Ethereum Staking is the process of depositing 32 ETH to activate the validation software.
As a validator, you will be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This keeps Ethereum safe for everyone and earns you new ETH in the process.
This process, known as Proof-of-Stake, was introduced by the Beacon Chain.
The launch of the Beacon Chain network in December served as a new consensus model for Ethereum. Staking is a public benefit for the Ethereum ecosystem, allowing you to contribute to network security and earn rewards. Ethereum Staking involves locking a certain amount of ETH, the native digital currency of the Ethereum blockchain, for a specific period of time to help secure the blockchain and earn network rewards.
What is Ethereum staking?
As we mentioned in the introduction, Ethereum staking is the process of locking a certain amount of ETH for a specified period of time to help secure the blockchain and earn network rewards. Individuals who do this are known as “validators” or “stakers” and are responsible for processing transactions, storing data, and adding blocks to Beacon Chain, the new consensus model for Ethereum. Validators receive rewards for their active participation in the network, receiving profits from their staked coins, which are determined in Ether.
The Ethereum staking method not only serves as a passive income opportunity for participants, but also helps with the next level of security for the Ethereum network, known as Ethereum 2.0. Ethereum 2.0 is the next phase of Ethereum that runs on Beacon Chain, the Proof of Stake (PoS) consensus model for Ethereum.
What is Proof of Stake?
The Proof of Stake algorithm was created as part of programs to activate the transaction validation process faster and more environmentally friendly. In this mechanism, it is expected that Ethereum protocol developers will make a shift from the well-known Proof of Work (PoW) consensus model to PoS or Proof of Stake.
Proof of Stake is a consensus mechanism that requires users to share a portion of their digital currency for validation, as explained above, unlike something like Proof of Work that requires users to purchase and run mining equipment. Often, in a PoS system, validating by putting more coins increases one’s chances of earning rewards in the network. Depending on the PoS system, users may also be able to transfer their stakes to another user who can take on the responsibility of validation on their behalf.
Why is Ethereum switching to PoS?
One of the main reasons for the consensus change in Ethereum’s staking process is the significant reduction in energy required for validating transactions and issuing new Ethereum. According to a post published by the Ethereum Foundation blog, the team expects the new PoS system to reduce the energy consumed during the validation process by up to 99.95%.
One reason for this is that the minimum hardware required to run a PoS validation node for an average user is significantly cheaper and more accessible than the advanced computer hardware required for Ethereum digital currency mining. Unlike mining, this can be done on everyday computers or laptops, eliminating the need for mining equipment and, as it is more accessible, it is likely that the new 2.0 system will attract more node operators. This, in turn, will help strengthen the decentralization of the new network.
PoS in Ethereum staking was also created to facilitate “sharding”, a partitioning technique that allows multiple parallel chains to efficiently share data and transaction load. These shards, when combined with a secondary scaling solution called “rollups”, can allow Ethereum to process over 100,000 transactions per second. This is a huge leap compared to the 10-15 transactions per second it currently processes. Aggregation involves collecting dozens of transactions together from the main chain, creating cryptographic proofs for them (proof of their validity), and then sending them to the main chain.
How does Ethereum staking work?
Unlike PoW-based blockchain, PoS-based blockchain validates approximately 32 transaction blocks during each validation round, which takes an average of 6.4 minutes. These blocks are known as “origination” blocks. A completed round means that existing transactions are irreversible when the blockchain adds two more rounds after it.
During the validation process (also known as the “verification process”), the beacon chain randomly groups stakeholders into 128-person “committees” and assigns them to a specific shard block.
Each committee has a designated time called a “slot” to propose a new block and validate transactions within it. There are 32 slots per round, meaning that 32 committee sets are required to complete the validation process in each round.
When a committee is appointed to a block, a random member of the exclusive group is given the right to propose a new block of transactions while the remaining 127 members vote on and validate the proposed transactions.
When the majority of the committee confirms the new block, it is added to the blockchain and a “cross-link” is created to confirm its insertion. Only then does the sticker selected to propose the new block receive its reward.
The cross-link is the process of matching disconnected states with the main chain, also known as the Beacon Chain. The final state of each piece must be reflected on the Beacon Chain through mutual links.
Note that block proposers and validators have different reward models. The block proposer receives ⅛ of the base reward, known as “B,” while the validator receives the remaining ⅞ B. The validator must submit it as quickly as possible.
How to do Ethereum staking?
People who are interested in Ethereum staking need to set up a staking node by running Ethereum 1.0 and Ethereum 2.0 clients. Ethereum clients are simply software that enables nodes to interact with the Ethereum network.
The software clients that are compatible with staking nodes include:
- Prysm: This client is a Go language version of Ethereum software.
- Nimbus: This is a lightweight version of Eth1 and Eth2 written in the Nim programming language.
- Teku: This client is a centralized Eth2 software client written in Java.
- Lighthouse: This software uses the Rust programming language.
As a minimum requirement, you need a computer with enough storage space to download both Ethereum blockchains (old and new). Currently, Ethereum 1.0 contains about 900 GB of data and is expanding at a rate of around 1 GB per day.
Validators are also expected to keep their nodes connected to the blockchain 24/7. Therefore, having a quality internet connection is a major criterion. After installing your validator software on your computer, the next step is to lock at least 32 Ethereum in the Ethereum deposit contract address:
To do this, you need to create two keys (one for signing and verifying transaction blocks and the other for withdrawing your funds). However, until Eth1.0 is merged with Eth2.0 in 2022, you cannot create your withdrawal key.
Note that you need to first visit the ETH 2.0 launchpad and follow the available instructions before making a payment to the staking contract address.
This payment confirms your claim for validation. It also provides a way to punish disobedient validators who deliberately or accidentally undermine the Ethereum blockchain.
How much is the Ethereum staking profit?
The distributed reward among shareholders depends on the total number of staked ETH and the number of validators in the network. When the amount of ETH staked by shareholders decreases, the annual interest rate increases.
For example, when there were only about 500,000 ETH available last year, the annual interest rate (APR) was slightly over 20%. Today, over 6.8 million ETH is locked on the blockchain, which means the APR has decreased to about 6.0%.
As soon as the shareholder pool is large enough to upgrade a decentralized ecosystem, the interest rate will decrease. Currently, it is impossible for shareholders to withdraw their staked funds and accumulated rewards, at least until Ethereum 2.0 and Ethereum 1.0 are merged.
Staking Ethereum on CoinBase
To stake Ethereum on CoinBase, users first need to create an account on this exchange. This requires a verification process.
After creating an account, users need to specify the amount of assets they want to stake. To stake on CoinBase, users need to purchase Ether tokens.
After buying this cryptocurrency and transferring it to the Ethereum 2 network, users are added to the waiting list for staking due to high demand.
Once activated, CoinBase completes the remaining steps of the staking process, and users only receive profits.
Staking Ethereum can be a great way to earn passive income while contributing to the security and decentralization of the network. However, as with any investment, it’s important to do your research, understand the risks involved, and only invest what you can afford to lose. The rewards and interest rates for staking can fluctuate depending on various factors, such as the total amount of Ethereum staked and the number of validators on the network.