In this article, we will discuss:
1.What is staking in Ethereum 2.0?
Maintain a certain amount of Ether (ETH) to join the network and get a reward.
The staking process involves blocking a particular cryptocurrency in a wallet to participate in the operation of a blockchain in exchange for rewards. Theoretically, anyone can participate in this process on any blockchain that operates a proof-of-stake consensus. The proof of participation has several variations, which also allow people to participate in staking.
The core Ethereum development team is currently working on a significant upgrade, called Ethereum 2.0. This involves re-engineering the entire Ethereum platform, effectively releasing a new, more scalable version. Implementation is expected to begin in the summer of 2020 and will likely run for another year or two until all three phases are complete. Part of the Ethereum 2.0 implementation involves moving Ethereum from proof-of-work to consensus proof-of-stake.
2.What is proof of participation?
Proof of participation, or PoS, is a consensus mechanism used by some blockchains.
PoS provides those with a stake in network tokens with the right to earn rewards for validating blocks. This is in contrast to proof-of-work, or PoW, the consensus model used by Bitcoin (BTC). PoW assigns block commit rights to those who demonstrate the greatest amount of computing power.
After a validator agrees to stake your tokens, the bet is blocked. In many cases, it will be lost in whole or in part if the validator does not act in the interest of the network - whether intentionally or not.
In principle, anyone can do staking; but in reality, a protocol will be used to determine which participants will be selected to validate blocks and earn rewards. The right to validate a block and receive rewards is usually assigned based on the proportional value blocked. Therefore, someone who bets 1% of the total amount will be able to validate 1% of all blocks. However, the time period in which the value was blocked can also take into account the validator's selection protocol.
3.Why is Ethereum 2.0 implementing PoS?
Ethereum seeks to decentralize and accelerate the network. Ethereum has historically operated a proof of work consensus. However, one reason for switching to the proof of participation is that it is generally considered to be much more energy efficient than the proof of work.
Ethereum's core developers are strongly in favor of decentralization, which points to another reason to move to PoS. In recent years, mining of the biggest cryptocurrencies, including BTC and ETH, has become heavily reliant on a small number of large mining pools due to the rush to develop faster and more sophisticated mining hardware.
On the other hand, anyone can operate as a PoS validator without the need for specialized hardware. Therefore, the theory is that PoS blockchains have a better chance of being more decentralized due to a lower barrier to entry. Ethereum 2.0 will also involve the implementation of sharding, which is a partitioning (division) technique that allows for faster throughput.
4.How does the application of staking work in Ethereum 2.0?
As with most other platforms, lock, load and wait.
Staking on Ethereum 2.0 will be quite straightforward. There will be a minimum limit of 32 ETH required to participate, and validators will need to be running a validator node. As mentioned earlier, this does not have to be specialized machinery and can be done on a normal computer or laptop. However, validators are expected to be online consistently or face some minor penalties.
The ETH staking rate of return is expected to be around 4% to 10%. A program called “slashing” will be applied to any validator that acts maliciously towards the network, taking a part of the validator's participation.
5.Comparing Ethereum 2.0 with other PoS platforms
Several other major blockchains are already running a proof of participation consensus, including Tezos, Algorand and Qtum.
Tezos runs a staking program using the “Net stake test” algorithm, a hybrid between pure PoS and delegated stake test, or DPoS. The validation of blocks in the Tezos network is known as “baking”. Anyone who has the Tezos token (XTZ) can delegate their tokens to a validator to "bake" on their behalf. However, the original owner retains his tokens in his own wallet. You can participate as a 'baker' if you have 8.000 or more XTZ tokens, called a "roll", and operate a validator node. The rate of return for staking at Tezos is currently around 7%.
Algorand operates a consensus protocol called “pure proof of participation”. It uses a system called “secret self-selection” to choose randomly selected stakeholder committees that will validate each block. What makes Algorand different is that all Algo token holders are rewarded simply for keeping their tokens, regardless of whether they choose to participate in the PoS program or not. Therefore, there is no minimum bet to win rewards with Algorand. The current rate of return for Algorand token retention is about 5%.
Likewise, Qtum is also run based on an absolute consensus of PoS, where anyone with up to a fraction of a Qtum token can become a validator and compete for block rewards. The project implemented a native application, facilitating the participation of ordinary users in its staking program, and there is also a command line option for more technical users. The bet on Qtum provides a return of around 7% per year. There is no minimum participation, but the retention of more tokens increases the chances of being selected to validate and process transactions on the network.
Many other blockchains operate staking programs, including EOS, Cosmos and others. Many of them are running variants of the standard PoS consensus, such as DPoS.
6.What are staking pools?
Staking pools involve several parties coming together to participate in the process as a single validator.
Staking pools are managed by an operator. For example, exchanges like Binance, Crypto.com and Kraken run staking pool programs, where the exchange will deposit user funds into a wallet that will be used for staking. However, there is also the opportunity to participate in staking operations based on users holding tokens in their personal wallets – even in cold wallets.
The advantage of staking pools is that they allow users to group their cryptocurrencies for a greater chance of being selected as validators and winning rewards. On the other hand, the rewards are spread across all participants in the pool, so they generally produce proportionally less.
Staking pools are also a good option to obtain passive income, without the need for technical knowledge to configure a validation node in the network. An additional advantage is that no token must be blocked for a defined period, which is necessary to be a validator in many staking programs.
7.What are the risks and benefits of staking?
Passive income vs. vulnerability to changes in the market.
The most obvious benefit of staking is the opportunity to generate income by holding cryptocurrencies. Participation also provides an opportunity to be an active participant in your favorite blockchain.
However, by staking, users block their cryptocurrency reserves for a defined period. This means that if there is a sudden drop in the market, they will not be able to withdraw their cryptocurrencies from the staking program to sell and mitigate any losses.
Even in the event of a minor market downturn, the value of the rewards may not cover the reduction in the value of the cryptocurrency. When participating in a staking group, people need to be aware that someone may be taking custody of their cryptocurrencies, and that carries some risk. According to the general advice for cryptocurrency users, all private keys must be kept secure and never shared with other people or entities.