Experts say that by adopting Proof of Stake, the Ethereum merger will reduce the network’s energy consumption by 99.95% and improve transaction speeds.
But what exactly is proof of stake? How can regular investors participate in Ethereum staking?
What is Ethereum Staking?
you’ve probably heard Cryptocurrency A miner that validates transactions on a proof-of-work blockchain like Bitcoin.
Cryptocurrency miners use high-powered, power-hungry computers to solve complex mathematical puzzles.
Several major cryptocurrencies with proof-of-work models, especially Bitcoin, have been widely criticized for their rapidly increasing energy consumption.
Rather than using powerful computers to solve mathematical puzzles, Ethereum staking involves locking ETH onto the blockchain (aka staking it), validating transactions and rewarding more ETH. have the opportunity to create
How does Ethereum staking work?
To become a validator (also known as a staker), network participants must lock 32 ETH on the blockchain. This is a significant amount that at today’s ETH price he is worth more than Rs 39 million.
Validators are then randomly assigned responsibility for validating transactions, building new blocks, and maintaining the overall functioning of the blockchain. Instead of locking ETH, the staker earns yield paid in her ETH.
If a validator fails to validate a block for which it has been assigned responsibility, yield will suffer.
Validators are punished under “thrashing” where the network confiscates some or all of the validator’s staked ETH for engaging in malicious activity such as colluding to fraudulently validate blocks. sometimes.
In theory, these incentives encourage validators to behave appropriately and avoid slashing for passive income.
In fact, Ethereum validators have been staking for several months already. Beacon Chain is an upgraded proof-of-stake network that will “merge” into the main Ethereum network around September 15th, but originally launched on December 1st, 2020.
Since then, investors have been able to participate in staking on the network. Their ETH, once staked, will be locked until the newly upgraded blockchain goes live.
ethereum staking pool
Given the current price, 32 ETH is a very high threshold to participate in Ethereum staking. Most retail investors are not in a position to lock this amount of his ETH to become a validator.
That’s where staking pools come in. We provide a way for individuals to work together to meet the minimum 32 ETH required to become a validator. Corresponding rewards will be distributed proportionally among the pool participants.
Ethereum does not have a native protocol to support staking pools.many big cryptocurrency exchangeCoinDCX and Binance, and third parties provide Ethereum pooling functionality.
For example, CoinDCX users can bet on Ethereum with annual yields (APY) ranging from 5% to 20%.
Staking pools, including those offered through crypto exchanges, allow more ETH holders to participate and earn passive income.
The chart below shows that there are currently over 13 million ETH locked in staking contracts, much of it through third-party mining pools. Equivalent to about 1 trillion Indian rupees, representing almost 11% of the total supply.
It is important to note that the merge will not allow the current validator to withdraw staked ETH. Withdrawals will only be possible after the Shanghai upgrade is completed at a later date.
Lido DAO and Ethereum Staking
Current Ethereum validators have the option to get Liquidity before the next upgrade takes place.
Lido DAO is a liquid staking solution. Here’s how it works: In exchange for stakers locking tokens, they receive liquid tokens called stETH or staked ETH.
The solution was launched in December 2020, a few weeks after Ethereum’s beacon chain enabled staking. Since then, it has become the dominant market leader in liquid staking on Ethereum, with over 80% market share earlier this year. Unlike many liquid staking options, it is also decentralized.
With Lido, stakers receive ETH staking rewards, but they can also use the stETH tokens they receive to earn additional yield or trade across the decentralized financial ecosystem.
The stETH/ETH relationship should theoretically be 1:1, but that is not always the case.Amid the Contagion Crisis That Finally Seen Centralized Crypto Lenders Celsius At the time of filing for bankruptcy in June, stETH was trading at a discount of up to 8% to ETH.
This reflected extreme fear in the market and the knowledge that Celsius was holding a large amount of stETH on its balance sheet in search of liquidity when it suspended customer withdrawals.
How much can I earn by staking ETH?
There is no fixed rate paid for staking ETH. Instead, it always depends on the number of participating validators. When there are few validators, the protocol increases rewards to incentivize more stakers to participate.
Currently, stakers earn approximately 5% to 20% annually. However, some analysts predict that this could jump to 8% or more before declining again once consolidation occurs.
When it comes to dollar profits, the yield percentage you get depends not only on this total rate, but also on the price of Ethereum, which has shown extreme volatility. ETH has lost more than 54% of its value this year alone.
Is Ethereum Staking a Good Idea?
Staking may be worthwhile if you expect to hold Ethereum for the long term. The incremental yield you earn boosts your total ETH holdings.
Staking may not be appropriate. One is that ETH is locked for months, thus sacrificing liquidity.
Protocols such as the aforementioned Lido can help, but there is no guarantee that market sentiment will suddenly change and the stETH/ETH rate will not change from a 1:1 ratio.of Stablecoin Market Meltdown May 2022 offers a cautionary tale.
The most important consideration here is your time range and willingness to stick with ETH.
Ethereum, like any other cryptocurrency, is a volatile and risky investment that can change direction quickly. Before investing in Ethereum or any other cryptocurrency, you should do your due diligence and be prepared for the volatile nature of this type of investment.