The challenges of Eth2 staking, explained

This is where someone deposits 32 ETH in order to become a validator in Ethereum 2.0.

The blockchain recently hit a big milestone when enough ETH was transferred into a deposit contract to trigger the launch of the new beacon chain.

Otherwise known as Phase 0 of Ethereum’s ambitious move to a proof-of-stake consensus mechanism, a staggering 524,288 ETH needed to be deposited for the launch to take place.

In 2021, shard chains are going to be deployed — allowing Ethereum to process a greater number of transactions per second. This upgrade has been desperately needed for a while, with network fees recently reaching unprecedented highs due to the popularity of DeFi.

Once the transition to PoS is complete, miners will no longer be involved in verifying transactions. Instead, validators who stake Ether will be responsible for adding blocks to the blockchain, and they’ll receive brand-new ETH as a reward. It’s hoped that this method will be far less energy intensive than proof-of-work.

Right now, staking ETH is a significant, long-term commitment.

The minimum amount that someone was able to contribute into the deposit contract was 32 ETH — and at one point in November, that was worth an eye-watering $19,877.

These funds are going to be locked until the current mainnet “docks” with the beacon chain. At present, estimates suggest that this milestone may only be reached in 2022, meaning that aspiring validators may have to wait some time until they get their funds back.

One of the biggest downsides with the transition to Eth2 is how this takes a lot of commitment from the thousands of validators who have put their crypto where their mouths are. It’s a leap of faith — not least because several other key milestones related to this project have been hit behind schedule. Should further complications arise, there’s a chance that it could be years before the deposited ETH is released from the one-way contract, and its cash value may have fallen by then.

Serving as a validator also comes with responsibilities… and risks. “Slashing” means that nodes can be penalized for failing to act in the network’s best interests — as a result, there’s a real risk that staking could cause someone to lose crypto instead of earn it. Accidentally waving through an invalid transaction or falling offline can have huge consequences.

Because of the limitations set by the deposit contract… not really.

Figures from Etherscan show that there are now more than 126 million unique Ethereum addresses, and 113.6 million ETH currently in circulation. This means that, at present, it’s impossible for every single address to own one whole ETH.

Back in April, research from Adam Cochran showed that 17% of ETH was held by just 10 addresses — and the top 10,000 addresses hold about 94% of the cryptocurrency’s circulating supply. On the face of it, these statistics make it seem unlikely that your average crypto enthusiast has enough ETH lying around to start staking — and mathematically impossible that everyone who’s interested in staking will have 32 ETH.

But there are other barriers to entry that need to be tackled, too. Even those who have 32 ETH to stake may be concerned about how their assets are going to be illiquid for a prolonged period of time. Setting up and maintaining a validator node can also be a complicated business. Although someone may be interested in receiving staking rewards, they may lack the technical knowhow or time to do this themselves.

Staking platforms are emerging that help address some of the limitations currently provided by Eth2.

These services can simplify the process of getting involved in Eth2 — and open up opportunities to those who may have a smaller amount of ETH to stake.

However, it’s important for crypto enthusiasts to do their due diligence about these staking services to ensure that their cryptocurrency will remain safe.

Platforms such as Stkr, built by Ankr, to allow anyone to stake in a validator node, with a minimum requirement of just 0.5 ETH. This is 64 times smaller than the contributions that needed to be made to the deposit contract — opening up opportunities to more people. Stkr then brings these funds together in the form of Micropools and allocates them to real-life Eth2 nodes.

Another feature of Stkr that’s likely to bring mass appeal to the world of Eth2 staking is the fact that users receive a synthetic token known as aETH in exchange for the Ether they lock up. These tokens can be used in DeFi applications — or sold at any time.

There can also be advantages for those who have greater amounts of crypto to stake. An unlimited one-click deposit limit means that high net worth users can gain exposure to the next iteration of Ethereum’s mainnet without having to operate their own nodes. Stkr also claims that this approach eliminates the risk of a stake being lost in the event that a node performs poorly.

There are three key roles within the Stkr ecosystem.

Providers deliver the computing resources that drive the Eth2 nodes — and they pay insurance that acts as a guarantee against poor hardware performance. These funds will be used to compensate stakers if there is an outage, but providers also stand to gain rewards if their infrastructure runs without a hitch. By building a good reputation, they are prioritized whenever new staking funds need to be allocated.

Requesters, otherwise known as stakers, are those who want to lock up their ETH without hosting a node themselves. In time, governors will be responsible for deciding the future direction of Stkr through votes and will be incentivized to work in the platform’s best interests.

Every now and again in the crypto world, trends begin to form. We’ve had the rise of ERC-20 tokens, nonfungible tokens, and DeFi too. In the coming months, attention is going to shift to Ethereum 2.0 as the launch of the world’s biggest proof-of-stake network draws closer. Platforms that allow people from all backgrounds to get involved in staking will be a crucial part of this newly formed ecosystem.