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

Ethereum 2.0 Launch Scheduled for December 1st. How to become an ETH 2.0 validator, why is it necessary and what to do if it is not possible to buy 32 ETH? On November 24, 524,288 ETH were collected on the Ethereum 2.0 deposit contract, 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 member of the cryptocurrency industry can become a validator. Bits.media has prepared a guide on how to participate in Ethereum 2.0 staking. What is staking in Ethereum 2.0? Staking in Ethereum 2.0 is the blocking of 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 a new version of the network based on a new Proof-of-Stake (PoS) consensus algorithm. Staking is a similar process to mining in PoS-based networks, where validators perform the same functions as miners. They are engaged in the creation of new blocks and confirmation of 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 lock up at least 32 ETH for staking. At the end of November, the cost of such a deposit is about $18,000. Validator rewards Only validators that actively participate in the consensus are rewarded. Disconnected validators are penalized – the penalties are equal to the rewards for active participation. Validator rewards are affected by the total number of ETH locked up for staking. Depending on this figure, the maximum annual yield of the validator can be from 2 to 20%. You can calculate the approximate profitability from staking here and here. How to participate in ETH 2.0 staking? Users who wish to become validators have two options to participate in staking: Self Staking. Blocking from 32 ETH and independent launch of the validator node in compliance with technical requirements. Locked ETH will not be available until the launch of Phase 1.5, which will take place in 12-24 months, depending on the speed of development. After the launch of Phase 1.5, a dynamic lock time will be set to prevent the mass withdrawal of ETH – 256 epochs (about 27 hours). Joint staking. Providing existing ETH to a staking service provider – a pool, a cryptocurrency exchange, etc.. There are security risks associated with trusting an intermediary. However, it is possible to stake without having 32 ETH and withdraw locked assets before Phase 1.5 rolls out. Self-Staking To become a self-staking ETH 2.0 validator, you need to follow the instructions on the Ethereum.org 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 work of the validator, including confirmation of perceived risks, consequences of malicious and dishonest behavior. 2. Generating Validator Keys Offline. To process incoming validator deposits from the ETH 1.0 chain, you need to run the ETH 1.0 client in parallel with the ETH 2.0 client. At this step, you need to select an ETH 1.0 client and follow the installation instructions on the program website. Then you need to select an 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 CLI application from the GitHub Ethereum Foundation or choose to create a client from Python source code. You must clearly follow the instructions and generate the keys for the deposit. Validator keystores should 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 window provided. 3. Convert ETH to ETH 2.0. At this step, you need to transfer your ETH to the specified smart contract address in accordance with the instructions. In addition to running the node yourself, you can use the pre-configured validator node hardware (Pre-configured Validator Nodes). This will save time and effort on the initial setup to run the validator.. At the same time, the responsibility to maintain the operation of the node also falls on the user, and 32 ETH must be blocked for staking. Solution examples: 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 to manage the node. Suitable for large ETH holders and institutional investors. Service examples: Stakewise Solo, stakefish, Staked, Attestant, Blox Staking. 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 that offer joint staking in Ethereum 2.0. The developers of Ethereum 2.0 have published a list of such services, but emphasize that none of them have passed a special check by the developers.. Users must independently evaluate the risks and opportunities of each offer. There are three options for collaborative staking: Staking Pools. You can lock up any amount of ETH for staking. The pool is an intermediate link for people with less than 32 ETH, pooling crypto assets for staking. Staking rewards are distributed among pool members in proportion to their stakes. Storage is decentralized, transparent and verifiable in any blockchain explorer. Suitable for retail investors and participants in the DeFi industry. Lending platforms. A balanced option between staking and the ability to borrow tokens against ETH locked in staking. Suitable for traders and investors aimed at maximizing profits. Exchanges and custodians. The easiest option is to transfer ETH to an exchange wallet or other custodial service that offers staking reward sharing. The user has no control over the private keys. Let's consider each of the options in more detail. Staking Pools Staking pools allow you to pool 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, it is necessary to ensure that the service has passed a security audit before sending ETH to the pool contract. Most staking pools issue tokenized versions of locked ETH for staking, such as rETH. These ERC-20 tokens represent not only ether, but also staking income. 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 fees from them to validator node operators. Pools charge a fee for staking, some services have a limit on the minimum amount of ETH deposited. Advantages: liquidity on ETH blocked for staking due to the secondary issuance of tokens; additional incentives for operators of validators in the network. Disadvantages: risk of smart contract vulnerabilities; in some cases, custodial storage of ETH by the pool operator; the risk of unscrupulous behavior of the pool, threatening the loss of locked ETH. Service examples: Rocket Pool, Stkr, Stafi Protocol, Stakewise Pool, Lido Finance, Etherchest, Stakehound, StakeDAO, CanEth Pool. Lending platforms So far, there is only one lending platform that allows you to use blocked for staking ETH as collateral for a loan. LiquidStake from DHARMA Capital allows ETH holders to borrow in USDC using locked ETH as collateral. The user can benefit from the opportunity to generate income through staking and maintain the ability to trade, invest or hold liquid crypto assets. LiquidStake aggregates clients' crypto assets and transfers them to major staking service providers. Credits can be received from the very beginning of staking ETH or later. Advantages: limited capital liquidity. Disadvantages: middleman risk; validator liquidation risk and liquidation penalty. Exchanges and custodians Most exchanges have not yet launched collaborative 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 Beacon Chain. It is not yet clear how exchanges will deal with the indefinite blocking period. Exchanges may offer fixed income products in which coins are locked up for a predetermined period without the possibility of withdrawal.. Custodial wallets are likely to offer solutions with a longer asset lockout period. The fee structures of exchanges are often opaque, so it is not clear at what intervals exchanges accumulate fees. To participate in staking through 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. Weaknesses: non-transparent reward structure; intermediary risk; loss of control over private keys and crypto assets. Service examples: Bitcoin Suisse, Coinbase, Binance, Kraken, CoinDCX, TokenPocket. Conclusion Any user with any deposit size can participate in ETH staking. But only with 32 ETH or more you can launch your own validator without transferring assets to intermediaries. With the current value of ETH over $500, launching your own validator is out of reach for most users. Keep in mind: Validator rewards decrease as more ETH is locked up for staking. The sooner the validator node is deployed, the greater the reward for its owner in the early stages. But after the full launch of Ethereum 2.0, you should focus on a yield of about 2% per annum or even less. Profitability of staking can be low, while stakers bear financial risks. ETH locked for self-staking cannot be withdrawn until Phase 1.5 rolls out, i.e. 1-2 years, possibly more. In joint staking, it depends on the rules of the contract or service.. Validators may be penalized for poor performance or protocol violations. Non-technical users who wish to block for staking from 32 ETH can use pre-configured validator nodes or services based on the concept of “validator as a service”. For retail investors who want to participate in staking but do not have enough capital to run their own validator, collaborative staking solutions have been developed that eliminate some of the risks and issues associated with a long blocking period. Despite the small number of services for joint staking, there are already products that meet the needs of different user groups.. You can take advantage of the offers of pools, lending platforms, cryptocurrency exchanges and custodians. When choosing a staking service operator, it is necessary to carefully study the offered product, the size of the commission for services, liquidity, the reliability of smart contracts, and take into account the risks that the complete or partial loss of control over the keys entails.