Ethereum 2.0, also known as ETH2, is a comprehensive upgrade to the Ethereum network aimed at enhancing its scalability and security. The upgrade involves several phases and involves significant infrastructure modifications, with a key change being the transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus process.
The Ethereum Foundation rebranded Ethereum 2.0 as the “consensus layer” in January 2022 to emphasize that it is an upgrade to the existing network rather than the creation of an entirely new network. The existing Ethereum network, known as Ethereum 1.0, is referred to as the “execution layer” where the network and smart contract rules are implemented.
The upgrade to Ethereum 2.0 is being implemented in multiple stages, with the aim of completing the full transition by 2023. This phased approach allows for the gradual integration of new features and improvements, ensuring a smoother transition and minimizing disruptions to the Ethereum ecosystem.
By transitioning to a proof-of-stake consensus mechanism, Ethereum aims to address scalability challenges and reduce energy consumption. Proof-of-stake relies on validators who hold and lock up a certain amount of cryptocurrency to secure the network and validate transactions, offering a more energy-efficient alternative to the computational-intensive proof-of-work process.
Overall, Ethereum 2.0 represents a significant upgrade to the Ethereum network, enabling it to handle a larger volume of transactions, improve security, and pave the way for the development of decentralized applications and solutions on a larger scale.
The Ethereum (ETH) network has experienced significant congestion, resulting in soaring transaction costs that have become prohibitively expensive for many use cases. This issue is partially driven by the success of DeFi projects, where users are willing to pay high fees due to the substantial value of transactions involved.
In Ethereum, transaction fees are referred to as “gas” costs because they fund the operations of applications running on the Ethereum blockchain, rather than being solely transaction fees. Non-financial decentralized applications (DApps) face challenges in operating on Ethereum due to the high gas fees.
To tackle these challenges, the Ethereum Foundation has been working on a network upgrade, previously known as ETH2, aimed at enhancing the security, speed, efficiency, and scalability of the Ethereum network. This upgrade aims to improve the network’s capacity to process transactions, alleviate bottlenecks, and accommodate a broader range of use cases, especially beyond the realm of finance.
As part of this upgrade, Ethereum’s mining process will be replaced by a staking model. Staking involves actively participating in transaction validation, similar to mining, where individuals with the minimum required cryptocurrency balance can validate transactions and earn staking rewards on the blockchain. Platforms like Coinbase, Binance, Kraken, and others allow users to stake their Ethereum holdings.
Currently, Ethereum processes around 15 transactions per second, which is relatively slow compared to financial transactions. With the implementation of proof-of-stake, Ethereum is expected to handle up to 100,000 transactions per second, significantly expanding the possibilities for projects and applications on the Ethereum blockchain.
This guide will introduce you to Ethereum staking, providing an explanation of how to stake Ethereum, the mechanics of Ethereum staking, and the rewards associated with ETH 2.0 staking.
From mining to staking model
Proof-of-stake is a consensus method employed by blockchain networks to achieve distributed consensus. Staking is the process utilized by proof-of-stake blockchains to secure the network and create new blocks. Staking involves selecting validators to propose and validate new blocks.
In the proof-of-stake mechanism, the likelihood of a validator being chosen to produce or validate a block is proportional to the number of coins they hold. This means that even individuals with a small number of coins can participate in staking and earn additional coins in proportion to their staked amount.
To become a validator on the network, users need to stake their native cryptocurrency, in this case, ETH (the native cryptocurrency of the Ethereum blockchain). Validators, similar to miners in the proof-of-work system, are responsible for organizing transactions and constructing new blocks that all nodes on the network can agree upon.
Validators, also known as “stakers,” play a role in processing transactions, storing data, and adding blocks to the Beacon Chain, which is Ethereum’s new consensus model. Validators receive interest on their staked coins, which are denominated in Ether, as a reward for actively participating in the network.
Becoming a validator on Ethereum requires a stake of 32 ETH. Validators are randomly selected to produce blocks and are responsible for validating any blocks they do not produce.
The stake of a user also serves as an incentive for positive validator behavior. For instance, a user may lose a portion of their stake if they go offline (fail to validate), or they may lose their entire investment if they engage in intentional collusion. Additionally, depending on the specific proof-of-stake system, users may have the option to delegate their stake to another user who can perform validator duties on their behalf.
This staking mechanism offers contributors a passive income stream and contributes to the security of the consensus layer upgrade, previously known as Ethereum 2.0, which represents the next version of the Ethereum network.
In a proof-of-stake (PoS) blockchain, unlike a proof-of-work (PoW) blockchain, 32 blocks of transactions are grouped together in each round of validation, which typically takes about 6.4 minutes. These groups of blocks are called “epochs.” When two additional epochs are added to the blockchain, it is considered irreversible, or finalized.
The Beacon Chain organizes stakers into committees of 128 and randomly assigns them to specific shard blocks. Each committee is given a slot and a designated time to propose a new block and validate the transactions within it. Each epoch consists of 32 slots, requiring 32 sets of committees to complete the validation process.
Once a committee is assigned to a block, one member is chosen at random to propose a new block of transactions. The other 127 members of the committee vote on the proposal and attest to the validity of the transactions.
The Beacon Chain collects state information from shards and distributes it to neighboring shards, ensuring synchronization across the network. The Beacon Chain manages the validators, handling tasks such as registering their stake contributions and distributing rewards and penalties.
Sharding involves dividing the Ethereum network into multiple parts called “shards.” Each shard maintains its own state, including a distinct set of account balances and smart contracts.
When the majority of the committee attests to a proposed block, it is added to the blockchain and a “cross-link” is created to validate its inclusion. The staker who proposed the block receives their reward only after this process.
During cross-linking, individual shard states are reconciled with the main chain, which is the Beacon Chain. This ensures that the final state of each shard is reflected on the Beacon Chain.
To achieve finality, which means a transaction cannot be changed in a distributed network, the Casper finality protocol is employed in the proof-of-stake consensus. Validators agree on the state of a block at specific checkpoints. If two-thirds of the validators agree, the block is considered finalized. Attempting to reverse a finalized block with a 51% attack would result in the validators losing their entire stake.
In Ethereum 2.0, the calculation of rewards is based on annualized interest rates and an inverse square root function. In simpler terms, this means that when the overall amount of ETH staked is lower, the incentives for each validator will also be lower.
The reward distribution differs between block proposers and attesters. The block proposer receives 1/8th of the base reward (referred to as “B”), while the attester receives the remaining 7/8ths of B. The attester’s reward is adjusted based on the time it takes for the block proposer to submit their attestation.
To receive the full 7/8ths B reward, the attester needs to submit their attestation quickly. The reward decreases for each slot that passes without the attestation being included in the block. For example, if two slots pass before the attestation is included, the reward is reduced by 7/16ths of B. If three slots pass, it is reduced by 7/32nds of B, and so on.
The issuance rate of Ethereum 2.0 is primarily determined by the base reward. When the base reward per validator is lower, more validators are attracted to Ethereum 2.0. This is because the base reward is inversely proportional to the square root of the total balance of all validators in Ethereum 2.0.
The rewards received by stakers depend on the total amount of ETH staked and the number of validators on the network. As the pool of staked ETH decreases, the annual interest rate increases. Conversely, as the pool grows larger and supports a decentralized ecosystem, the interest rate decreases.
However, it’s important to note that stakers cannot currently withdraw their staked coins or earned rewards until the Ethereum 2.0 and Ethereum 1.0 merge occurs.
Staking Ethereum is advantageous because it simplifies the process of running a node. It doesn’t require substantial investments in hardware or energy, and if you don’t have enough ETH to stake on your own, you can participate in staking pools.
Staking promotes a more decentralized approach, allowing for increased participation.
The road ahead
Ethereum has undoubtedly achieved tremendous success thus far, attracting a talented community of developers who have contributed to its growth and development. The ongoing upgrades to the core protocol reflect the dedication and meticulous planning of the Ethereum team.
While the timeline for completing various aspects, such as rollups and migration, remains uncertain, the Ethereum team continues to work diligently to address these complexities.
Although newer blockchains are emerging and offering alternative solutions, it is important to note that the blockchain market as a whole is expanding rapidly. Rather than being a zero-sum game, there is room for multiple blockchains to coexist and serve different use cases.
Furthermore, many of these newer blockchains are actively working on interoperability solutions with Ethereum, highlighting the significance and success of Ethereum as a foundational blockchain platform. Given this ongoing progress and the overall growth of the blockchain market, Ethereum is poised to remain a prominent player in the industry for the foreseeable future.
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