Staking in Ethereum 2.0: how to become a validator and the potential profitability of staking

The launch of Ethereum 2.0 is scheduled for December 1. How to become an ETH 2.0 validator, why do you need it, and what to do if you can’t buy 32 ETH?

On November 24, 524,288 ETH were collected on the Ethereum 2.0 deposit contract
, which is necessary for staking and launching the first phase of Ethereum 2.0 — the “signal Chain” (Beacon Chain). The new version of the network will be automatically launched on December 1, and any participant in the cryptocurrency industry can become a validator. The editorial board of Bits. media has prepared a guide on how to participate in the Ethereum 2.0 staking.

What is staking in Ethereum 2.0?

Staking in Ethereum 2.0 is blocking ETH in a smart contract to participate in the network as a validator and receive a reward for confirming blocks. Staking will become possible after the launch of the new version of the network on the new Proof-of-Stake (PoS) consensus algorithm.

Staking is a process similar to mining in PoS-based networks, where validators perform the same functions as miners. They are engaged in creating new blocks and confirming transactions for a fee. Instead of using computing resources, validators lock coins in the wallet. To become an Ethereum 2.0 validator, you need to block at least 32 ETH for staking. At the end of November, the cost of such a deposit is about $18 thousand.

Validator rewards

Only validators who actively participate in the consensus are rewarded. Disconnected validators are penalized — the penalties are equal to the rewards for active participation.

The reward of validators is affected by the total number of ETH blocked for staking. Depending on this figure, the maximum annual yield of the validator can be from 2 to 20%. You can calculate the approximate return on staking here and here.

How to participate in ETH 2.0 staking?

Users who want to become validators have two options for participating in staking:

Independent staking. Blocking of 32 ETH and independent launch of the validator node in compliance with technical requirements. The blocked ETH will not be available until the launch of Phase 1.5, which will happen in 12-24 months, depending on the development speed. After the launch of Phase 1.5, a dynamic lock time will be set to prevent mass withdrawal of ETH-256 epochs (about 27 hours).

Joint staking. Providing available ETH to a staking service provider – a pool, a cryptocurrency exchange, etc. There are security risks associated with trust in the intermediary. However, you can participate in the staking without having 32 ETH, and withdraw the blocked assets before the deployment of Phase 1.5.

Independent staking

To become an independent validator of ETH 2.0, you must follow the instructions on the website, which includes three main steps:

  1. Acceptance of the terms of participation in the network as a validator. It is necessary to read and accept the nine conditions of the validator’s work, including confirmation of the perceived risks, consequences of malicious and unfair behavior.
  2. Create a key of the validator in standalone mode. To process incoming validator deposits from the ETH 1.0 chain, you must run the ETH 1.0 client in parallel with the ETH 2.0 client. At this step, select the ETH 1.0 client and follow the installation instructions on the program’s website.

Then you need to select the ETH 2.0 client.

Next, you need to specify the number of nodes that the user plans to manage, as well as select the operating system of the device. After that, download the application with the command-line interface from the GitHub Ethereum Foundation or choose the option of creating a client from Python source code.

You must clearly follow the instructions and generate the keys for the deposit. Validator key stores must be available in the new validator_keys directory. Upload the deposit data file Deposit-data – [timestamp]. json, which is located in the /eth2.0-deposit-cli/validator_keys directory, in the suggested window.

  1. Transfer ETH to ETH 2.0. At this step, you need to transfer your ETH to the specified address of the smart contract in accordance with the instructions.

In addition to starting the node yourself, you can use the pre-configured Validator node hardware (Pre-configured Validator Nodes). This will save time and effort during the initial setup to run the validator. At the same time, the responsibility for maintaining the operation of the node also falls on the user, and for staking it is necessary to block 32 ETH. Examples of solutions: Avado, Launchnodes.

Another option is to use the services of services based on the concept of” validator-as-a-service ” (Validador-as-a-service), and pay the service for managing the node. Suitable for large ETH holders and institutional investors. Examples of services: Stakewise Solo, stakefish, Staked, Attestant, Blox Betting.

Joint staking

At the exchange rate at the end of November, 32 ETH is almost $18,000, so not everyone can run their own validator node. To start staking with a small amount of ETH, you can use the services of services that offer joint staking in Ethereum 2.0.

The developers of Ethereum 2.0 have published a list
such services, but they emphasize that none of them has passed a special check of the developers. Users should independently assess the risks and opportunities of each offer. There are three options for joint staking:

Staking pools. You can block any amount in ETH for staking. The pool is an intermediary for people with less than 32 ETH, combining crypto assets for staking. The rewards for staking are distributed among the pool participants in proportion to their shares. Storage is decentralized, transparent, and verified in any blockchain browser. Suitable for retail investors and participants in the DeFi industry.

Lending platforms. A balanced option between staking and the possibility of borrowing tokens for ETH blocked in staking. Suitable for traders and investors focused on maximizing profits.

Exchanges and custodians. The easiest option is to transfer ETH to the wallet of an exchange or other custodial service that offers a split reward for staking. At the same time, the user does not control the private keys.

Let’s look at each of the options in more detail.

Staking pools

With the help of pools, you can combine existing crypto assets with other participants who do not have 32 ETH to run their own validator. Since most of the coordination will take place through smart contracts, you need to make sure that the service has passed a security audit before sending ETH to the pool contract.

Most staking pools issue tokenized versions of staking-locked ETH, such as rETH. These ERC-20 tokens represent not only ether, but also the income from staking. Tokens can have the same symbol or name, but if they are not issued by the same pool, they are different assets with different liquidity.

Pool validators are either managed by well-known staking service providers, or by a dynamic composition of contract users. The staking pool receives commissions from users and partially deducts a fee from them to the operators of validator nodes.

Pools charge a commission for staking, and some services have a limit on the minimum amount of ETH deposited.

Advantages: liquidity on ETH blocked for staking due to the secondary issue of tokens; additional incentives for validator operators in the network.

Disadvantages: the risk of vulnerabilities of the smart contract; in some cases, the custodial storage of ETH by the pool operator; the risk of unfair behavior of the pool, which threatens to lose the blocked ETH.

Examples of services: Rocket Pool, Stkr, Stafi Protocol, Stakewise Pool, Lido Finance, Etherchest, Stakehound, StakeDAO, CanEth Pool.

Lending platforms

So far, there is only one credit platform that allows you to use ETH blocked for staking as collateral for obtaining a loan. DHARMA Capital’s LiquidStake allows ETH holders to get a loan in USDC using the blocked ETH as collateral.

The user can benefit from the ability to generate income through staking and retain the ability to trade, invest, or store liquid crypto assets. LiquidStake combines clients ‘ crypto assets and transfers them to major providers of staking services. Credits can be obtained from the very beginning of the ETH staking or later.

Advantages: limited capital liquidity.

Disadvantages: risk of an intermediary; the risk of liquidation of the validator and the liquidation penalty.

Exchanges and custodians

Most exchanges have not yet launched co-staking products, but some have already announced plans to roll out such solutions in the future. The situation is likely to change after the launch and testing of the Beacon Chain.

It is not yet clear how the exchanges will address the problem with the indefinite blocking period. Exchanges can offer fixed-income products in which coins are blocked for a predetermined period of time without the possibility of withdrawal. Custodial wallets are likely to offer solutions with a longer asset lockout period. The commission structures of exchanges are often opaque, so it is not clear at what intervals exchanges accumulate remuneration.

To participate in staking via an exchange or custodian, you need to register on the service and transfer ETH to its wallet. In this case, the user loses control over the private keys.

Advantages: ease of use of the service; you can block any amount for staking, including less than 32 ETH.

Disadvantages: opaque reward structure; intermediary risk; loss of control over private keys and crypto assets.

Examples of services: Bitcoin Suisse, Coinbase, Binance, Kraken, CoinDCX, TokenPocket.