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Well, it finally happened, Ethereum has transitioned to the Proof-of-Stake consensus mechanism, bringing about a new age in the project's life. The scalability issue that has been the bane of many blockchains out there (Bitcoin comes to mind first) has finally been addressed with the introduction of Ethereum 2.0 staking.
Let us take a closer look at what the transition (or 'The Merge') aims to accomplish and how exactly Ethereum staking work.
Proof-of-Stake vs Proof-of-Work
Before diving into the peculiarities of Ethereum 2.0 staking and how the blockchain operates now, it's worth taking a look at how it used to work.
This traditional approach, Proof of work, requires a node to validate transactions by approving them and adding them to a new block on the blockchain. A node to validate transactions is chosen based on its computational power. This is what gave rise to crypto mining as an industry. This consensus mechanism is used in such coins as Bitcoin and, up until very recently, Ethereum.
Proof of Stake (PoS) is a consensus mechanism, where the network chooses validators to add new blocks to the blockchain. A computational power of a node is not taken into account. The process is random, but the bigger the stake (i.e. the number of cryptocurrency users have staked with a particular validator) the more likely the validator is to be the one to add new blocks to the blockchain. In exchange for adding the new block, the validator earns some crypto, which they, in turn, distribute among those who staked their assets with them.
Why switch to staking?
The main issue that the Ethereum network was facing before is that it was constantly overloaded. This results in transactions being very costly and taking longer to process. The blockchain speed is measured in TPS - transactions per second. Before the introduction of Ethereum 2.0, the Ethereum network speed was around 10-20 TPS. The aforementioned scalability issue refers to the amount of data a blockchain can process at the same time. In other words, how well it can process a huge number of transactions.
In order to address the low TPS and make Ethereum 2.0 safer, faster, more efficient, and more scalable, the team behind Ethereum has been working on a network update (previously known as ETH2). In other words, the update aims to allow the Ethereum blockchain to process more transactions at lower costs.
Ethereum team plans to accomplish it by using sharding. That is a process of partitioning the blockchain into shards to evenly spread the load among several chains to process data in parallel for more efficiency.
As mentioned above, mining and staking serve the same purpose, so after Ethereum switched to the Proof-of-Stake model, the need for mining is gone.
Ethereum 2.0 is expected to handle up to 100 000 TPS, further expanding the range of apps that could be built on the Ethereum blockchain.
How does ETH staking work?
The Proof-of-Stake Ethereum 2.0 takes batches of transactions, consisting of 32 blocks. These batches are referred to as 'Epochs'. Epochs are then validated, which takes about 6.5 minutes. An epoch is considered finalized (i.e. irreversible) when there are at least two epochs processed after it.
During the transactions validation process, the stakers (i.e. those who staked ETH with specific validator nodes) are bundled together at random into so-called 'committees'. Each committee, consisting of 128 stakers is then assigned a shard block. Each committee is then allotted a set amount of time to propose a new block and validate transactions in it. It's called a slot. Each epoch consists of 32 slots, so the transaction validation process requires 32 sets of committees to validate an epoch. Once the new block was proposed and the committee votes on it, the block is added to the Ethereum blockchain, and staking rewards are paid out.
Why would I stake ETH?
The most popular reason why people start staking ETH or any other asset is, of course, the passive income. Your staked ETH will generate staking rewards for you, without the need to actively manage your funds. It all makes staking sound a bit like a bank deposit. You put some money in and collect the dividends off of your staked coins from time to time.
Ethereum 2.0 staking offers rewards for those willing to put their funds on the line to achieve the network consensus and make the blockchain safer. With staking, your staked ETH doesn't just take up space on the Ethereum blockchain.
You can stake your coins and earn rewards for validating transactions or, in other words, earn passive income for holding funds. By staking your funds with a specific validator or staking pool, you increase their chances of being chosen and, by extension, your chances of getting better rewards. The more ETH is staked with a certain validator, the more of a chance a validator has of adding a new block to the blockchain.
The process is still random, however, so it doesn't mean that everyone should just stake their funds with the same staking pool. While smaller staking pools are less likely to be chosen to validate the new blocks, the rewards are going to be much higher, since there aren't as many investors among which the rewards shall be distributed.
Switching to Proof of Stake dramatically reduces the power consumption of Ethereum 2.0. In order to validate transactions you no longer need expensive hardware, even if you go the 'running a validator' route. In order to participate in a Proof-of-Stake consensus mechanism, all you need is a PC or even a smartphone.
Not only does the Proof-of-Stake switch helps lower the barrier of entry for participation, but it also makes the Ethereum ecosystem more environmentally responsible and gets the regulators off their back.
Securing the network
Proof-of-Stake consensus mechanism makes the Ethereum network more resilient and robust against attacks. In short, if a malicious actor decides to attack the network, they'd need a large amount of ETH to do so.
How do I start staking ETH?
There are several ways you, as an individual can get into Ethereum staking as the Ethereum staking model is quite unique.
Becoming a validator
The most profitable way of staking Ethereum 2.0 is by running a validator node (or staking node), also known as solo staking. As the most profitable way, it is also the most complex one as well.
First of all, this method of staking requires you to have at least 32 ETH to become a validator. That's the minimum requirement, so you can stake even more ETH if you can afford it. Ethereum validators have their ETH locked for the duration of the staking, without being able to withdraw their ETH deposits or perform a token swap.
In addition to that, you need certain hardware requirements to be met. As you'll need to download the entire Ethereum blockchain, you need to have plenty of space on your hard drive. Also, a validator node is supposed to be connected to the blockchain all the time, so a good Internet connection is of paramount importance here. Computing power also plays a role, so a good GPU/CPU is still a requirement.
If you meet these requirements, then all you need to do to stake your ETH is to set up the validator software (Ethereum client) on your PC and you're good to go. As mentioned above, this is the most profitable way since it allows Ethereum validators to get full participation rewards.
This one works very similarly to becoming a validator, but with less headache. If you have the required 32 ETH, but lack the hardware and/or are not sure if you can stay online all the time, you can use this method.
With this method, you basically delegate your 32 ETH to a staking provider to earn native block rewards for you. They set up your validator credentials for you as well, you give them the signing keys and send your 32 ETH.
Needless to say, this method requires a certain level of trust toward the provider. Just in case, in order to limit counter party risk, the keys for withdrawal of your ETH are always staying with you.
A staking pool is a means of combining (or pooling) assets of several ETH holders into one. When it comes to ETH staking pools, it means combining several stakers' funds in order to reach the threshold of 32 ETH and become a validator. Staking pools count all the ETH staked by users with that specific staking pool.
The obvious advantage of pooled staking is that one does not need to invest as much upfront. 32 ETH on top of all the hardware costs might be too much for certain users.
Needless to say, the staking yield is not as high here as with the previous two options. Staking rewards you get that way will be lower than the ETH rewards you'd get by running your own validator. Staking rewards that the validator gets will then have to be divided between all the stakers who chose to delegate their funds to that particular staking pool.
That being said, different staking pools offer different participation rewards. You can find different lists of 'best ETH staking pools' on the Internet and find a staking pool that suits you the best.
One of the downsides of staking ETH is the long-term commitment. Staked ETH cannot be withdrawn or exchanged, so some users might be deterred from the idea of staking ETH as a whole. That's where liquid staking comes in.
Liquid staking solves this issue by introducing special tokens that allow ETH holders to receive staking rewards, yet you could also trade them or withdraw them at any time.
With liquid staking, you receive a special token, that acts as a kind of receipt. These liquid tokens are earning ETH staking rewards for you, yet you can still exchange them or move them around at any time. The most popular of these liquid tokens are stETH tokens.
Liquid staking enables easy access to staking, since it's available to everyone, regardless of how much ETH a user has.
You must keep in mind, however, that liquid staking is not native to the Ethereum mainnet, it's done via third-party staking services. This option is usually available in centralized exchanges or an Ethereum wallet.
Are there any risks?
Each aforementioned method of staking Ethereum has its own risks and penalties which cost ETH.
When it comes to running a validator, risks consist of financial penalties for failing to perform your 'duty' as a validator.
Ethereum network can penalize validators for going offline for too long and failing to validate a batch, in other words. Malicious behavior is also punishable. That is validating wrong transactions.
This may result in slashing - a punishment in response to a network or validator failure. It is a process of taking out your staked ETH or your staking rewards. In case of going offline, only your rewards will be slashed, however, malicious behavior is punishable by slashing your staked assets.
Slashing serves as a deterrent, making it expensive to attack the network and making sure that validators act in the interest of the network at all times.
Slashing, however, is not exclusive to running a validator. Staking as a service bears the same risks since your staking provider might fail to perform accordingly just as well.
With regard to pooled staking or liquid staking, there is always a chance that the service you use might have a smart contract vulnerability or a bug. Make sure the service you choose is transparent about its code, to minimize the risks.
Liquid tokens are also at risk of price fluctuations, as well as ETH itself. The value of said tokens depends on rewards around Ethereum Beacon Chain. Both tokens and ETH prices might be affected if Ethereum fails to reach the required levels of adoption. On top of that, slashing risk remains in this category as well.
Is it profitable?
In short, the more ETH is staked overall, the higher the reward rate for each validator will be. The opposite is also true, the lower the overall amount of ETH staked, the lower fewer rewards there are.
Another aspect that is taken into account is the number of validators in the Ethereum ecosystem. The more validators there are, the fewer rewards are out there for each validator. APR, or Annual Percentage Rate decreases as more validators join the Ethereum ecosystem. The APR currently sits at around 7%.
Other than these two aspects, you earn staking rewards depending on how many transactions the Ethereum network is validating at a specific time.
Staking ETH in Atomic Wallet
Atomic Wallet currently supports liquid staking for ETH, using the Lido protocol.
Lido is the largest liquid staking service provider on the Beacon chain. Lido allows users to participate in Ethereum staking without having to deal with the less comfortable aspects of the Beacon chain staking, like the need to run a validator themselves, the inability to withdraw funds, etc.
Staking with Lido makes your staked ETH liquid, while still allowing you to participate in improving the stability and security of the Ethereum mainnet. Lido accounts for about a third of all staked ETH. When staking with Lido, you receive an ERC20 token, the aforementioned stETH. You are free to do whatever you'd like with your stETH tokens. As mentioned above, these tokens are not locked for the duration of the staking period.
How do I stake ETH in Atomic Wallet?
Staking in Atomic Wallet is a pretty straightforward process. First, of course, you need to have some ETH in your wallet.
You can acquire ETH on a centralized exchange or any other service and then simply deposit it into Atomic Wallet. Here's a detailed guide on how to do that. In short, get some ETH, copy your ETH address in Atomic Wallet and send the funds!
Here's a more comprehensive guide on depositing funds into Atomic Wallet.
An even easier way to get some ETH into your Atomic Wallet is to purchase it directly in the wallet. If you choose to go ahead with this route, you will need to provide some information, like your name, billing information, etc. You will also have to undergo a verification process, done by our partners to prevent fraud and money laundering. You can pay with a debit or a credit card.
Exchanging an asset for ETH
If you wish to stake ETH as soon as possible, but only have, let's say, ATOM, you can exchange it for ETH right in the wallet. Atomic Wallet features a built-in exchange that supports more than 500 crypto assets, while you can freely swap tokens without having to verify your identity or follow time-consuming ‘Know Your Customer (KYC) protocols. The exchange also provides real-time prices for assets and cryptocurrency pairs, so you can ensure that you time the transaction to achieve the best possible value.
A step-by-step guide on exchanging assets in Atomic Wallet is available here.
Time to start staking Ethereum
Now that you've got some ETH in your wallet, it's time to start staking.
First, let's get into the staking tab. Click 'Staking' on the left sidebar of your desktop wallet interface. If you're on mobile, the button is located in the bottom panel. The staking tab is a list of all the assets available for staking in the Atomic Wallet, along with their APYs. Here's what it looks like:
Select Ethereum from the list. You'll be presented with the ETH staking interface.
Total is, as the name suggests, the total amount of ETH you have.
Available is the total amount of ETH you can stake at the moment.
Staked is your staked balance. I.e., the total staked ETH you have right now.
Press the 'Stake' button at the bottom of the screen. Here you can choose the amount of ETH you want to stake. You'll also see how much you'll have to pay in transaction fees. Keep in mind, that Atomic Wallet does not charge any additional transaction fees from their users.
Enter the amount of ETH you wish to stake and confirm it, by entering your password. That's pretty much it! You have now officially started staking your Ethereum and received your equivalent amount of stETH tokens. Staking rewards are already being generated. Keep in mind, however, that ETH rewards take a bit of time to generate.
When will I get my staking rewards?
You'll receive your first staking rewards in 24 hours after staking your ETH. After that, your rewards will arrive once every 24 hours as well.
The good thing is that the process requires minimal oversight on your behalf. There's no need to claim them, as they'll automatically be added to your staking deposit. Your stETH balance will automatically refresh once the rewards have been paid out.
How do I unstake my ETH?
As mentioned before, there is no way of 'unstaking' your ETH in the traditional sense of the word. If you wish to stop staking ETH, all you need to do is to exchange your stETH tokens for any other asset. As mentioned above, you can do it right in the wallet.
What is Ethereum staking?
Staking is a process of actively participating in transaction validation by delegating your funds in a Proof-of-Stake blockchain, one of which Ethereum has recently become.
Why does Ethereum staking exist?
Switching to the Proof-of-Stake model allows Ethereum to achieve a greater TPS count and makes the network more secure.
Why would I stake ETH?
In addition to helping Ethereum become a more environmentally friendly blockchain and making it more secure, you can also earn staking rewards.
How do I stake ETH?
There are several ways of getting into staking Ethereum. You can either:
Run your own validator node, aka solo staking. Requires more of an investment time- and moneywise (having at least 32 ETH, properly specced PC, and a good Internet connection) but provides the best staking rewards.
Staking as a service. Still requires an investment of at least 32 ETH, but does not require you to invest in hardware.
Pooled staking. If you are unable or unwilling to invest 32 ETH, you can pool your ETH holdings with others into staking pools to get to the desired threshold. Different Ethereum staking pools usually offer different reward rates.
Liquid staking. You exchange your ETH for specialized tokens that you can exchange at any moment. As long as you hold the aforementioned tokens, you are getting rewards.
Is Ethereum staking risky?
Ethereum has measures in place to protect the network from malicious behavior. If you, a validator, or a liquid staking service provider participate in malicious behavior, your staking rewards or even the entire amount of your staked ETH may be slashed, or taken away, in simple terms.
What if I have more questions?
If you need an even more detailed guide on Ethereum staking, check out the article in our Knowledge Base, it really covers all of it!
If you do have any issues with either staking Ethereum or exchanging it, you can contact Atomic Wallet’s 24/7 customer support team (by reaching out directly through this online contact form).
Stake Ethereum today!
Staking Ethereum is a straightforward and profitable process, that allows you to put your ETH tokens to good use and insure the security and stability of the blockchain. Staking yields great rewards, while also being beneficial to the entire network. Stake your ETH to help the blockchain and get some staking rewards in the process.
Ethereum is now using the Proof-of-Stake consensus mechanism, allowing users to earn staking rewards and make the network more secure.