On November 24, the Ethereum 2.0 deposit contract raised
524,288 ETH needed to stack and launch the first phase of Ethereum 2.0, the Beacon Chain. The new version of the network will be automatically launched on December 1, and anyone in the cryptocurrency industry can become a validator. The Bits.media editorial team has prepared a guide on how to take part in the Etherium 2.0 Stacking.
What is stacking in Etherium 2.0?
Stacking in Etherium 2.0 is blocking ETH in a smart contract to participate in the network as a validator and receive rewards for validating blocks. Stacking will be possible after the launch of a new version of the network on the new Proof-of-Stake (PoS) consensus algorithm.
Stacking is a similar process to mining in PoS-based networks, where validators perform the same functions as miners. They create new blocks and confirm transactions for a fee. Instead of using computing resources, validators block coins in the wallet. To become an Etherium 2.0 validator, you must block at least 32 ETH for stacking. At the end of November, the value of such a deposit is about $18,000.
Validator Rewards.
Only validators who actively participate in the consensus receive a reward. Disconnected validators are penalized – penalties equal to active participation rewards.
Rewards for validators are affected by the total number of ETH blocked for stacking. Depending on this figure, the maximum annual yield of the validator can be from 2 to 20%. You can calculate the approximate profitability of steaking here and here.
How do I participate in ETH 2.0 Staking?
Users who want to become validators have two options for participating in steaking:
Self-staking.. Locking from 32 ETH and self-starting the validator node in compliance with technical requirements. Locked ETH will not be available until the launch of Phase 1.5, which will occur in 12-24 months, depending on the speed of development. Once Phase 1.5 starts, there will be a dynamic lock time to prevent mass withdrawals of ETH – 256 epochs (about 27 hours).
Collaborative Stacking.. Providing available ETH to a stacking service provider – pool, cryptocurrency exchange, etc.. There are security risks associated with trusting an intermediary. However, it is possible to participate in stacking without having 32 ETH and withdraw locked assets before Phase 1.5 rolls out.
Self-stacking.
To become a self-stacking ETH 2.0 validator, you must follow the instructions on Ethereum.org, which include three basic steps:
1. Accepting the conditions of participation in the network as a validator. You must read and accept the validator’s nine conditions of operation, including confirmations of understood risks, consequences of malicious and dishonest behavior.
2. Creating 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 point, you need to select the ETH 1.0 client and follow the installation instructions on the program’s website.
Then you must select the ETH 2.0 client.
The next step is to specify the number of nodes you want to manage, as well as choosing the operating system of the device. After that, download the command line application from Ethereum Foundation’s GitHub or choose to build the client from Python source code.
You need to follow the instructions clearly and generate the keys for the deposit. Validator key storages must be available in the new validator_keys directory. Load the Deposit-data-[timestamp].json file, which is located in /eth2.0-deposit-cli/validator_keys, in the suggested window.
3. Convert ETH to ETH 2.0. At this step, you need to transfer your ETH to the specified smart contract address according to the instructions.
In addition to running the node yourself, you can use the Pre-configured Validator Nodes hardware. This will save time and effort during the initial setup to start the validator. In this case, the onus of maintaining the node also falls on the user, and for stacking it is necessary to block 32 ETH. Examples of solutions: Avado, Launchnodes.
Another option is to use Validador-as-a-service (Validador-as-a-service) and pay the service for managing the node. Suitable for large ETH owners and institutional investors. Examples of services: Stakewise Solo, stakefish, Staked, Attestant, Blox Staking.
Collaborative Staking
At the end of November, 32 ETH is almost $18,000, so not everyone can run their own validator node. To get started with a small amount of ETH, you can use services that offer co-stacking in Etherium 2.0.
The developers of Etherium 2.0 have published a list of
of such services, but emphasize that none of them have passed any special verification by developers. Users must independently assess the risks and opportunities of each offer. There are three options for collaborative steaking:
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Steaking pools. Any amount in ETH can be blocked for steaking. Pool – an intermediate link for people with less than 32 ETH, combining crypto-assets for stacking. Rewards for steaking are distributed among the participants of the pool in proportion to their shares. Storage is decentralized, transparent and verifiable in any blockchain browser. Suitable for retail investors and DeFi industry participants.
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Lending platforms. Balanced option between stacking and the possibility of borrowing tokens under blocked in stacking ETH. Suitable for traders and investors aiming to maximize profits.
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Exchanges and custodians. The easiest option is to transfer ETH to the wallet of an exchange or other custodial service that offers sharing of the staking reward. The user has no control over the private keys.
Let’s explore each option in more detail.
Steaking pools
Pools can be used 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 via smart contracts, you need to make sure that the service has passed a security audit before sending ETH to the pool contract.
Most stacking pools release tokenized versions of ETH blocked for stacking, such as rETH. These ERC-20 tokens represent not only ether, but also income from steaking. 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 known stacking providers or by a dynamic mix of contract users. The Stacking Pool collects commissions from users and partially pays a fee to the operators of the valued nodes.
Pools charge commissions for stacking, and some services have a limit on the minimum amount of ETH they can contribute.
Advantages: liquidity on ETH blocked for stacking due to secondary issue of tokens; additional incentives for operators of validators on the network.
Disadvantages: risk of smart contract vulnerabilities; in some cases, custodial storage of ETH by the pool operator; risk of unfair pool behavior, threatening to lose 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 lending platform that allows you to use ETH blocked for staking as collateral for a loan. DHARMA Capital’s LiquidStake allows ETH holders to borrow from USDC using blocked ETH as collateral.
Users can benefit from the ability to create income by staking and retaining the ability to trade, invest or store liquid crypto assets. LiquidStake pools customers’ crypto-assets and transfers them to large steaming service providers. Credits can be earned from the start of ETH steaming or later.
Advantages: limited capital liquidity.
Disadvantages: intermediary risk; validator liquidation risk and liquidation penalty.
Exchanges and custodians.
Most exchanges have not yet launched co-stacking products, but some have already announced plans to roll out such solutions in the future. This will probably change once Beacon Chain is launched and tested.
It’s still unclear how exchanges will deal with the uncertain blocking period. Exchanges may offer fixed-income products in which coins are locked in for a predetermined period of time without the possibility of withdrawal. Custodial wallets are likely to offer solutions with longer asset lockout periods. The fee structures of exchanges are often opaque, so it is unclear at what intervals exchanges accumulate fees.
To participate in staking through an exchange or custodian, you must register with the service and transfer ETH into its wallet. In doing so, the user loses control over the private keys.
Advantages: easy to use the service; it is possible to block any amount for stacking, including less than 32 ETH.
Disadvantages: non-transparent fee structure; intermediary risk; loss of control over private keys and crypto-assets.
Examples of services: Bitcoin Suisse, Coinbase, Binance, Kraken, CoinDCX, TokenPocket.
Conclusion
Anyone with any amount of deposit can take part in the ETH-stacking. But only having 32 ETH or more, you can run your own validator without reassigning assets to intermediaries. With the current cost of ETH over $500, running your own validator is out of reach for most users.
Keep in mind: rewards for validators decrease as more and more ETH is blocked for stacking. The sooner the validator node is deployed, the more rewarding it will be for the owner in the early stages. But after the full launch of Ethereum 2.0, we should aim for a return of about 2% per annum or even less.
Stacking yields can be low, with stackers bearing financial risks. ETH blocked for self-stacking cannot be withdrawn until Phase 1.5 is deployed, i.e. 1-2 years, possibly more. In cooperative steaking, it depends on the rules of the contract or service. Validators can be fined for poor performance or protocol violations.
Non-technical users who want to lock in 32 ETH or more for stacking can use pre-configured validator nodes or validator-as-a-service services.
For retail investors who want to participate in staking but don’t have enough capital to run their own validator, co-stacking solutions have been developed that eliminate some of the risks and challenges associated with a long blockchain period.
While there are a small number of co-stacking services, there are already products that meet the needs of different user groups. You can take advantage of offers from pools, credit platforms, cryptocurrency exchanges and custodians.
When choosing a staking service operator, it is necessary to carefully examine the product offered, the amount of service fees, liquidity, reliability of smart contracts, and to consider the risks that full or partial loss of control over the keys entails.