Initially, Ethereum was created on a Proof-of-Work (PoW) blockchain, which secures and validates transactions by the actions of miners who utilize computing power to solve complex mathematical problems. Unfortunately, with the growth of blockchain technology, many technologists and environmental scientists have shown concerns about PoW and its harmful environmental impacts (due to high energy consumption).
Ethereum is the most widely-used blockchain; it is home to many pioneer dApps and DeFi protocols while supporting the use and building of smart contracts through the Ethereum Virtual Machine (EVM). Many other blockchains and dApp also build their apps to be EVM-compatible to ensure smooth and interoperable transactions.
Although the proof-of-Work consensus mechanism has proven to be highly secure and decentralized (effectively ticking two important boxes of the blockchain trilemma), it is not very scalable; therefore, developers seek advancements to enable mass adoption of blockchain technology, especially via Ethereum. This birthed Ethereum 2.0
What is Ethereum 2.0?
Ethereum 2.0, otherwise called “Serenity,” or ETH 2.0, is an impending upgrade to the Ethereum network, where several changes will be made to the blockchain network, notably a switch from the existing Proof-of-Work consensus mechanism to Proof-of-Stake (PoS).
This upgrade is expected to facilitate better scalability for Ethereum without compromising decentralization or security. Although several solutions have been created to scale Ethereum’s Proof-of-Work (PoW) blockchain, Ethereum’s massive blockchain activity requires a total overhaul to ensure a very scalable network that doesn’t harm the environment.
· Phase One (Beacon Chain): The first phase of the ETH 2.0 upgrade involved launching the Beacon Chain – a side chain that introduces and effectively tests staking on the Ethereum blockchain by managing the Proof-of-Stake (PoS) protocol and all associated components. The beacon chain was launched in December 2020
· Phase Two (The Merge): The second phase of the upgrade will involve merging the Beacon chain with the Ethereum Mainnet; hence, they will no longer exist in a mainchain/sidechain relationship but will function as one single blockchain. The “Merge” is expected to occur in Q3/Q4 2022.
· Phase Three (Shard Chains): The final phase of the ETH 2.0 Upgrade involves sharding the entire blockchain. The Ethereum network is expected to be divided into 64 shards for massive scalability. Read more about how sharding works here.
After the upgrade, each of the 64 shards will individually process transactions simultaneously; hence, the network automatically works 64 times faster than it usually would.
To increase transaction speed further, Each of the 64 shards will be supported by ZK-rollups (a layer-2 solution) that roll up hundreds of transactions for off-chain batch processing before returning to the shard for confirmation.
What is Ethereum Staking?
Ethereum Staking is the process of participating in Ethereum’s Proof-of-Stake network governance (validating transactions and securing the network) by locking in ETH tokens as “stakes” in a pool to participate in these activities. In order to validate transactions, a network participant is required to become a validating node by Staking 32 ETH. For validating transactions and maintaining the network, each validating node will get ETH rewards, which is how new ETH tokens will be created (mined). Other network participants (Delegators) who cannot afford that much can assign some of their tokens to the validating nodes to earn a share of the rewards.
For example, if a validating node has 10 delegates who have delegated 2.5 ETH each to the validator with 7 ETH, the total reward (approximately 4.15%) will be shared among all delegates in a predetermined formula. Different staking pools have their formula for sharing staking rewards.
N.B. 32 ETH doesn’t automatically qualify a node to be a validator. It is only the minimum amount of ETH required to become a validator.
How Does Ethereum Staking Work?
Each round of validation on the Beacon chain bundles 32 blocks of transactions. To begin a validation round, the Beacon chain randomly selects 4,096 validating nodes who have staked a minimum of 32 ETH to form 32 committees. Each committee of 128 members is assigned to each block of transactions (epochs).
For each epoch, one node is randomly assigned to propose new blocks, while the remaining 127 work on the validation process; this leads to an election, where all 127 members vote on the proposal. If two-thirds of these 127 members reach a consensus, a new block will be added to the Beacon chain, and rewards will be shared.
The proposing node will receive one-eighth of the base reward, while the remaining 127 members will get the remaining seven-eighth. However, to receive a complete reward, the proposer needs to send the consensus result (attestation) to the Beacon chain as fast as possible; if any of the other 127 committee members do it first, the reward of the proposing node will be reduced.
Before rewards are shared, the Beacon Chain cross-links information across all epochs; hence, transaction information of each committee is available to others.
After Ethereum completes its upgrade, The blockchain will consist of 64 shards. Each shard will act as an individual blockchain; hence, 4,096 validators will be required to validate transactions on each shard (totaling 262,144 after the upgrade). Here, information in the shards is cross-linked to one another before rewards are made available.
How To Stake Ethereum
Staking on Ethereum can be done in two major ways. They include:
Staking Pool: A staking pool involves pooling ETH tokens together in a pool for one validator to act on behalf of other delegates.
A staking pool may be custodial or non-custodial.
Custodial staking manages the entire staking process on behalf of delegates. The custodian will hold private validator keys and withdrawal keys; hence, every delegate trusts the custodian (validator) to validate transactions and share the obtained rewards. However, in a non-custodial staking pool, the validator doesn’t hold private validator and withdrawal keys.
Solo Staking: If you have a minimum of 32 ETH, you can stake yourself. However, you would need thousands of terabytes of computing space to download and update the blockchain information. You must also keep your node connected to the Blockchain at all times to ensure that you don’t miss out on required processes. Validators who miss out on required processes may be regarded as malicious, and they will lose a portion of their stake, regardless of if it is intentional or not.
Ethereum Staking is a good idea for individuals who intend to hold their tokens for the long term. At the moment, stakers cannot generate their withdrawal keys until the upgrade is completed in 2023; hence, people who don’t actively transact with their tokens can stake them for rewards.
At the moment, the Average Percentage Rate of interest (APR) is 4.3%, which has massively reduced from over 20% when Ethereum Staking just began. Typically, with more staked tokens and validators, the APR reduces, since there are more people to share the yield.
Ethereum’s transition from a Proof-of-Work blockchain to a Proof-of-Stake blockchain shows the readiness of the network to scale for mass usage. With an expected upgrade from 15 to 100,000 TPS, Ethereum could facilitate the mainstream adoption of Blockchain in our traditional world.
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