Leading smart contracts computing platform Ethereum is set to move from its current Proof-of-Work consensus protocol to Proof-of-Stake. This transition is part of its natural evolution and Ethereum developers are adamant that it will happen at some point.
Ethereum Proof-of-Stake will solve the burning issue of scalability, allowing the network to process several orders of magnitude more transactions than it can currently handle. It will also allow Ether (ETH) holders to earn “interest” on their currency, through staking.
In this article, you will learn about Ethereum staking and how you can potentially benefit once the blockchain moves to Proof-of-stake.
How Does Ethereum Move from PoW to PoS?
The consensus protocol switch is part of a larger set of planned upgrades, known as Serenity. Once fully implemented, Serenity will take Ethereum to Ethereum 2.0.
The scope of Serenity is much wider than the PoW-to-PoS move. It also encompasses the replacement of the Ethereum Virtual Engine, the “heart” of the network, with eWASM, some quantum-proofing elements, and the radical improvement of the survivability of the network.
The introduction of Ethereum staking is the very first step of Serenity.
- It all begins with the implementation of the Casper PoS protocol, on a parallel Beacon Chain. Casper will address the issue of scalability and the threat of centralization through PoW. In a PoW environment, a handful of mining pools are responsible for the majority of hashing.
- Casper sets the stage for a process called “sharding”.
Sharding spreads the workload over several smaller databases, radically increasing efficiency. It is extremely difficult to implement on PoW blockchains but much easier in a PoS environment.
- Hot on Casper’s heels, comes a PoW “difficulty bomb”. It makes mining very difficult at first and quite impossible down the line. It is meant to herd miners over to the PoS chain.
- Eventually, the entire PoW chain gets folded into the PoS one, using a massive smart contract.
To stake Ether (ETH), and thus to earn “interest” in the form of new ETH, users can deposit a minimum required sum of ETH into a special wallet, linked to a smart contract (masternode). The size of the deposit determines the amount of rewards stakers receive.
What is the minimum staking amount? At first, the ludicrous sum of 1,500 ETH was apparently considered. Nowadays, a more affordable 32 ETH minimum is being floated.
If an investor cannot afford to fund a full masternode, he/she can always join a staking pool. Staking pools distribute rewards among their members, based on the amount they contribute.
How much can an investor earn through ETH staking? Nothing is certain in this regard yet. But stakingrewards.com estimates that the daily yield might be around 0.36%, adding up for a yearly yield of 4.30%. An investor who locks up the projected minimum of ETH 32, may thus earn $0.82 per day and $297.67 per year.
The Move to PoS Entails Some Challenges
Ethereum developers do not seem to know when they will roll out the Casper protocol. They do believe however that its arrival is not a question of “if”, but rather, one of “when”.
Delays are indeed possible. Given the number of hurdles to overcome, that is hardly surprising.
Leaving aside the fact that this thorough shakeup is certain to leave some in the community disgruntled, here is a short rundown of the potential technical pitfalls:
- Casper’s first implementation may open up some unexpected vulnerabilities. Having up to 250 validators in the beginning, leaves the entire network easy prey to hacking, regulatory crackdowns, and physical disasters.
- Staking is meant to deal with the issue of centralization. Interestingly however, it hands more power to those with more ETH. It may indeed end up making the rich richer, while the poor jump ship. If that happens, Ethereum will have shot itself in the foot with the PoS push, at least in regards to centralization.
- Future forks will present stakers with an incentive to support both chains. By validating both chains, stakers get the rewards regardless of the outcome of the fork. Measures need to be implemented to discourage such behavior.
- 51 percent attacks are scarier on a PoS chain. Without work- and time-intensive PoW involved, the attacker can rewrite a much longer portion of the chain. Fortunately, developers already know how they will address this issue.
- ETH staking comes with inherent risks. Most of these risks stem from the need to keep the staked funds online, in a “hot” wallet. Miners can take the proceeds of their work and stash them away in cold storage. Stakers will not enjoy the same luxury however.
- Withdrawing staked ETH is possible. Those who want to do so can join a withdrawal queue. If there is no queue, withdrawals will take at least 18 hours.
ETH Staking Is a BIG Deal
Never before has such a large market cap digital asset embarked on such an aggressively transformative journey. If Ethereum’s Serenity turns out successful, it will set a precedent that other leading blockchain projects may follow in the future.
The very idea of Ethereum staking has already drawn plenty of attention. Some investors are loading up on ETH in anticipation of the move while others are waiting on the sidelines ready to jump in.
Is PoS indeed the magic solution for scalability? Serenity will certainly answer that question.
If Serenity does indeed deal with scalability as expected, it will give the Ethereum ecosystem a massive boost in regards to utility. According to Vitalik Buterin, scalability is the main issue currently preventing Ethereum from realizing its true potential.
With low transaction speeds out of the way, scores of apps currently sidelined, get the green light. Whichever way Serenity unfolds, it will certainly be fascinating to watch.
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