The adoption of proof-of-stake is the first phase of the Ethereum 2.0 update.
Let’s take a closer look at the reasons the PoS consensus was adopted, its differences from PoW, and ways for Ethereum investors to stake ETH.
Ethereum 2.0 and Proof-of-Stake
The most paradigm-shifting change in Ethereum 2.0 is the move from Proof-of-Work to Proof-of-Stake. Let’s take a closer look at the rationale behind this decision and its impact on the community.
What is wrong with Proof-of-Work?
While PoW is reliable and secure, it’s computationally inefficient. The biggest problem with Proof-of-Work is that it wastes energy by design as a way to secure the network. Thus, there’s no way to reduce the energy strain of PoW without lowering the blockchain security.
As a way to cut energy consumption, an alternative consensus mechanism – Proof-of-Stake – was ideated.
What is Proof of Stake?
Proof-of-Stake secures the blockchain by asking participants to deposit assets to the network. A stake is first and foremost a control mechanism that gives the network the power to penalize dishonest validators. As an incentive for verifying transactions, network contributors claim transaction fees.
While there were other PoS projects before Ethereum 2.0, ETH 2.0 is the largest proof-of-stake implementation up to date. Using PoS to reach a consensus on the second biggest blockchain in the world will put the algorithm to the test and prove its viability and security to the crypto community.
The key differences between PoW and PoS are listed below.
|Miners solve computationally intensive cryptographic puzzles||Block validators are chosen randomly among those with a stake in the network.|
|Security is ensured by high energy consumption||Security is ensured by a stake as a risk collateral|
|Low accessibility, miners have to invest in electricity and hardware||Higher accessibility, basic hardware (a laptop or a smartphone) is enough to become a validator.|
How can we prepare for Ethereum 2.0?
With Ethereum 2.0 updates around the corner, ETH holders, dApps developers, and end-users are eager to make the transition to the new network as smooth as possible.
Here’s how you can prepare for ETH 2.
ETH investors: stake Ethereum
In Ethereum staking, early contributors have the advantage. As more people stake on the Beacon Chain, rewards get lower – thus, jumping on the bandwagon as early as possible will increase your returns. Aside from the well-known Binance and Kraken, staking Ethereum is also available on Redot where there’s an option to get back your staked Ethereum on any stage.
Decentralized application developers: do your research on upcoming updates
For dApps developers, ETH 2.0 is impactful because it improves the network scalability (sharding) and versatility (shift to eWASM). If you want to be ahead of the curve, take your time to understand the technicalities of key ETH 2 updates.
Here are a few helpful resources:
- FAQ from the Ethereum team
- Buterin’s explanation of how sharding will work
- Rollups in Ethereum
- The impact of EIP-1559
For end-users and ETH holders, nothing will change after the release of Ethereum 2.0. Your ETH will be automatically converted to ETH 2.0. The end-user experience of trading and using dApps will stay unchanged
Is There Any Opportunity to Buy Ethereum 2.0 Now?
There are two ways to stake Ethereum: depositing the required 32 ETH and becoming a solo validator or staking Ethereum in a pool. Let’s take a look at the benefits of both approaches:
Becoming a solo validator:
- No intermediaries, alignment with the values of decentralization.
- Full autonomy
- No third-party fees.
Joining a staking pool:
- 24/7 accessibility is the responsibility of a Staking-as-a-Service provider.
- It’s possible to stake even if you don’t have 32 ETH.
- Becoming a part of an enthusiastic community
Investing or Staking?
While staking is a form of investing, there are a few considerations to keep in mind before you stake ETH:
- The lockup period – you will not be able to withdraw tokens until Phase 1.5 of the update is released (2022 by estimates).
- The risk of price plunges – stakers are dependent on the prices of the asset they deposit.
- As more people join the network, staking rewards get lower.
Having said that, Ethereum staking is superior to investing in crypto projects in many ways:
- You are contributing to a reputable network with a successful track record.
- Staking is a way to proactively support Ethereum innovation.
- Ethereum staking is a reliable way to earn passive income.
Ethereum staking is one of the most ambitious experiments in crypto right now. If Ethereum’s shift to PoS is successful, other teams will likely follow, starting the era of energy-efficient blockchains.
Whether they want to contribute to the network is up to each crypto enthusiast. Do your own research on the benefits and limitations of Proof-of-Stake and make an informed decision.