Ethereum 2 staking rewards

Eth2 Staking: Interest & Rewards
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Ethereum is going through a monumental change which holds an appealing upside potential. Staking 32 ETH allows anyone to run a validator (effectively replacing miners in Eth2) and reap rewards for securing network transactions. The potential upside is appealing, but there are also risks involved, let’s dive in.

The Eth2 Wake Up Call

With Bitcoin halving happening in a few days, the crypto space is paying little to no attention to Ethereum’s transition from a Proof of Work to Proof of Stake (PoS) consensus mechanism. For the less technical among us, this transition allows the blockchain to truly scale in a decentralized fashion.

Miners will be no longer and validators will hit the scene, taking turns proposing and attesting blocks. Think of validators as similar to traditional PoW miners – as they are helping secure and grow the network – only with no specialized hardware and with much less difficult tasks. Current mining operations require deep pockets which makes it almost impossible for the average person to meaningfully participate in PoW based blockchains. Eth2 will be based on a new PoS based blockchain, the Beacon Chain, allowing anyone with 32 ETH (or less with the development of the decentralized staking pools!) to join in if they so choose.

By staking 32 ETH, the potential exists to earn up to 18% annual percentage yield (APY) while contributing to the future of Ethereum.

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 the interest. As such, early validators will be able to enjoy higher interest rates and rewards.

Eth2 Staking: Interest & Rewards
There is a logic to having the network operate in such a manner; early stakers will assume more risk since the network may be unstable as the tech is new and untested at scale. As they assume greater risk, so too shall they receive greater potential rewards.

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 returns from ETH staking.

Slashing and penalties, in a nutshell, are mechanisms built into the network to prevent bad actors 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 in the form of reduced rewards. In more extreme cases where the network detects fraudulent activity, a validator could be ‘Slashed’, i.e, a large reduction of staked ETH and forceful removal from the network.

Server or third party costs If hosting a validator on a dedicated server (AWS, Azure etc.) this will come at a cost. Set up and maintenance will also require technical knowledge. Alternatively, staking services can be employed to do the job for you.

Scale should also be considered – A larger number of validators could potentially demand aggregating infrastructure and management costs depending on your set-up.

The Bottom Line

For many, deciding to stake ETH eventually comes down to an investment decision. Like equity or bonds, it is imperative to plan exposure to a certain asset and model the risk-reward paradigm. A major consideration for most early adopters will be the fact that staked ETH for the time being is a one way transaction – one’s entire 32 ETH stake + rewards are locked up in the network until later Phases (potentially 1.5-2 years from genesis).

With all that in mind, there is an immense upside and early validators can reap significant rewards for supporting Ethereum’s transition to PoS from the get-go.

To learn more about decentralized ETH staking, Eth2, and more, check out our other blog posts and you can download our staking tool, here.

Team Blox