Ethereum Staking

Ethereum Staking

Ethereum will soon upgrade to ETH 2.0. The transition is planned to happen later this year. The mining proof-of-work (PoW) model will start changing to proof-of stake (PoS) Ethereum staking model. Consequently, Ethereum mining will eventually stop. Where does it leave us and what are the options?

 

Ethereum mining

The current Ethereum consensus is, alike Bitcoin, based on PoW. This means miners are using computation power to confirm transactions (validating blocks) in exchange for a reward in a form of the mined cryptocurrency. The difference is that Bitcoin is mined by ASICs – specially designed machines to mine only one specific cryptocurrency, whereas Ethereum runs on the Ethash hashing algorithm employing the standard GPUs from Nvidia or AMD for instance. GPUs are much cheaper and more accessible with an advantage that they can be switch to mine a different coin that allows GPU mining. ASICs, on the other hand, are much more energy efficient and have high hashing powers. Though they can become quickly obsolete when a new model is released and normally support only one cryptocurrency.

Schematics of crypto mining

Even though Ethereum should be ASIC resistant, some of the EHT ASICs appear on the market and it rumored that around 40% of hash power is created by ASIC miners. There was an ongoing discussion whether the Ethereum should be upgraded to ProgPoW (programmatic proof-of-work) that would remove the current ASICs, but the community did not reach consensus. And it might not even happen at all since the mining will end in the near future with Ethereum upgrade to PoS.

 

How will Ethereum staking work?

In PoS, validators need to stake their coin in order to participate in the block confirmation. This means they need to lock their ETH they want to stake in a wallet and run a validating node. The validation node does not need to be a specific machine. A personal laptop will do as long as it is constantly connected to the network. In PoW, the right to validate a block is assigned according to the provided hashing power. The right to confirm a block in PoS is distributed based on the amount of ETH you are staking. For instance, if you provide 1% of all ETH available for staking you will validate 1% of all blocks. However, the amount of time that your ETH coins have been available for staking might also be a factor in the validator selection protocol. The deposited ETH also acts as and deposit and can be forfeited if the validator attempts to commit fraud.

 

Why PoS?

Ethereum developers are trying to come up with an algorithm that would help to speed up the network and provide better decentralization. With PoS, the validator will not need specialist hardware, so more people can join. Also, the ETH 2.0 will be re-engineered to a new, more scalable platform. The staking model is also considered to be far more energy-efficient compared to PoW, where all the participants are trying to validate the block simultaneously.

scalability

 

What will happen to ETH miners?

Even though the implementation of PoS will be gradual (a year or two) with a planned start in the second half of 2020, ETH miners need to be prepared for this transition. It is unreasonable to think that big mining pools with contracted electricity and leased place would suddenly sell the equipment to buy more ETH and start staking instead. After all, miners are not usually after mining one specific coin. So we can expect that most of the ETH hashing power will switch to alternative coins like Ethereum Classic, Monero, ZCash, Grin, Ravencoin, and many others. Miners might then either keep those coins or exchange them immediately to BTC or ETH.

Some smaller miners might decide to sell their equipment to raise capital. Especially since the minimum threshold required to participate in staking is 32 ETH and they might not have accumulated enough ETH over their mining period. To stake the ETH you will not need powerful equipment like current GPU mining rigs. However, you are required to run your own network node. And it has to be constantly online, or you will lose your daily income. Therefore, for smaller users, staking ETH on their own may not be so straight forward. However, there are alternatives.

 

Staking services and staking pools

Crypto companies and exchanges are already preparing for ETH staking service, taking on all the risks and maintenance expenses. The advantage here is that you can deposit any amount of ETH and they will stake it for you for. However, there are usually charges for the service in form of a fee or a percentage of the staking reward. Alternatively, validators can join a staking “pool”. In a staking pool, multiple parties come together and participate as a single validator. They share together all the risk and expenses so there are no additional charge fees for staking.

Coins

Will staking be profitable?

Expected annual return on staking range between 2% to 18% and will depend on the total number of participating ETH coins. In the beginning, when fewer people are expected to participate and the staking service would not be so widely spread, higher returns can be expected. The costs of running a node and a possible ETH price volatility have to be however also consider. Though, successful implementation of PoS should be bullish for Ethereum as the whole network will be faster and substantial part of ETH coins will be locked-up for staking purpose creating a shortage.

 

Overall, ETH staking should constitute a nice passive income.

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