- Ethereum staking is the method of earning more ethereum by merely depositing it into a staking wallet.
- Ethereum planned to initially start with a proof-of-work (PoW) consensus and gradually transition into a proof-of-stake (PoS) consensus.
- Ethereum staking protocols also offer a higher level of security and preventive measures to maintain control over the network.
What is Ethereum Staking?
Ethereum staking is the method of earning more ethereum by merely depositing it into a staking wallet. On a surface level, Ethstaking can compare to storing money in a bank and gradually attaining interest over time.
The longer the deposit maintained in the bank, the more the interest amount that will accumulate for the deposit. In Ethereum staking, though, a deposit or a “stake” is maintained in a staking wallet for a fixed time anywhere between 3 to 12 months.
The staking wallet linked to a smart contract on the Ethereum blockchain whose primary purpose is to validate block transactions, much like Ethereum miners.
Under a proof-of-stake (PoS) network, such as the one Ethereum is gradually striving to transition to under Ethereum 2.0, a vote taken from the validator with a higher ether deposit.
This is the basis of the PoS consensus in general, as it relies on the network participants who have a lot more to lose, or who have a higher “stake” in the system, to validate transactions.
The Workings of And Ethereum Staking System
The core working behind Ethstaking works using the principles of smart contracts that function using a group of protocols on the ETH blockchain, also called “Casper.”
These smart contracts allow for Ethstakers to “stake” a deposit on a validator node of the blockchain that will work on validating transactions while being rewarded with a portion of the transaction fees for every validated transaction.
Casper also prevents the Ethstaker from damaging the network by keeping the staked Ether locked in the case of an invalid block.
The whole idea behind Ethstaking works behind the ideology that the Ether staked will serve as collateral that vouches for the genuine validity of new blocks on the chain and rewards a fraction of the transaction processing fees for the validation work.
Why should Ethereum Staking become relevant?
Ethereum planned to initially start with a proof-of-work (PoW) consensus and gradually transition into a proof-of-stake (PoS) consensus.
This transition would occur due to a piece of code within the Ethereum blockchain that continually increases the mining complexity until mining is no longer possible.
This bit of code is called the Ethereum difficulty bomb, and is meant to help gradually transition the PoW miners to PoS, as mining becomes impossible.
The Casper protocols meant to help lead miners from the PoW network to the PoS one by slowly reducing the number of blocks mined and promote Ethstaking so that miners will be able to gain income by staking their Ether into a pool from which consensus can obtain when new blocks validated on PoS.
Why Ethereum Staking over Ethereum Mining?
There are multiple reasons as to why Ethereum Staking is much a much better model at achieving validity consensus compared to Ethereum Mining.
- Firstly, Ethereum Staking allows for much more energy-efficient than mining. Mining on a PoW is exceptionally computationally expensive as it requires nodes to try and brute force the hash that validates the block.
- This requires a large amount of energy and costly computation. This kind of energy consumption only offers a probability at which the miner can receive the block reward.
Ethereum Staking, on the other hand, relies on the economic loss of Ether upon falsely validating a block compared to mining’s brute force approach. It relies on the nodes with a more significant stake in the Ethereum network to make sure that the blocks are validated correctly.
It achieves the same number of validated blocks as a PoW Network, but with thousands of energy cycles lesser. Therefore, Ethereum Staking is a reliable solution to fixing the enormous amount of energy that PoW systems, like the current Ethereum or Bitcoin, consume.
- Secondly, Ethereum mining only offers a probabilistic reward based on energy spent on validating blocks. This can be very damaging to miners as the amount of energy spent on the network needs to be more significant to have a higher chance of winning the block reward.
On an Ethstaking model, though, the reward is offering is almost deterministic or inevitable based on the stake. The larger a node has in stake on the network, the more constraint to that node to validate a block.
This results in a mathematical certainty that the higher “stake” node will hash the block, and the network will remain secure.
- Ethereum staking protocols also offer a higher level of security and preventive measures to maintain control over the network. Like discussed above, a bad actor in the network will have a significant economic loss if they validate an invalid block, whereas, on a PoW network, any node that has significantly enough compute power (mathematically over 50% of the computation power of the mining network) can successfully achieve consensus for an invalid block.
- Ethereum Staking also allows for the network to always be moving since the nodes are only required to log in once every two months. This prevents an attacker from choking the network by blocking it from achieving consensus on blocks.
- This kind of PoS consensus also prevents every node in the network from having to validate transactions or actively maintain the current status of all transactions allowing for a more complex node responsibility scenario.
So then, where does Ethereum Staking fail?
As beneficial as Ethereum Staking may seem in comparison to a PoW Ethereum Network, it does have its downsides too.
In the case of a hard fork to the blockchain, Ethereum staking would cause nodes to have to validate blocks on both chains and gain twice the rewards regardless of the fork’s outcome.
This issue has a potential solution by creating a negative factor for the node when validating both chains.
The network can also be blocked if the high stakes validator goes offline. The Ehtereum Foundation has been working on a fix to this problem by issuing a cost for blocking the network relative to the node’s rewards balance.
There is also the problem of a long-range attack to the network where an attacker can rewrite the ledger to their benefit since there is no time/computation-intensive task that holds the network history secure compared to a PoW network.
This issue is mitigated by the “Slasher” protocol that allows the network users to penalize the attacker who forks the blockchain.
There is also the problem of the “rich getting richer” and wealth inequality in a PoS network since block validations are more toned to the nodes with more at stake.
Ethstaking also required for rewarded Ether to remain exposed in the Ethstaking wallet and thus holds a higher risk for the node due to the exposure.