ETH2 holds many promises for tech enthusiasts and speculators alike. Ethereum is going through a monumental change which holds an appealing upside potential. Staking 32 ETH will allow you to become a validator(miner) and reap hafty rewards for securing network transactions. One must be aware of the potential upside as well as the risks involved before jumping head first to the future of blockchain technology.
But rest assured, ETH 2.0 is where the action will be and it’s one train you don’t want to miss.
The ETH 2.0 Wake Up Call
With Bitcoin Halving happening in a few days time, the crypto space is paying little to no attention to Ethereum transition from POW to Proof-of-Stake consensus mechanism. For the less technical amongst us, this transition practically marks the opening shot in creating a truly decentralized, scalable blockchain infrastructure. For many ETH holders, developers and ecosystem participants, POS allows anyone to become a validator(miner) and receive rewards for securing the network.
Think of it as traditional bitcoin mining, only no hardware is needed and it’s much easier to participate and get rewarded for attensting or proposing a new block. Current mining operations require deep pockets which makes it impossible for the average person to meaningfully participate in POW based blockchains. Ethereum POS will be based on a new blockchain, Beacon-chain. The new chain is generally responsible for organizing the active validators in the network, to become a validator on the Beacon chain, one is required to stake 32 ETH.
Already confused? The interesting part for most non die-hard-Ethereum-developers is the fact that like any mining operation, there are rewards involved. 32 ETH allows you to join the network and potentially make 5-15% yearly interest on your staked ETH.
The Reward Lottery Basics
The more active validators operate in the network the less each validator is rewarded on average. Very much similar to fixed interest securities, the higher the demand, the lower goes the interest. As such, early movers will be able to enjoy higher interest rates or rewards. However, being late to the party will necessarily mean that you will enjoy a smaller piece of the pie.
It’s important to understand the mechanics behind the scenes. The Beacon chain, amongst other functions, is randomly organizing validators into committees (groups of around 128). Every committee is assigned to attest on new blocks. Chosen validators are rewarded for successful and timely completion of their assigned task, do your job get paid, it’s as simple as that. The more validators are active the less each one will be rewarded for completing a task:
ETH Price Sparks New Wave
ETH market price is one of the most important components behind the economic incentives offered in the Beacon chain ecosystem. Generally speaking, the more ETH is being staked, the higher ETH price will go. There is no model to prove that is the case, allowing for greater speculation. However, if we are to expect millions of staked ETH in the first few years, there is a good case to be made in favor off a positive price effect. Increasing ETH prices will make it more attractive for participants to continue staking their ETH and remain active in the network.
Let’s imagine a scenario: (Image Below)
Total network staked ETH – 1,000,000
Interest rate – 10%
ETH price – USD 300
A well operating validator will be able to return (32 * 10%)*300 = USD 960 / Year.
Total network staked ETH – 5,000,000
Interest rate – 5.5%
ETH price – USD 600
A well operating validator will be able to return (32 * 5.5%)*600 = USD 1056 / Year.
This is coupled with the upward price action. One should not miss out on the fact that the ETH earned in interest during the first year went up in price as well. Total interest income should be calculated as following:
(Year 1) 3.2 ETH * 600 + 1056 = USD 2,976 per validator in 2 years of staking. This represents a staggering 30% upside on your initial investment of 32 ETH (or USD 9,600).
Like everything crypto, guesstimating ETH price trajectory is a risky game. If you are in the game for speculative reasons alone, better wait or go slow. A more suited mindset would include some understanding of the technological promise in ETH2. A quick glimpse into Vitalik’s vision of the future will make it easier for you to stomach the rocky road ahead.
Rough Seas Ahead for Staking?
Now that we can start dreaming, let’s take a step back and understand that like any other investment, usually there are no free meals. Many factors come into play when generating return from ETH staking.
Slashing and penalties, in a nutshell, are mechanisms built in the network to prevent bad acting and ensure optimal validator performance. If you fail to conform with basic requirements such as making sure your validators are updated and online, you might be exposed to penalties (reduced rewards). In more extreme cases where the network detects fraudulent activity, a certain validator might get ‘Slashed’, i.e, automatically lose part of your invested principal of 32 ETH and forcefully exit the network.
Server or third party costs are paramount as running validators in AWS, Azure etc. comes at a cost while set up and maintenance require technical knowhow. For the less tech savvy, there is the option of depositing your ETH with a third party such as Coinbase and Binance, however, their service comes at a steep cost which usually consists of a % of your rewards.
Scale should also be considered, the bigger the amount you stake, the higher the costs you’ll sustain. To top it all, a larger number of validators will demand security, monitoring, software updates etc. in increasing frequency and complexity. It is expected that easier, less technical staking solutions will be available once ETH 2.0 ecosystem matures. Early stage participants should be aware of the immense potential upside but also take the related costs and risks under consideration.
Staking Is First Come, First Serve
For many, staking our ETH eventually comes down to an investment decision. Like equity or bonds, it is imperative to plan your exposure to a certain asset and model the risks-reward. A major consideration for most early adopters would be the fact that staked ETH is a one way transaction, i.e, once staked it will convert into a different asset (BeaconETH) and your original ETH will be dissolved.
Additionally, staked ETH will be non-transferable until the network reaches a predetermined volume of validators to add stability. However no one can predict exactly when that will occur.
Ethereum is still being explored and experimented with, which holds a promise for powering the decentralized web. With all that in mind, there is an immense upside and early movers will reap hefty rewards for supporting the new PoS network from the get-go.
Those who start staking first are guaranteed to earn more and have the rewarding advantage of already being in the game and earning interest on their stake.
To learn more about our new staking service, Eth 2.0 and more, check out the Blox blog.
You can start staking by visiting us online today!