What Is Ethereum Staking And How Does It Work?

In its effort to be faster and more energy-efficient, the Ethereum blockchain (version 1.0), which is the second-largest cryptocurrency network, has also now set out to upgrade to Ethereum 2.0 and a process called staking is one of the key changes.
To understand what staking is, let us take a look at what the original Ethereum looked like and what the transition to Ethereum 2.0 involves. The Ethereum blockchain was initially launched on the proof-of-work (PoW) consensus mechanism just like Bitcoin. This meant the native miners of its native currency Ether (ETH) would have to devote an astonishing amount of computing power to decrypt users’ transaction data and validate them. The decrypting process involved intense calculations, which also guzzled massive gas fees over and above hardware costs.

To make the network more energy-efficient, the Ethereum blockchain has now planned migration to a proof-of-stake (PoS) mechanism, which will have a new native cryptocurrency – ETH2. This new consensus mechanism requires miners called validators to pledge a certain amount of cryptocurrency to the blockchain, making them transaction authenticators.

Such a mechanism does not require the miners to devote a tremendous amount of computing power to scrutinise transactions. This, in turn, reduces the money being consumed in gas fees and hardware costs as compared to the PoW mechanism. According to a blog by the Ethereum Foundation, the new structure will reduce these operating costs by as much as 99.95 percent.

When miners increase the stake, i.e., pledge larger amounts of ETH2, it proportionately increases their likelihood of becoming a validator.

How does the new Ethereum 2.0 blockchain work?

The new PoS consensus mechanism on the upgraded blockchain will allow it to process upwards of 100,000 transactions per second (TPS). This is a massive leap from its current processing speed of 13 TPS. How is this happening?

The Ethereum 2.0 blockchain adds shards to the main chain called the ‘Beacon Chain’. Each shard is a parallel chain to the Beacon Chain and evaluates transactions that the Beacon Chain was earlier doing. This leads to decongestion of the main chain and contributes to faster speeds.

Moreover, each shard adds the validated transaction data onto the Beacon Chain, which means its robust security protocols are also retained on the shards.

These shards will be supported by ‘Zero-Knowledge Rollups’ or ‘ZK Rollups’ for batch processing. ZK protocols will only access transaction-relevant data without compromising personal data, hence the name ‘Zero-Knowledge. As limited data will need to be accessed during a transaction, this execution will allow the shards to pack data from more transactions into a single batch and further add to the speed.

How does the staking process work on the ethereum 2.0 blockchain?

The PoS blockchain takes around 6.4 minutes to complete a round of validation, during which it adds 32 blocks of data to the Beacon Chain.

Each bundle of 32 blocks is called an ‘epoch.’ When two such epochs are added after one epoch on the blockchain, it becomes irreversible in nature, which means it can neither be modified nor tampered with – a concept called ‘finality.’

When the validation round happens, the Beacon Chain randomly picks 128 validators and forms a committee. Each committee is assigned a specific shard for processing data. Each epoch has 32 slots which require one committee each to process the data, i.e., 32 committees work on creating each epoch.

As soon as a committee is formed, one random member is granted exclusive rights to propose a new block while the remaining 127 work on the validation process. Only when a majority of the 127 members have voted in favour of adding a new block (called ‘attestation’) is the processed block added to the Beacon Chain. This is when the ETH2 stakers receive their reward for the validation process.

The one member who is granted block proposing rights is rewarded one-eighth of the base reward, whereas the other validators are given seven-eighth of the base reward. The proposer has to pass on his attestation from the committee to the Beacon Chain as fast as possible to claim the entirety of his one-eighth share.

If attestations from other committees pass before his/hers, the rewards reduce by a fixed fraction per attestation passed. The base reward per validator reduces when more and more validators join the blockchain.

How can you get involved in staking?

In order to be able to participate in the staking process, stakers must set up a node. A node is a machine that runs a software client which communicates with the blockchain.

The computer needs to have a vast memory as both blockchains contain 900 GB worth of data each and expand at the rate of 1 GB/day. Since the validation process happens 24×7, the node must always be connected to the internet.

Once the software clients have been installed on your machine, you must pledge 32 ETH to the blockchain. This qualifies you to become a validator on the blockchain.

Is Ethereum Staking profitable?

To begin with, 32 ETH translates into Rs 0.89 crore at current exchange rates. Many aspiring stakers do not have access to such exorbitant sums and are therefore left out of this process.

Some third-party platforms have now started allowing investors to pool their resources and jointly stake their cryptocurrency in the blockchain. It is possible to earn rewards commensurate with the amount you have staked in the pool.
Staking also helps the Ethereum blockchain by making it more environmentally friendly. The reduced requirement of resources can also attract more investors to participate in the staking process.