Understanding How Staking works on Ethereum
3 min read
One of the key components of a blockchain is the ability to carry out a trustless consensus mechanism to verify transactions, the traditional means of validating transactions has been the Proof-Of-Stake mechanism which requires that for every transaction to be validated a certain complex cryptographical puzzle needs to be solved before that block of transaction can be added to the main chain. To solve the cryptographical puzzle, highly energy-intensive hardware which is specially designed for this work has to be put to use, afterwards the 'miner' as they are commonly called, will then be rewarded by the network with a token for the role he has performed. Due to the high rate of power consumption that such systems involve there have been pushes to move to a much more climate-friendly validation method, recently the Ethereum blockchain moved from a POW(Proof-Of-Work) consensus to a POS(Proof-Of-Stake) in what has now been called The Merge.
The role of the miners is replaced with network validators, in other to be a validator you have to lock up 32 ETH in the network, the valdators are then randomly selected to start new blocks and verify transactions , if a validator is found liable of sabotage or collusion he loses a part of or all ofh is staked tokens in a process called slashing and for every successful validation he is rewarded accordingly.
Types of Staking
Here are some of the different types of staking being done at the moment;
Solo Home staking:This is the most decentralized form of staking, you operate your own Ethereum node by providing your hardware and operating the necessary software for the validation services on the blockchain, apart from providing the compulsory 32 ETH this requires a dedicated computer and a sound understanding of how the network works.
Staking as a service: In the case where not everyone has the necessary technical knowhow or the hardware requirements all they have to do is to signup with a staking provider service and deposit the 32 ETH, the provider will then carry out the uses validators duties on their behalf usually at a particular fee.
Pooled Staking: Many might not be able to provide up to 32 ETH to establish a single validator node, there are services that allow users to contribute their deposits and manage them on their behalf. Other forms of this also include staking with popular centralized exchanges like Binanace, Coinbase, etc.
Since the Shanghai upgrade which allows for stakes to now be withdrawn, we have seen an increase in deposits for staking on Ethereum, this shows that there is an increased interest by users in staking and its earning potential. With the rise of staking pools which now account for a third of the total stakes on Ethereum, many fear the potential risk this poses by increasingly centralizing the network, one thing is for sure many people are beginning to see the intrinsic value that this technology has and desire to play a vital role in its future.
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