Along with the debut Ethereum 2.0 at the end of 2020, many questions arise about the introduction by ETH Proof of Stake (PoS). How to make money on ETH? Can anyone become a validator? We will provide answers to these questions in the article below. Earning ETH isn’t easy, but definitely possible.
Ethereum 2.0 has started
We also wrote about Ethereum 2.0 in another article: The premiere of Phase 0 of the Ethereum Serenity update is the most important technological event in the cryptocurrency industry in 2020. With the beginning of December, the first phase of the Ethereum transition from the algorithm Proof of Work on Proof of Stake has become a fact. Entire process is divided into three phasesand each of them deals with different elements of the implementation. Earning ETH is spread over each of them.
Congrats on the launch all!
– vitalik.eth (@VitalikButerin) December 1, 2020
Phase 0 – Beacon Chain
Zero phase marks the official launch of Beacon (lighthouse) chains. The main goal of this phase is to introduce shards validation and randomization (shard blocks). Running this stage will create a new token – ETH2. Network users will be able to exchange their regular ETH tokens for those in version 2.0 in a 1: 1 ratio using a special smart contract. This contract will effectively burn all the ones held so far tokens ETH. This exchange is necessary to start the staking process. It is also worth adding that the ETH2 chain will function in parallel with the Mainnet ETH.
Phase 1 – Shard Chain
The second stage The Ethereum 2.0 update is designed to significantly increase network scalability by dividing the network into 64 shards, operating at the same time. Phase 1 is also supposed to introduce the possibility of individual shards communicating with each other. Thanks to these solutions, the hardware barrier of entry to the maintenance of your own node will be effectively lowered. The expected implementation period is 2021.
Phase 2 – Connecting Mainnet and ETH2
Final phase update will take place in 2021/22. It was then Mainnet the Ethereum network will unify with the rest of the Eth2.0 updates. This means the end of the algorithm’s operation PoW including blockchain and full transition to PoS.
Passive ETH Earning
Passive earning of ETH is possible thanks to the use of an algorithm Proof of Stake. However, this is a side effect. PoS is primarily a new way of securing the network based on proof of participation in the network. Ethereum.org determines this algorithm as:
Public good that will make Ethereum healthier and earn you more ETH as a result. In practice, it assumes your participation in ETH staking in order to activate the validation software. As a validator, you will process transactions and create new blocks in the chain.
PoS awards are given for taking actions that help networks maintain consensus. New tokens are obtained for collecting transactions in blocks, as well as auditing the activities of other validators.
How to become a validator?
It is not that simple. To become a validator and receive ETH2 rewards, it is necessary to include 32 ETH in the contract. Why was such an amount decided? 32 ETH is a balance amount that protects against a deluge of minor investors who want to earn with minimal investment. On the other hand, this limit is sufficiently available to a sufficiently broad group of investors (assuming 32 ETH is the equivalent of around $ 11,000). Moreover, 32 ETH provides a satisfactory rate of return on staking.
In order to participate in the Ethereum 2.0 network, we must also meet the technical requirements. The optimal hardware configuration can be found under THIS link.
The next step is to select and install the appropriate client that will help us run the validator. At this point, we can choose one of 4: Teku, Nimbus, Lighthouse and Prysm. Before choosing, it is worth getting acquainted with the specifications of the offered software.
The third stage is the installation of the ETH1 node, whose task is to monitor deposits (32ETH) made by validators. Here, once again, there are several options to choose from – Nethermind, Besu, OpenEthereum, and Geth are just a few of them.
The next step is to launch the ETH2 Launchpad. A special application has been prepared by the Ethereum Foundation, Codefi Activate and Deep Work to facilitate the setting of the validator for hobby users. Launchpad will transparently lead everyone through the Due Diligence process and its overview section – this stage is mainly educational and informative. Here we will see all the risks associated with ETH staking. Launchpad will then allow us to generate keys and a mnemonic phrase, upload a deposit file and connect the wallet.
You will find a link to the official ETH2 Launchpad here.
REMEMBER! There is also risk involved in setting up a validator account. The validator must actively participate in maintaining the stability of the Eth2 network. Otherwise, he may face penalties that will reduce his fortune. Second, an investment in validator status is a long-term investment. Funds from this account cannot be withdrawn until the update of Phase 1.5. This means that for the next 1-2 years, the 32ETH invested cannot be paid out.
What if I don’t have 32 ETH? Earning Ethereum without a validator
32 ETH at the time of writing this text is about PLN 70,000. Not everyone is able to accumulate such capital, especially during the rising price of cryptocurrencies. Fortunately, there are also alternative methods of earning Ethereum via PoS without the need for a validator profile. The solution in this situation are staking pools, which function similarly to mining pools. In this case, we can use our capital to top up the existing validator in exchange for a percentage of its profits.
Already at this point, enough is available a large amount of polyolswhich enable staking in ETH2.0. Please note, however, that the proposed solutions are not official solutions supported by the Ethereum Foundation. Therefore, first of all, you should take care of your own research before choosing the right broker. The selection should be helped by criteria such as control over the validator key and the key for the payment of funds. It is worth remembering that some pools also impose lower limits on the funds deposited, and sometimes require brokerage fees (these fees can be one-time, subscription or commission-based – charged on profits).
Staking on Binance
ETH offers quite an interesting staking offer to its users Binance. The largest entity in the cryptocurrency space allows, as part of its staking mechanism, the use of a new method of creating ETH. After ETH2 staking begins, Binance will launch its own in January 2021 token BETH (Binance Eth). BETH will be tradable 1: 1 with Ethereum on the exchange. Thanks to the introduction of the token, the user will be able to immediately exchange the accrued interest for Ethereum, without waiting for the implementation of phase 1.5.
This solution is certainly not as beneficial as creating a validator profile, but it provides a much greater amount of flexibility – assuming that the implementation is successful.
How much can you earn from ETH staking?
In order to determine the potential return on investment in ETH staking, you can use the posted on the site Ethereumprice.org, a special calculator. According to his settings, we can see that it is annual ROI the investment should amount to approximately 14%.
The operating scheme of the ETH2 calculator is based on framework provided by Consensys Codefi – in the document explaining how the calculator works, we can see that the return on investment value is dynamic and depends on the total amount of ETH stacked. In addition, the values related to the possible costs of running / maintaining a validator profile cannot be forgotten.
The New Era of Cryptocurrency?
Ethereum 2.0 is sure to shake up the modern cryptocurrency world. It is worth considering what changes this will bring to the functioning of the entire network ecosystem.
Two employees from ConsenSys Corporate Development, Tom Borgers and Tanner Hoban, prepared economic audit Eth 2.0in which they identify the main opportunities, threats, strengths and weaknesses of the latest project update Vitalika Buterin.
According to the authors, the PoS Ethereum 2.0 system is much more advanced than the PoW model. It is a well-thought-out and well-designed system, but may turn out to be too complicated for validators. This, in turn, can translate into the security and stability of the entire network, which is mainly based on three components – the amount of ETH stacked, the price of ETH itself and volatility. These are fairly typical elements for any PoS system in which network security relies heavily on the difficulty of taking control of the network due to the high economic barrier resulting from the above premises. Furthermore, for the network to function smoothly, validators need to be confident in the capital efficiency of their investment. This certainty may be limited in phases 0 and 1, when the obtained funds cannot be liquidated. This situation may also lead to network centralization by creating a derivative market by external entities – a good example is the aforementioned staking service offered by Binance.
Nevertheless, all the above-mentioned elements are only certain pieces of a larger puzzle, and Ethereum itself still has a long way to go, related to the full implementation of ETH2.