Ethereum is a few days away from “The Merge,” its transition from Proof of Work (mining) to Proof of Stake (staking). The promised benefits of Proof of Stake (PoS) include a significantly higher number of transactions per second (tps), reduced environmental impact (PoS requires far less energy than mining), and greater scale. Where mining rigs are expensive, require a lot of electricity, and require specialized skills to efficiently operate, PoS rigs only require average hardware, a static IP address, and the ability to read and follow directions.
Oh, there’s one more thing: you need 32 ETH (roughly $96,000) to operate a solo PoS node. If you don’t have that much, you can join a PoS pool for a small service fee. Which raises the question: If you are planning to hodl (slang for “hold”) your ETH, should you make the investment to become a solo PoS validator node, commit it to a staking pool, or completely ignore all of this and just hodl your ETH safely in a hardware wallet?
Understanding Ethereum’s Vision
Before we get to the question, it’s important to understand Ethereum’s vision for the future and understand the problem it’s trying to solve. The network wants to be more scalable and secure but also to remain decentralized. The problem is (generally speaking), distributed ledgers (blockchains) can be decentralized, secure, or scalable – pick any two. This problem is called the “trilemma,” and it is considered one of crypto’s most challenging issues. Ethereum believes its approach to PoS offers a solution to the trilemma. You can read more about it here.
What Is Staking?
On Ethereum, Proof of Work (PoW) is done by miners, who compete to create new blocks on the Ethereum mainnet. The winner shares the new block with the rest of the network and earns newly created ETH as a reward. Mining will cease after the merge (sometime late this year or early next) and be replaced by PoS.
PoS is done by validators who have staked 32 ETH to become validator nodes. A validator is chosen at random to create new blocks and share them with the network to earn a reward. Validators are currently receiving rewards equal to approximately a 4.4% annual rate of return.
How To Stake
There are several ways to get involved with staking. First, you can visit Ethereum’s Staking Launchpad and simply read the instructions. You should do this no matter what method of staking you ultimately choose. The site clearly outlines the risks, rewards, hardware requirements, and other important information.
After you understand what’s involved, if you’re still interested but not sure you have the hardware chops to do it yourself, consider a hybrid approach. Ethermine (the largest ETH mining pool) is offering an interesting twist on solo ETH staking. They call it a “Non-custodial staking pool for Ethereum 2.0.” This sounds strange because generally a pool is a collection of pooled fractional resources created to achieve a greater goal than any individual resource could achieve by itself. But in this case, the non-custodial aspect specifically means that while you still need 32 ETH to get into the pool, your crypto stays in your wallet. The “pool” part of this particular pool is the fact that you don’t need any hardware to receive the benefits for being a validator node. (The fine print says the pool will take a 10% cut after the Ethereum merge, so do the math before you commit to this, or any, staking solution.)
There are some other staking pools that offer the ability to stake less than 32 ETH and still enjoy some of the benefits of staking. These solutions are generally offered by centralized exchanges with strict KYC (Know Your Customer) regulations, and in these cases, you are simply investing with the hope of receiving a specified rate of return on your investment. You can call it staking, but you might as well just call it what it is, an alternative financial instrument tied in some way to the return on ETH staking.
Should You Stake Your ETH?
First and foremost, I am not a licensed financial advisor (see the disclaimer below). Staking comes with a wide range of very high risks, and you should seek out the advice of a licensed financial professional before investing. You will also need to be a hardware, software, and cybersecurity expert or retain the services of one to ensure that your system is properly set up and adequate for your needs.
That said, Ethereum believes that “validators will play an active part in Ethereum’s future” and that they are key to a “more secure, scalable, and sustainable Ethereum.” This is clearly the case. Today, there are more than 361,883 validator nodes with over 15,000 nodes pending. There are more than 12,138,721 ETH staked.
As exciting as all of this is, there are severe downsides to staking. You’ll be tying up your ETH for up to two years. And making rudimentary hardware and software mistakes can cost you real money. For example, if your node goes offline, you will be penalized in ETH for the time your system is unavailable to the network. Should you actually do something wrong (like try to defraud the network), or if you make a mistake that makes it appear as though you were trying to defraud the network, your ETH stake can be “slashed” (a term of art for the fine that will be automatically deducted from your stake). You must fully understand the hardware and software obligations you are assuming before you get into staking. You need some real tech chops and a time commitment to keep your system healthy and updated.
With that strong admonition, it’s clear that there are a lot of validator nodes already online and quite a few in the queue. If you’re interested in becoming an Ethereum validator node, do the reading, reach out to some experienced people for guidance, and get ready for a wild and exciting ride.
Author’s note: This is not a sponsored post. I am the author of this article and it expresses my own opinions. I am not, nor is my company, receiving compensation for it. I am not a financial advisor. Nothing contained herein should be considered financial advice. If you are considering any type of investment you should conduct your own research and, if necessary, seek the advice of a licensed financial advisor.