Hype of the Week: Ethereum 2.0 Phase 0 Staking

On the 1st of December 2020, the long-awaited Ethereum’s 2.0 launch will commence. The initial stage, Phase 0, will start with a process of converting its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS). This will be done via a Beacon Chain, however for Phase 0 to begin at least 524,288ETH need to be staked.  Thus, should one participate in the staking process?

Proof-of-Work (PoW)

Since 2015, Ethereum has used the proof-of-work mechanism to help nodes on the network reach consensus and determine the computational rules subject to miners. The PoW protocol used by Ethereum is called Ethash, which requires miners to compete via a process of trial and error to find a valid nonce for a given block in order to validate a transaction.    

Proof-of-Stake (PoS)

The initial phase of Eth2 will be subject to a transition in consensus mechanisms, moving from PoW to PoS. Under a PoS protocol, users are incentivized to stake their ETH (hold their ETH) in order to support a network by allowing the network to verify transactions.  By staking, users can become network validators and the more ETH one stakes, the higher the reward will be. The minimum staking requirement to become a validator is 32ETH (~$14700).  

Phase 0 of Ethereum 2.0

In order for Phase 0 to launch, at least 524,288ETH must be staked, if not the beacon chain will not start mining blocks. However, in Phase 0 only empty blocks are mined, no transactions are being undertaken on the chain, no smart contracts are running. The rewards for staking will purely come from inflationary pressure.  

Should one stake?

As no transactions are running, the coins that are provided in order to take part in the staking process, will be fully locked inside of the contract until Eth2 Phase 2 (the final phase) launches. This means that every person providing ETH to the staking contract has the risk of:

  1. Unknown time of your coins being locked up
  2. Impermanent loss if the Beacon Chain should suffer from technical issues

However, for undertaking this risk, each person staking will be rewarded with a high APY of 21%, until more coins are provided into the contract. The exact APY schedule is detailed below:

APR payout vs. ETH Staked (in Millions)

Thus, in terms of investment, there is an opportunity cost of locked up coins verse coins that are stable. If one fundamentally believes in  the Ethereum project, with no plans to sell within the next 2 years, staking may offer an interesting investment opportunity.  

However, if the possibility of technical issues, delays, uncertainty surrounding the project or uncertainty regarding the price of ETH is too great, it may be best to wait and see. At present, it remains to be seen if enough ETH can be staked in order to provide the security required and if the stake requirement of 524,288ETH can be provided. Currently, roughly 57,000ETH have been staked.

If you are interested in staking Ethereum you can read about it here: