What is Ethereum 2.0: Ethereum’s consensus layer explained
Ethereum 2.0 or ETH2 is a multi-phased upgrade that attempts to improve the Ethereum network's scalability and security by making infrastructure modifications, notably switching from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus process.
In January 2022, the Ethereum Foundation rebranded Eth2 to "consensus layer" since it is a network upgrade rather than building a new network from scratch. That said, Ethereum 1.0 is referred to as the "execution layer," where network and smart contract rules reside. It is important to note that the full upgrade will be completed by 2023.
What is ETH 2.0 staking?
The Ethereum (ETH) network is now overburdened, forcing transaction costs to skyrocket to prohibitively expensive levels for many use cases. This is partly due to the success of DeFi projects, where consumers are willing to pay high transaction fees due to the tremendous financial value of the transactions.
Transaction fees are "gas" costs in Ethereum because they fund actual applications operating on the Ethereum blockchain rather than just transactions. Non-finance DApps (decentralized applications developed on top of Ethereum) find it challenging to run on Ethereum due to high gas fees.
To address these issues, the Ethereum Foundation has been working on a network upgrade (previously ETH2) that attempts to improve the security, speed, efficiency and scalability of the Ethereum network. The Ethereum network’s security and scalability allow it to process more transactions, alleviate bottlenecks and accommodate more use cases, particularly outside of finance.
As mentioned before, a staking model will replace Ethereum's existing mining process as part of this upgrade. On a PoS blockchain, staking is the process of actively participating in transaction validation (similar to mining). Anyone with the minimum necessary cryptocurrency balance can validate transactions and earn staking rewards on these blockchains. Ethereum can be staked on cryptocurrency exchange platforms like Coinbase, Binance, Kraken, etc.
Ethereum now handles 15 transactions per second, which is relatively slow in the context of financial transactions. Proof-of-stake, on the other hand, is expected to enable the processing of 100,000 transactions per second, considerably expanding the breadth of projects and applications that can be built on the Ethereum blockchain.
This guide will introduce you to ETH staking, explaining how to stake Ethereum, how Ethereum staking works and ETH 2.0 staking rewards.
From mining to staking model
Proof-of-stake is a consensus method that blockchain networks utilize to reach distributed consensus. Staking is a process used by PoS blockchains to secure the blockchain and generate new blocks. The process of selecting validators to establish a new block is known as staking.
The validator's chance of getting chosen to produce/validate a block is proportional to the number of coins. As a result, anyone with a small number of coins can engage in staking and earn additional coins in proportion to their staked amount.
To become a validator on the network, users must stake their ETH (the native cryptocurrency of the Ethereum blockchain). Validators, like miners in proof-of-work, are in charge of arranging transactions and constructing new blocks so that all nodes can agree on the network's state.
Validators, sometimes known as "stakers," are responsible for processing transactions, storing data and adding blocks to the Beacon Chain, Ethereum's new consensus model. Validators receive interest on their staked coins, which are denominated in Ether, as a reward for their active participation in the network.
To become a validator on Ethereum, users must invest 32 ETH. Validators are assigned to produce blocks at random and are accountable for double-checking and confirming any blocks they do not make.
The stake of the user is also used to incentivize positive validator activity. For example, a user may lose a portion of their share if they go offline (fail to validate) or lose their entire investment if they engage in willful collusion. Furthermore, users may be able to delegate their stake to another user who can perform the duties of a validator on their behalf, depending on the PoS system.
This form of staking provides contributors with a passive revenue stream and aids in the security of consensus layer upgrade (previously Ethereum 2.0), the next version of the Ethereum network.
How does Ethereum staking work?
The PoS-powered blockchain, unlike the proof-of-work or PoW-based blockchain, bundles 32 blocks of transactions during each round of validation, which lasts on average 6.4 minutes. "Epochs" are the names given to these groups of blocks. When the blockchain adds two additional epochs after it, it is considered irreversible i.e., an epoch is considered finalized.
The Beacon Chain divides stakers into ‘committee’ of 128 and randomly assigns them to a specific shard block. Each committee is allotted a ‘slot’ and has a set time to propose a new block and validate the inside transactions. Each epoch has 32 slots, requiring 32 sets of committees to complete the validation process.
Once a committee has been assigned to a block, one member at random is given the exclusive power to propose a new block of transactions. In contrast, the remaining 127 members vote on the proposal and attest to the transactions.
The Beacon Chain collects state information from shards and distributes it to neighboring shards, keeping the network in sync. The validators will be managed by the Beacon Chain, which will handle everything from registering their stake contributions to awarding rewards and punishments.
Sharding is the process of dividing the Ethereum network into many parts known as 'shards.' Each shard would have its state, which would include a distinct set of account balances and smart contracts.
The new block is added to the blockchain and a "cross-link" is formed to authenticate its insertion once a majority of the committee has attested it. The staker who is chosen to propose the new block only receives their reward after that.
Individual shard states are reconciled with the main chain, i.e., the Beacon Chain, during the process of cross-linking. Through cross-linking, the final state of each shard must reflect on the Beacon Chain.
When a transaction is part of a block that cannot be changed in a distributed network, it is said to have "finality." Casper, a finality protocol, gets validators to agree on the state of a block at particular checkpoints in order to accomplish this in proof-of-stake.
The block is finalized if two-thirds of the validators agree. If validators try to reverse this later with a 51% attack, they will lose their whole stake.
How much do you make staking Ethereum?
Annualized interest rates and an inverse square root function are used to calculate rewards in ETH 2.0. In layman's terms, this means that the lower the overall amount of ETH staked, the lower the incentives for each validator will be.
The reward models for block proposers and attesters differ. The block proposer gets ⅛ of the base reward, known as "B," while the attester receives the remaining ⅞ B, which is adjusted based on how long it takes the block proposer to submit their attestation.
To receive the complete ⅞ B award, the attester must submit it as quickly as possible. The payment decreases for each slot that passes without the attester, including the attestation to the block. The prize is reduced by 7/16 B if two slots pass before the attestation is included, 7/32 B if three slots pass, and so on.
The issuance rate of Ethereum 2.0 is mainly determined by the base reward. The lower the base reward per validator, the greater the number of validators connected to Ethereum 2.0. This is the case because the base payment is inversely proportional to the square root of all Eth 2.0 validators' total balance.
Why stake ETH for Ethereum 2.0?
The primary reason why many people would want to invest in Ether is to obtain the APR, or annual percentage rate, which can range from 6% to 15%. With the minimum need of 32 ETH, you may expect to earn anywhere between 2 and 5 ETH at current prices.
What's the catch, exactly? You must store your ETH for years. Some people may be hesitant to accept this option if they don't have 32 ETH to lock up on the fly or prefer to spend ETH for other decentralized applications.
You must continue to do so until the Ethereum 2.0 protocol is released, which could be years away. Staking Ethereum for Ethereum 2.0 will not be a realistic alternative for people who have a restricted amount of ETH or utilize it regularly.
You can also stake and get rewards by putting them on an exchange, but you aren't necessarily running a validator node and staking for Ethereum 2.0.
Another reason someone would wish to stake Ether is to aid the network. Nodes, which are individual computers that have staked ETH and are functioning, must validate the network to be legitimate. Staking could be for you if you want to validate the network, help it out and gain a reasonable payout in the process.
How to stake Ethereum?
Staking on Ethereum can be done in a variety of ways. Custodial staking systems handle the complete staking process on your behalf. You simply deposit Ether, and they will set up the node for you. They also run and manage the node for you, so you don't have to.
The fundamental distinction between solo and other staking platforms is that you do not control the validator node's private key. The staking provider is in charge of and manages your assets. They take a cut of your rewards in exchange for their services.
Staking on the new Ethereum network requires setting up a staking node using Ethereum 1.0 and Ethereum 2.0 clients. Ethereum clients are simply applications that allow nodes to communicate with the Ethereum network.
The following software clients are compatible with staking nodes:
Users will need a computer with enough memory space to download both Ethereum blockchains — the old and new — as a minimum requirement. Ethereum 1.0 already has roughly 900 terabytes of data and is growing at a rate of about 1 gigabyte each day.
Validators must also keep their nodes connected to the blockchain at all times. As a result, a good internet connection is a must-have. After you've installed the validator software on your computer, you'll need to send at least 32 ETH to the Ethereum staking contract address.
To do so, you'll need to generate two keys: one for signing and validating transaction blocks and another for withdrawing your cash. However, until Eth1.0 and Eth2.0 merge in 2022, you won't be able to create your withdrawal key.
Before sending money to the staking contract address, you must first go to the ETH 2.0 launchpad and follow the procedures.This payment verifies your eligibility to be a validator. It also provides the network with a method to punish rogue validators that purposefully or unintentionally undermine the Ethereum blockchain's authenticity. When the blockchain detects inconsistencies in validator activity, it will "slash" the culprits' staked funds.
When an Ethereum 2.0 validator intentionally defies network rules and gets removed, this is referred to as slashing. As a penalty, a portion of their staked ETH is taken away, and in some situations, the entire staked sum of 32 ETH is withdrawn.
Offline validator nodes are also penalized for encouraging them to stay connected to the network. Every six and a half minutes, or epoch, the protocol issues both penalties and incentives.
Is it a good idea to stake Ethereum?
The amount awarded to stakers is determined by the total amount of ETH invested and the number of validators on the network. The annual interest rate rises as the pool of staked ETH decreases.
The interest rate falls as soon as the stakeholder pool grows large enough to support a decentralized ecosystem. However, stakers cannot withdraw staked coins or earned rewards for the time being — at least, not until Ethereum 2.0 and Ethereum 1.0 merge.
Moreover, it is a good idea to stake Etherem because it is easier to run a node if you stake it. It doesn't necessitate significant investments in hardware or energy, and you can join staking pools if you don't have enough ETH to stake.
Staking takes place in a more decentralized manner. It enables greater involvement because, unlike mining, additional nodes do not imply higher percent profits. Staking enables safe sharding. Shard chains will allow Ethereum to construct many blocks at once, allowing transactions to be processed faster. In a proof-of-work system, sharding the network would reduce the amount of power required to compromise a piece of the network.
How to stake Ethereum on Coinbase?
As previously mentioned, ETH can be staked on Coinbase and other cryptocurrency exchanges, making it simple for anyone to stake their Ethereum tokens with no minimum investment. Various steps need to be followed to stake ETH on Coinbase as is explained in the sections below.
Create a Coinbase account
You'll need to create a Coinbase account via the Coinbase mobile app if you don't already have one. It's easy to sign up with Coinbase; all you have to do is input your name, email and location, then make a strong password.
You'll need to authenticate your identity for tax purposes once you've created an account, which will require your driver's license, the last four digits of your Social Security number and your date of birth. You can buy any cryptocurrency supported on Coinbase's exchange once you've been authenticated.
Purchase Ethereum tokens
Staking Ethereum necessitates the acquisition of Ether tokens. Coinbase allows you to buy Ethereum tokens directly, making it simple to purchase and stake your Ethereum tokens all in one spot.
Ether tokens can be purchased the same way as equities: as a limit or market order. Limit orders only buy Ether tokens if the price reaches the price that you set when creating your limit order. Market orders buy Ether tokens at market price.
Join the waitlist
Unfortunately, you won't be able to stake Ethereum tokens right away on Coinbase. Coinbase has developed a waitlist to place you in line to stake your Ethereum tokens due to the enormous demand. The waiting period varies, but the sooner you sign up, the sooner you may start earning interest on your Ethereum tokens.
Stake your ETH tokens
Because Coinbase maintains the validator nodes, all you have to do is stake any amount of Ether tokens, and the exchange will take care of the rest. You can sit back, relax and watch your cryptocurrency portfolio generate interest without doing anything once you've staked your Ethereum tokens on the Eth 2.0 network.
What are the rewards of staking ETH on Coinbase?
As an incentive for helping to safeguard the network, you can earn up to 5% APR on each ETH you stake on Coinbase. Staking payouts for Eth2 are calculated based on how much ETH is validating and what rewards the network is paying over time.
When a small quantity of ETH is staked, the protocol payments increase, encouraging users to stake more ETH. However, the reward is reduced when a substantial amount of ETH has been staked previously.
What are the possible risks of staking ETH?
While this may not be a problem in the long term if Ethereum 2.0's value is extremely high, you should keep in mind that Eth 2.0's value is unclear at this time and will almost certainly differ from Ether. If you believe Ethereum 2.0 will be a success, you should believe that hosting a validator node will be advantageous.
A lack of liquidation is another major issue. You won't be able to withdraw your earned or staked ETH until Ethereum 2.0 is released, which might take up to two years or more. This may not sit well with you if you are not a long-term holder and plan to sell Ethereum during this bull run or the next.
The chance of losing your staked assets or "primary funds" due to slashing is an essential risk about which you need to be mindful. Slashing is a protocol-level punishment imposed in response to a network or validator failure.
The road ahead
Ethereum has been an enormous success so far. The Ethereum community has attracted some brilliant minds, including application developers and core protocol developers. The upgrading of the core protocol is a huge undertaking that has been meticulously planned and implemented to date.
The core team behind Ethereum does not seem to stop working until all of the intricacies, such as rollups and migration, are completed. The only question is: How long will this take?
Other, newer blockchains are gradually eroding some of Ethereum's use cases, but the blockchain market as a whole is rising rapidly, so this isn't a zero-sum game. Many of these new blockchains are building Ethereum interoperability solutions, demonstrating the potential and success of Ethereum. It is apparent that Ethereum will not vanish into obscurity anytime soon.
