Ethereum is one of the most reliable blockchain networks, its upgraded and advanced version Ethereum 2.0 provides more scalable, faster, and less expensive transactions. Its native token ETH can be staked in the platform to secure the network and in exchange, holders receive rewards in the form of ETH tokens.
What Is Ethereum 2.0?
Ethereum 2.0 is an upgrade emphasized to improve the scalability, speed, and cost efficiency of the Ethereum network. Instead of Proof of Work, Ethereum 2.0 utilizes Proof of Stake consensus, increasing the performance and reducing the cost of transactions.
Understanding Ethereum 2.0 Staking
Ethereum’s major challenges were a reduced number of transactions and increased gas fees. By utilizing Proof of Stake (PoS) consensus, Ethereum 2.0 increased the efficiency of transactions, from 14 transactions per second to around 100,000 transactions is a big change. The PoS consensus requires less energy for computations, reducing energy consumption and thus gas fees.
The staking model offers more efficiency than crypto mining. Any network participant with a certain amount of crypto tokens can validate transactions. Once a transaction is validated the participants are eligible for rewards in the form of ETH2 tokens. Validators are responsible for processing transactions, storing data, and adding new blocks to the network. To be a validator, a person must have at least 32 ETH in their account.
Benefits Of Ethereum Staking
1. Earn Passive Income: Token holders can rewarded by staking ETH. This is considered a passive income as the asset is neither bought nor sold for earning rewards.
2. Enhance Network Security: The rewards offered to network participants allow them to enhance the security of the validation process, contributing to the overall network security.
3. Lowers Entry Barrier: Any individual can participate in the Ethereum consensus process by staking a small amount of ETH tokens.
How Ethereum Staking Works?
To enable staking, a person must have enough ETH to send a transaction and should be signed with the private key. The network sends the transaction to a random pool and broadcasts it. The chosen node processes the transaction into a block and broadcasts it to other nodes. The nodes verify the validity of the blocks and add them to the blockchain.
A node is selected at random and is rewarded with tokens proportional to the number of tokens staked and the amount of balance available. Other validators are also rewarded if they add a block to the network. The staked tokens are locked in smart contracts and can not be transferred or traded until it is unstaked. The unstaking process can take many days to complete.
How To Stake Ethereum?
Staking Ethereum can be done in various ways
1. Independent Staking
- Independant staking requires buying the hardware. A user has to buy the hardware and install the necessary software including execution clients, validator clients, and consensus clients.
- Once the software is installed edit the validator nodes. Then configure the network settings and generate the cryptographic keys. A user must have a basic understanding of the Ethereum network and familiarity with the structure of configuration files to complete the edit successfully.
- Maintain the validator node by checking logs, updating software, and troubleshooting issues. A holder must have familiarity with analysis tools and command line tools for maintaining the validator nodes.
2. Staking By Intermediaries
Staking by intermediaries can be done through crypto exchanges and cryptocurrency wallets.
- Crypto Exchange Staking: A user should have a crypto exchange account to enable staking. Transfer the ETH tokens to the exchange platform and select the staking option. Choose the amount you want to stake and the period of staking. Press confirm stake and your tokens will be added to the staking protocol.
- Crypto Wallet Staking: Choose a crypto wallet compatible with Ethereum. Ensure you have enough ETH tokens to enable staking. Navigate to the staking section and choose the amount of tokens to stake. Follow the instructions and confirm staking. The staking rewards get transferred to your wallet automatically after attaining the reward period.
Limitations Of Ethereum Staking
1. Market Volatility: The price of ETH tokens can either increase or decrease during the staking period due to the prevailing market conditions. A price decline reduces the amount of rewards earned.
2. Locking Of Assets: Once staked, the assets are locked in smart contracts that can’t be traded before completing the staking period. This prevents selling the assets during a high-price market.
3. Staking Penalties: Validators are charged penalties if they fail to remain functional, miss source and target voting deadlines, etc. Malicious behavior by the validator can even lose their staked ETH altogether.
Final Thoughts
Staking Ethereum allows holders to earn rewards in exchange for ensuring blockchain security. A person holding 32 ETH tokens is eligible for the staking process. Always read the terms and conditions before staking your assets, as staking is subject to a locking period and other risks.