Stakero Blog

Ethereum 2.0 Staking: Earn Passive Income but Remember the Risks

One of the main events of the past year in the world of cryptocurrency may have been the long-awaited transition of Ethereum to version 2.0 of the network. It is long-awaited, among other things, because Vitalik Buterin predicted an update back in 2016. However, it was not possible to invest in the deadlines, and the process slowed down significantly.

Why switch to Ethereum 2.0

One of the problems of the Ethereum network that the update should solve is scalability. Earlier, the altcoin blockchain is capable of conducting up to 15 transactions per second. This figure is more than two times higher than that of bitcoin. However, for a large number of users, this speed is not enough. For example, the Visa payment system can carry out up to 24,000 transactions per second.

Another solution to the network speed problem is to change the Ethereum algorithm from Proof-of-Work to Proof-of-Stake. This mechanism implies that the confirmation of transactions in the cryptocurrency network occurs using the computing power of computers with the help of miners. 

The use of the Proof-of-Work algorithm prevents the growth of the throughput of the Ethereum network. For it to withstand a large load, more miners are needed. And the growth of their number is slowing down, since over time it becomes more difficult to mine cryptocurrency and, accordingly, more expensive.

For this reason, the Ethereum development team is planning a transition to the Proof-of-Stake algorithm. Unlike the first, it does not require the use of computing power of computers to confirm blocks. That is, there is no need for miners. Instead, transactions will be confirmed by validators, which are users who will keep a certain amount of coins in their wallet, but less than 32 ETH. Thus, the system will no longer need expensive equipment.

Another solution to the scalability problem will be the introduction of sharding. Now the Ethereum network is a common database. After the update, the blockchain will be divided into autonomous, interacting blocks, each of which will process its own transactions and smart contracts.

Ethereum 2.0 update will lead to technical improvement and development of its network. The transition to a new algorithm will significantly scale the product. Thanks to this, ETH will be able to keep first place in the altcoin ranking, as there are now blockchain platforms that compete with Ethereum in terms of throughput, network efficiency and the number of dApps applications.

Staking Ethereum 2.0

Since 2020, staking has become available for holders of Ethereum 2.0, when a user gives ethers like a deposit, thanks to which it ensures the operation of the network and earns interest. The best association with the staking process is a bank deposit. The main difference is that the coins you allocate will help the network and ensure the conduct of transactions in it, but not earn money for the bank.

For staking, you need to lock a certain number of your coins in the node. In fact, this is a passive income with interest on locked coins. There are services EthereumPrice.org makes it possible to calculate the estimated income from staking after switching to Ethereum 2.0. With the help of the new calculator, crypto enthusiasts can roughly imagine what the earnings on the Ethereum Proof-of-Stake will be, taking into account some parameters. The latter include the amount of ETH allocated for staking, as well as the duration of a single node.

Validators will confirm transactions on the new Ethereum network. They will be rewarded for their work in the form of passive income with staking. The profitability of staking will depend on the number of validators. The more of them, the smaller the amount is due as a reward. In this regard, it can be suggested that users who become validators at an early stage will be able to get the most profit.

Thanks to the update, Ethereum will be able to compete not only with other cryptocurrencies but also with DeFi projects. At the moment, they have firmly occupied a niche in which staking brings the main profit.

How to stake Ethereum 2.0

Anyone can block their tokens, but the choice of who will validate blocks and receive rewards is made by an automatic protocol. This choice depends on the total amount of the bet. If someone staked 2% of the total supply of tokens, they will be able to confirm 2% of the blocks. Also, the protocol can take into account the duration of the bet. 

To start staking Ether 2.0, you need to run a validator node and lock your ETH tokens in your wallet. This will allow you to participate in the creation of blocks. Validator nodes will be semi-randomly selected to vote on new blocks. The other validators then negotiate the result to reach a consensus.

The Proof-of-stake algorithm will perform the same function as mining, but it is more secure and decentralized than thу last, and this will help the Ethereum blockchain scale and process transactions more efficiently.

After the introduction of the staking feature, you can still mine Ethereum 1.0, but the reward for mining will gradually decrease. So after the Constantinople update in 2019, the mining reward has been significantly reduced. There are speculations that the mining reward will decrease tenfold in the coming years, although in the end, everything will depend on the price of ETH.

If you are interested in staking Ether and want to make money from it, then you will need at least 32 Ethers. Staking with fewer coins will not be available. However, small investors can join the staking pool.

You don't need a powerful computer to run ETH staking, and even ASIC devices don't offer any advantage. Consumer laptops are capable of supporting at least one validator slot.

However, for ETH staking to be continuous, it will be necessary to constantly stay online to verify blocks at any given time. You will also need some technical knowledge to run the Ethereum node software.

Validators will have to wait at least 18 hours to withdraw their ETH, assuming there is no queue. Naturally, most validators will lock up their coins for longer periods. To maintain the integrity and security of Ethereum 2.0, use deterrents. Small fines incentivize validators to stay online at all times. There is also a process designed to prevent malicious actions by validators. This feature is called Slashing, which takes away part of a validator's stack and forces that validator off the network.

Staking through mediators

To make money on Ethereum 2.0, it is not necessary to have 32 ETH, a powerful PC and other specific tools like the ability to read code. Such a high and difficult threshold for entering a new network is easily leveled by intermediaries from the DeFi sector and centralized services like exchanges.

Probably the easiest and laziest way to make money on ETH 2.0 is to go to an exchange and stake your ETH since almost any major exchange provides this option. Today, ETH 2.0 staking is offered by all popular exchanges, including Binance, Coinbase, and Kraken. It is beneficial for both exchanges and crypto investors since both parties earn. 

At the same time, PoS projects have been known on the market for a long time and have already proven their worth when used in many coins, and exchanges can offer their users more liquidity than pools.

Ethereum staking is beneficial for exchanges since now a very large number of user funds are stored on exchange wallets just like that, without bringing any income to either users or the exchange itself. During flat periods, the number of active users trading decreases, and there are negligible numbers of alt traders in general. With staking, exchanges are able to securely use these funds for the benefit of the user, while receiving a percentage for this and additionally participating in improving the stability of the network.

The main disadvantage of all these intermediaries is that you cannot withdraw your ETH before the full launch of the new network. In fact, in most cases, you freeze your coins at a small annual percentage indefinitely. But there are also several interesting DeFi projects on the market that issue the same real and fairly liquid synthetic token instead of real ETH.

Advantages 

Upgrading the Ethereum network will improve its technical characteristics, namely, it will speed up and reduce the cost of transactions, as well as make it more secure from centralization. In addition to this, it will be possible to receive passive income for storing your crypto.

This will help it to take one of the leading position in the crypto market and compete with other tokens that have already implemented the staking function, and maybe with Bitcoin.

The price of Ethereum has increased significantly due to the update. On the one hand, the altcoin will rise in price, as it will become a more attractive investment. On the other hand, the supply will decrease, as part of the coins will be blocked for staking.

Negative sides

Despite a number of advantages, upgrading Ethereum carries the risk of significant negative consequences. Earlier, there was information that if the coin switches to the Proof-of-Stake algorithm, then the US Securities Commission (SEC) will recognize ETH as a security, which has already been confirmed by the example of Pavel Durov's TON blockchain platform. In addition, this will change the approaches to mining, because of which the majority of small miners will simply leave the market, though today, ETH is the most popular coin for mining at home.

Secondly, there is a risk that validators will be trapped. If the price of the altcoin starts to drop sharply, they will not be able to sell the cryptocurrency promptly, as it will be locked.

Thirdly, the digital asset market is unpredictable, extremely volatile and not with a lack of scammers. In this regard, any cryptocurrency investment can result in a complete loss of invested funds.

Fourth, the competition from EOS and Tron cannot be discounted, since up to 80% of projects related to gambling are deployed on these platforms. The Ethereum ecosystem accounts for only 20%. Secondly, there are many tokens created on the Ethereum platform that are absolutely useless or are dead. But the very fact of their presence overloads the system, which causes failures. If this problem is not fixed shortly, then Ethereum may lose its position in the market.

You also need to consider the risk that the price of Ethereum may fall. In order to receive passive income for holding ETH, it will be necessary not only to have 32 coins but also to block them through a special transaction. It will not be possible to withdraw the blocked funds immediately. The cryptocurrency withdrawal process will take at least 18 hours. This period can be extended if many users request token refunds at the same time, as outlined in the project roadmap. Accordingly, if ETH starts to get cheaper, it will be impossible to sell it instantly. Thus, there is a risk of losing part of the capital and all the income received from staking.

Let's summarize

Cryptocurrency staking has really become very popular lately, gradually replacing well-known mining. The main reasons for this process are low access thresholds to the system, as well as ease of operation. It does not require expensive equipment or in-depth knowledge in this area.

There are a lot of profitable options, but it all depends on your deposit. With smart calculations, taking into account all the fees for transfers and due diligence, you can create a good passive income stream by not selling your ETH, but by making a series of collateral transactions.