Ethereum staking 2.0

Ethereum

The principle of staking is blocking a certain amount of Ether (ETH) on the account for the ability to participate in the validation of transactions and receive some reward for this.

This blocked amount is called the "stake" or "stake". Any member of the proof-of-stake blockchain network can join this process. In addition, there are several types of staking, each with its own benefits and conveniences.

The Ethereum blockchain development team is currently working on a major update, which they decided to call Ethereum 2.0. It implies a complete reengineering of the entire platform in order to turn it into a new one - more resistant to the problem of scaling. The start of the implementation of this project is planned for the summer of 2020, and the whole process will last for a year or two until all 3 main stages of the transition are completed. And one of the most significant changes in the Ethereum 2.0 protocol will be the move from proof-of-work consensus to proof-of-stake.

What is Proof of Stake?

PoS is a consensus mechanism used in some blockchains. It grants those users who have a certain share of network tokens the right to receive rewards for verifying new blocks in the blockchain. This method differs from the PoW used in the Bitcoin network, in which the right to validate blocks is given to the user who first found a solution to a complex cryptographic problem, which means that nodes with large computing power have an unconditional advantage over the rest.

If the user agrees to act within the PoS consensus algorithm, then his stake is blocked and he temporarily cannot use these tokens. And in the event of an error or malicious action against the interests of the network, the tokens can be permanently lost.

Anyone in the network can take part in this process. However, a stake is not at all a guarantee that its owner will be chosen to validate the next block. It only grants "the right to participate in the selection process." Moreover, in most situations, the likelihood of being a validator is directly proportional to the size of the blocked stake. If a node, for example, has blocked tokens at a cost of 1% of the total pool of all stakes, then it, accordingly, gets the right to confirm 1% of all blocks. Also, a certain role in the selection of a verifier can be performed by the duration of blocking funds and the time elapsed since the last moment of the selection of a participant by the verifier.

Why Ethereum 2.0 will work on PoS?

In short, for greater decentralization and higher speed of the blockchain.

At the beginning, Ethereum worked on the basis of the PoW consensus algorithm - this has happened historically. At the time the blockchain was launched, there was no real alternative to this algorithm. However, it soon became clear that proof-of-stake is more energy efficient than PoW.

In addition, Ethereum developers are actively supporting an increase in the degree of decentralization of their platform, and PoS will help them in this. The fact is that the mining process is now almost entirely in the hands of large mining pools in Asia and Europe, since they have a noticeable advantage in computing power, thanks to the use of specialized expensive equipment. It is impossible for ordinary users to compete with them.

With PoS, any user who has invested their tokens in the common stake can become a validator. Moreover, the algorithm is organized in such a way that even those who have invested the minimum allowable amount have real chances. This will significantly increase the degree of decentralization of the blockchain and remove its dependence on computing power.

In addition, the new Ethereum 2.0 will implement the sharding principle, which will significantly increase the total network capacity.

How will staking work in Ethereum 2.0?

Just like on other platforms which work on the basis of the PoS algorithm - blocking funds, loading a client and waiting for their turn for validation.

It will be relatively easy to connect to the process. There is a minimum allowable steak size - 32 ETH. Also, the participant will have to run the validator node on his machine. Fortunately, there is no need for specialized equipment for this - an ordinary computer or laptop will cope with this task. But the node must be constantly connected to the blockchain, otherwise, the validator will have to pay some penalty.

It is expected that the profit from the placement of ETH tokens in the stake will be from 4 to 10 percent per annum of the deposited amount. Regarding those who try to take advantage of the validator's capabilities for personal purposes, the “slashing” algorithm will work against them.

Differences between Ethereum 2.0 and other PoS platforms

There are already existing platforms operating on the basis of the PoS consensus algorithm - Tezos, Algorand and Qtum.

Tezos have developed their own "Liquid Proof-of-Stake" consensus algorithm. Something between PoS and delegated PoS. Verification of blocks in this blockchain is called "baking". In addition, anyone who owns Tezos (XTZ) tokens can transfer a certain share of them to the current validator so he'll be able to act on behalf of the user and share a part of the profits for baking. However, it is not the token itself that is transferred, which remains in the user's wallet, but the right to use it in the confirmation process. In order to become a full-fledged validator, however, a base fee of 8000 XTZ is required. According to reports, Tezos staking profit is approximately 7 percent of the original stake.

Algorand uses classic PoS. And in addition to it - the "secret self-selection" program, which randomly selects validators from the list of those who participate in the staking process. But the main "trick" of Algorand is that all holders of Algo tokens are rewarded simply for participating in the program. You can even not block anything and not participate in the block confirmation process. So there is no minimum rate to participate in the process. But the rate of return is also slightly lower - about 5% for each owner of Algorand tokens.

Qtum also uses pure PoS. Any user who has a Qtum token or even part of it can become a validator and compete for the right to validate blocks. The project even developed a special mobile application to make it easier for users to participate in staking. And for more advanced participants there is an opportunity to use the "command line" functions, which provide some additional benefits. Staking in Qtum provides a yield of about 7% per annum. There is no minimum deposit amount, however, the more tokens are blocked, the higher the chances of becoming the chosen validator.

There are other blockchains that use the PoS mechanism, for example - EOS, Cosmos and a number of others. And many of them use a more advanced version of proof of stake - Delegated Proof of Stake or DPoS.

What is a staking pool?

In short, this is when several users come together to participate in the staking process as a single validator.

The main advantage of pools is that they allow members to pool their funds and increase their chances of becoming elected validators. On the other hand, the remuneration is distributed in proportion to the amount contributed, so that the final profit is usually much less.

Staking pools can be a good source of passive income for those who do not have the knowledge to set up their own validator node on the network. Another advantage is the fact that funds are blocked in them - they can be withdrawn almost at any time.

Risks and benefits of staking

The main advantage of staking is the ability to earn income simply from owning a cryptocurrency. And at the same time, be an active participant in the chosen blockchain project.

However, by placing their assets in the stake, the user blocks them for a certain period. And if suddenly there is an unexpected drop in the market, it will not work to sell the crypt before the end of the blocking period in order to somehow compensate for the losses.

Even a slight negative market dynamics can lead to the fact that the reward will no longer cover the decline in the value of the cryptocurrency. As for those who participate in the formation of the staking pool, they must understand that they are giving their cryptocurrency into the wrong hands. And this is always a risk. Therefore, do not forget that your private keys cannot be transferred to anyone, even those who, allegedly, are acting in your interests.