What is Staking? Ethereum’s Replacement for Mining
When someone mentions “staking ETH when Ethereum 2.0 comes,” they’re talking about the Ethereum network’s upcoming transition to Proof of Stake (PoS). This upgrade, often referred to as Ethereum 2.0, will swap out Proof of Work (PoW) miners for validators locking in ETH deposits to validate blocks and earn block rewards.
Proof of Work in a nutshell
Currently, the Ethereum network is secured through a process called mining. Miners solve complex math puzzles which are difficult to compute. Once solved, the miner submits a valid block with proof of their “work” to the network. The first miner to submit a solved block in time earns a ‘block reward’ of newly minted ether (ETH) as well as any included transaction fees.
Ethereum’s security relies on the total hashrate or amount of processing power mining on the network. Hardware and operational costs make mining expensive, limiting the total hashrate or mining power any one miner can produce. The idea is that its extremely costly to acquire and sustain an control 51% or greater of the network’s hashrate.
Proof of Work vs Proof of Stake
Proof of Stake attempts to make Ethereum even more efficient and secure. Proof of Stake cuts out the step of purchasing expensive mining hardware and spending lots of money and energy mining. Instead, validators place deposits or stake 32 ETH for the ability to validate blocks and earn fees.
Ethereum 2.0 rewards validators with block rewards for enforcing the rules properly. But, if you try and cheat the system or fail to do your job as a validator, you’ll pay the price with your 32 ETH staked. Ethereum’s Proof of Stake mechanism punishes inaccurate or inactive validators by slashing portions of their 32 ETH staked.
Proof of Stake effectively brings the question of network security inside of the system instead of relying on outside factors like cost of materials or energy. Imagine trying 51% Ethereum in Proof of Stake. You’d need to own a significant amount of ETH to even attempt it. So at some point, you’d only be hurting yourself by attacking the network as a validator.
When is Ethereum switching to Proof of Stake?
Ethereum 2.0’s set to roll out in phases starting with Phase 0 expected in early 2020. Although, Ethereum 2.0 isn’t ready to take over all the functions of the original until Phase 2. Phase 0 will mark the launch of the Beacon Chain which will eventually become a fully functioning Ethereum 2.0. In the meantime, the Beacon chain will run parallel of the Ethereum 1.0 chain.
Phase 0 simply begins the process of validating blocks in a live Proof of Stake environment. Staking in Phase 0 is a one way transfer meaning once someone commits their 32 ETH into the deposit contact on Ethereum 1.0’s blockchain, there ETH is locked into ETH2.0 until later phases are developed and deployed. Phase 1 would introduce sharding. Finally, Phase 2 introduces full state execution for transfers and smart contracts.
Luckily, the phases can be developed and tested at the same time meaning innovation happens at a rapid pace. And, there are numerous teams working on ETH2.0. But, I wouldn’t get your hopes up for Ethereum 2.0 Phase 2 in 2020. Learn more about the phases of Ethereum 2.0 development.
How much can I expect to make from staking ETH?
The specifications behind Ethereum 2.0’s economics are still being solidified. However, the spec at this time shows staking returns on sliding scale from 18.10% down to 1.56% depending on how many ETH are being staked. Many experts expect returns to be around 5% a year due in Phase 0. Validators also earn fees in later phases.
It’s worth noting that staking ETH and running the validator software isn’t a passive experience and may require some technical expertise. There are costs involved like purchasing and maintaining the hardware. Although, these costs will be much lower than traditional mining hardware. And if your validator goes offline, your 32 ETH will begin to leak away the longer it’s down as a penalty. Vitalik has previously stated that if a validator is up more than 66% of the time they should remain profitable.
Learn more about Ethereum 2.0 Economics.
Try Proof of Stake right now
If you’re itching to give it a try, there are tons of ways to get involved. Try running a testnet validator for Prysmatic Labs. Or take a look at RocketPool’s staking pool beta. And, keep your eyes out for ETH2.0 cross-client testnets which should be coming soon!
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