞. These percentages are adjustable depending on the time a proposer takes to introduce the attestation. If the attester wants to earn the whole ⅞ of money, then he will have to present the block as soon as possible. If one slot does not include the attester adding the attestation to the block, the block will reduce in its reward value. If two slots pass to the block without adding the attestation, the reward will be decreased by 7/16B, 7/32 B for the three consecutive slots, and more.
Base reward determines the insurance rate of the Ethereum 2.0 blockchain, but the base reward reduces along with the rise of validators. If you are accepting of how the staking process works in Ethereum, then move to the next section of this post to take a part in it.
How to Participate in the Ethereum Staking Process?
To participate in the staking process in Ethereum, you will first need to set up a node or machine, and that machine will run software that will interact with the blockchain network. To become a staker in the Ethereum blockchain system, you should have a computer with a huge memory space because the blockchain will soon consume 900 GB of memory at 1 GB/day speed. Also, you will have to keep the computer switched on round-the-clock and keep it connected to the Internet 24/7. After installing staking software on your node, you will have to lock 32 ETH on the blockchain, and that is the first stage to become a validator in the Ethereum ecosystem. But since you are getting into the staking process for the first time, it’s also important to understand how profitable this operation can be.
How Profitable is Ethereum Staking?
32 ETH is worth 1,19,414.27 USD. And since you can see that it’s a lot of money, not many people are able to participate in the Ethereum staking process. But some third-party outlets give you access to various staking pools where you can rent the resources and share your rewards with joint stakers. Therefore, the amount of rewards you will be earning from staking is depending on how many amounts you have staked in the pool. Staking pools make the Ethereum blockchain accessible to many investors and strengthen the security of the blockchain. But if you don’t join a staking pool, then the chances of staking in Ethereum are not high for many investors. So, have you volunteered to take the wager?
Why Should You Stake in the Ethereum 2.0 Blockchain System?
Most investors who stake in the Ethereum 2.0 system are to earn an annual percentage rate that ranges from 6% to 15%. To get this APR, you will have to stake at least 32 ETH in the blockchain, and when the transactions are validated, you will make between 2 and 5 ETH according to the current market rate. But you will have to store your 32 ETH for years in the blockchain. People don’t risk this investment mostly because they don’t have enough ETH to stake or are keeping the coins to invest in other platforms. And you might want to do the same if you have very little ETH to stake in the blockchain. But if you want to get rewards with your ETH, you can put them on an exchange platform, and get some passive earnings from it. This does not mean you are actively running a validator node and staking on the Ethereum 2.0 system. But if you want to contribute to the Ethereum blockchain to make it stronger, then do stake ETH. Every node that stakes the ETH token validates the blockchain as a legitimate system in the industry. So, if you want to support the network, then staking would be the best option, and you are getting paid in return.
Is There Any Risk of Staking in ETH 2.0?
ETH 2.0 is not very advantageous at the moment, so if you want to stake in the blockchain, then you will have to take that risk. If you believe that the blockchain will become successful in the upcoming years, then staking on it is worth it. Another risk in staking in ETH is the lack of liquidity. If you stake in the platform, then you might not be able to withdraw or earn your returns in a couple of years because ETH 2.0 is not fully developed yet. This might not be appropriate for you if you had a straight intention. Also, there is another risk you should be worried about, which is Slashing. Slashing refers to a punishment you get if you fail to validate a transaction.
Ethereum blockchain is pretty successful, no doubt because it has some great minds involved, such as app developers and protocol developers. Upgrading the main protocol on the Ethereum system was the best decision it ever took because it has made the community stronger and more secure. Also, the team is not going to stop working on the platform until the integrations like rollups and migration are fully developed. But how long will it take for ETH 2.0 to receive success? We can only predict that based on how the blockchain is growing and how much hard work the community members are putting into the system. So, it’s obvious that the Ethereum blockchain will not vanish into thin air.