Now that Ethereum 2.0 is finally set to go live, people face a crucial decision: whether or not to stake. It comes down to balancing the age-old calculus of risk and reward. Ethereum 2.0 holds out the promise of steady if not “moon”-like staking returns – but the network upgrade also creates illiquidity through lockups and real risks in running infrastructure.
For a network with a market cap north of $40 billion, there is now a lot at … stake. Admittedly, we will only be at the inauspicious-sounding phase 0. But after delays and more delays, at last it’s time for crypto investors to make a decision on staking. And if you do choose to join the Ethereum 2.0 Beacon chain launch, do you run your own nodes or farm that complex, demanding work to a 24/7 service provider?
Tim Ogilvie is the CEO of Staked, which runs staking infrastructure for institutional investors, exchanges, custodians, and wallets.
Ethereum’s transition to proof-of-stake has seemed existential for the crypto community. It is by far the biggest network to opt for proof-of-stake (PoS) over proof-of-work (PoW). But over a year of inspections and testnets, the network seems robust, the “final final” audits are complete. This month a deposit contract opened. In a few short weeks, as early as Dec. 1, Ethereum 2.0 will ship.
In all the excitement, it’s easy to forget participants face hard choices with immense ramifications.
No going back
First of all, of course, the network needs to be secured for Ethereum to thrive. Everybody staking 32 ETH to run a node is playing their part to strengthen the blockchain’s security.
These true believers, who were in at the ground floor when Ethereum’s ICO launched, finally have an opportunity to help the network progress to the next level of security. Long-term ETH holders no doubt believe a secure network can support the health of the blockchain – and with it the price of their prized assets. All the while, they can earn some yield along the way.
What you need to consider when staking on Ethereum 2.0
To Stake or not to stake? The most immediate choice will be whether or not to stake on Ethereum 2.0. Staking offers rewards including yields north of 20%. But potential stakers must balance this with the risk that staked ETH will be locked up, and therefore illiquid, for an indefinite period. On top of this, stakers face the prospect of being “slashed” if they fail to perform their duties properly.
Should I use a third-party staking provider? Staking and running a node requires both infrastructure and expertise. For this reason, potential stakers must decide whether to do so themselves or delegate the task through staking providers. Those who choose this option delegate the task of staking to third parties with or without giving up their assets depending on the type of provider. These staking infrastructure services are designed to fulfill the staking function optimally to help reduce risk.
Short on ETH? You can pool your resources. The 32 ETH required to stake to run a node on the network may prove prohibitive for many. However, they have the option of joining staking pools that aggregate smaller amounts of ETH.
Standing up nodes in multiples of 32 ETH and running them with barely any downtime while the assets are locked up for what could be years won’t be for everyone – and it shouldn’t be. Whether staked alone or via a pool, once an asset is put on the Beacon chain, there is no going back to the original. Stakers whose ETH will remain locked up until a later phase must be willing to be locked into a long-term commitment.
In the world of decentralized finance (DeFi) with its breakneck speed of change and innovation and often eye-popping returns, speculators may well feel their assets are put to best use elsewhere. Still, the estimated yield, depending on how many stakers join the network, is 8%-15%. That will not match some of the more exciting, and risky, decentralized finance (DeFi) staking projects. But it is solid, and way better than familiar rates found in centralized finance.
There is also the likelihood that staked ETH on the Beacon chain will be tokenized. In other words, even though the ETH is locked up securing the network, a derivative of this asset will be created, used and traded given investors and developers have shown no lack of imagination in experimenting with DeFi systems.
Stakers need to weigh the complexity of running nodes on a major chain with the risk of being slashed for failing to stay up persistently or for other issues such as double-signing. Ethereum 2.0 staking requires the commitment and hassle of maintaining a node for years. Those inclined to support network security and earn steady yield may still shy away from the obligations of regularly tending to their servers.
That’s where staking-as-a-service providers come in – and again people have choices to make. As with many areas of cryptocurrency, a core decision is whether to give up your asset to a provider, or to choose a non-custodial service instead. At my company, Staked, we believe investors should have help in earning yield without having to give up custody of their assets. We typically support institutions, but we know not everybody can afford the 32 ETH (about $13,000) required to run each node. Pooling options such as Rocketpool, which will allow users to stake as little as 0.01 ETH, should become available to fulfill this need.
See also: Tim Oglivie – Tokenized Staked ETH Will Replace ETH – And That’s a Good Thing
Whatever the decision participants make at this point, it is a pivotal moment for Ethereum and the blockchain community in general. As Ethereum 2.0 moves through its phases, the network should be able to achieve real scale. A blockchain with a current sluggish speed of 14 transactions per second has obvious limitations. But Ethereum 2.0, with the potential of reaching 100,000 transactions per second, could help the network realize its stated ambition of becoming a “world computer.”