Ethereum 2.0 - What it is and how to participate in ETH 2.0 Stacking

What is staking in Ethereum 2.0?

Ethereum 2.0 has a unique system that includes blockchain ETH in smart contracts as a validator. This allows participants to be rewarded for verifying and validating blocks in the network. With the launch of the new version of the network, blockchain will be enabled using the Proof-of-Stake (PoS) consensus algorithm.

Stacking is comparable to mining and something that happens in PoS networks. So-called validators, similar to miners in the traditional sense, are rewarded for the task of creating new blocks as well as processing transactions. Unlike miners, validators don’t need to consume computing resources because they simply protect their coins in their wallets. To become an Etherium 2.0 validator, you need to block at least 32 ETH for a stacker. As of the end of November, the value of such a deposit is about $18,000.

Rewarding validators

To incentivize active validation, validators who actively participate in the consensus process are rewarded. Conversely, disabled validators face penalties equal in value to the rewards given for active participation.

Validator fees are affected by the total number of ETH blocked for stacking. Depending on this figure, the maximum annual yield of a validator can range from 2 to 20%. Calculate the approximate yield from stacking:

https://ethereumprice.org/staking/

https://beaconscan.com/staking-calculator

How do I stake ETH 2.0?

Users wishing to become validators have two options for participating in steking:

Self-stacking. Blocking from 32 ETH and self-stacking the validator node with compliance with technical requirements. Blocked ETH will not be available until the launch of Phase 1.5, which will occur in 12-24 months, depending on the speed of development. After the launch of Phase 1.5, the dynamic locking time will be set to prevent a mass withdrawal of ETH – 256 epochs (about 27 hours).

Joint Stacking. Providing available ETH to a stacking service provider – pool, cryptocurrency exchange, etc. There are security risks associated with trusting an intermediary. However, it is possible to participate in staking without having 32 ETH and withdraw blocked assets before Phase 1.5 rolls out.

Independent streaming

To become a standalone ETH 2.0 validator, you must follow the instructions at Ethereum.org:

https://launchpad.ethereum.org/en/

which includes three main steps:

1. Accepting the Conditions of Participation in the Network as a Validator. You must read and accept the nine Conditions of Validator, including acknowledgement of understood risks, consequences of malicious and dishonest behavior.

2. Creating validator keys offline. To process incoming validator deposits from the ETH 1.0 chain, you need to run the ETH 1.0 client in parallel with the ETH 2.0 client. In this step, you need to select the ETH 1.0 client and follow the installation instructions on the program’s website.

Then you must select the ETH 2.0 client.

Next, you need to specify the number of nodes that the user plans to manage, as well as select the operating system of the device. After that, download the command line application from Ethereum Foundation’s GitHub or choose to create the client from Python source code.

It is necessary to follow the instructions clearly and generate keys for the deposit. Validator key stores must be available in the new validator_keys directory. Load the deposit-data- [timestamp].json file, which is located in the /eth2.0-deposit-cli/validator_keys directory, in the suggested window.

3. Translate ETH to ETH 2.0. In this step, you must transfer your ETH to the specified smart contract address according to the instructions.

In addition to running the node yourself, you can also use Pre-configured Validator Nodes hardware. This saves time and effort in the initial setup for starting the validator. The onus is also on the user to keep the node running and you have to lock 32 ETH for the steking. Examples of solutions: Avado, Launchnodes.

Another option is to use Validador-as-a-service services and pay the service for node management. Suitable for large ETH owners and institutional investors. Examples of services: Stakewise Solo, stakefish, Staked, Attestant, Blox Staking.

Joint streaming

At the exchange rate at the end of November, 32 ETH is almost $18,000, so not everyone can start their own validator node. To start steaking with a small amount of ETH, you can use services that offer co-stacking in Etherium 2.0.

The developers of Etherium 2.0 have published a list of such services:

https://beaconcha.in/stakingServices#stakingServices

But they emphasize that none of them has passed a special test of the developers. Users must independently assess the risks and opportunities of each offer.

There are three options for joint steaking:

Stayking bullets. You can block any amount in ETH for stakeing. A pool is an intermediate link for people with less than 32 ETH, combining crypto actuals for stakeing. Steiling awards are distributed between the participants in the pool in proportion to their shares. Storage is decentralized, transparent and checked in any blockchain observer. Suitable for retail investors and participants in the Defi industry.
Lending platforms. A balanced version between stakeing and the possibility of borrowing tokens under the ETH stake. Suitable for traders and investors aimed at maximizing profit.
Exchange and Castodians. The easiest option is to transfer ETH to a wallet of the exchange or other caste -diode service, which offers the separation of a reward for stakeing. In this case, the user does not control the closed keys.

Consider each option in more detail.

Stayking bullets

Pools can be used to pool existing crypto-assets with other participants who do not have 32 ETH to run their own validator. Since most of the coordination will take place through smart contracts, you need to make sure that the service has passed a security audit before sending ETH to the pool contract.

Most stacking pools issue tokenized versions of ETH blocked for stacking, such as rETH. These ERC-20 tokens represent not only ether, but also stacking income. Tokens may have the same symbol or name, but if they are not issued by the same pool, they are different assets with different liquidity.

Validator pools are either managed by known providers of stacking services or by a dynamic set of contract users. The steering pool receives commissions from users and partially deducts fees from them to the operators of the validator nodes.

Pools charge a fee for stacking, some services have a limit on the minimum number of deposited ETH.

Advantages: Liquidity on ETH blocked for steaking due to the secondary release of tokens; Additional incentives for validators on the network.

Disadvantages: The risk of vulnerabilities of the smart contract; In some cases, the castodial storage of the ETH operator of the pool; The risk of unscrupulous behavior of the pool, threatening the loss of blocked ETH.

Service examples: Rocket Pool, Stkr, Stafi Protocol, Stakewise Pool, Lido Finance, Etherchest, Stakehound, StakeDao, Caneth Pool.

lending platforms

So far, there is only one lending platform that allows ETH blocked for steaking to be used as collateral to obtain a loan. DHARMA Capital’s LiquidStake allows ETH holders to borrow from USDC using blocked ETH as collateral.

Users can benefit from the ability to create income by staking and retaining the ability to trade, invest or store liquid cryptoassets. LiquidStake pools customers’ crypto-assets and transfers them to major staking service providers. Credits can be received from the start of ETH stacking or later.

Advantages: limited liquidity of capital.

Disadvantages: The risk of an intermediary; The risk of the liquidation of the validator and the liquidation fine.

Exchange and Castodians

Most exchanges have not yet launched co-stacking products, but some have already announced plans to deploy such solutions in the future. This will probably change after Beacon Chain is launched and tested.

It is still unclear how exchanges will solve the problem of an indefinite blocking period. Exchanges may offer fixed-income products in which coins are locked for a predetermined period without the possibility of withdrawal. Custodial wallets are likely to offer solutions with longer asset lock-in periods. The fee structures of exchanges are often opaque, so it is unclear at what intervals exchanges accumulate fees.

To participate in staking through an exchange or custodian, you must register with the service and transfer ETH into its wallet. In doing so, the user loses control over the private keys.

Advantages: Ease of use of the service; You can block any bag for stakeing, including less than 32 ETH.

Disadvantages: opaque structure of remuneration; the risk of an intermediary; Loss of control over closed keys and cryptoactives.

Service examples: Bitcoin Suisse, Coinbase, Binance, Kraken, CoindCX, TokenPocket.

Any user with any deposit size can take part in ETH stacking. But only with 32 ETH or more can you run your own validator without reassigning assets to intermediaries. With the current value of ETH over $500, running your own validator is out of reach for most users.

Keep in mind: the reward for validators decreases as more and more ETH is blocked for stealing. The earlier a validator node is deployed, the greater the reward for its owner in the early stages. But after Ethereum 2.0 is fully launched, one should aim for a return of around 2% per annum or even less.

Staking returns can be low, with stackers bearing financial risks. ETH blocked for self-staking cannot be withdrawn until Phase 1.5 rolls out, which is 1-2 years, possibly more. In co-stacking, it depends on the rules of the contract or service. Validators may be penalized for poor performance or violation of protocol rules.

Non-technical users who want to lock for stacking from 32 ETH can use pre-configured validator nodes or services based on the “validator as a service” concept.

For retail investors who want to participate in staking but don’t have enough capital to run their own validator, co-stacking solutions have been developed that eliminate some of the risks and challenges associated with a long lock-in period.

Despite the small number of co-stacking services, there are already products that meet the needs of different user groups. You can take advantage of offers from pools, credit platforms, cryptocurrency exchanges and custodians.

When choosing a steering service provider, it is necessary to carefully examine the product offered, the amount of service fees, liquidity, reliability of smart contracts, and to consider the risks that full or partial loss of control over the keys entails.

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