One of the most talked about features in the Ethereum 2.0 upgrade is the change from proof of work to proof of stake. The change in consensus mechanism which will make transaction validations easier and quicker will significantly improve trading in ethereum and use of DeFi applications.
PoW or proof of work is the current consensus mechanism, which requires heavy computational power to run.
PoS or proof of stake solves this problem by reducing the amount of computational power and energy required to solve this problem. The new consensus mechanism only requires validators who run simple computer software to validate transactions. The software could easily run on a smartphone and anyone could be a validator by staking a specific amount of ether.
What is Ethereum 2.0 Staking?
Staking is simply depositing 32 ETH, so as to have the right to become a validator. A validator is saddled with responsibility of validating transactions, and adding new blocks to the blockchain while earning new ETH.
This whole process of earning ETH as a validator is called PoW. To understand staking, it is important to understand how PoW works.
How proof of stake works
Proof of stake is a kind of consensus algorithm first introduced in 2011. A consensus algorithm is a system that allows users to coordinate in a decentralized setting. It ensures that all agents in that decentralized setting can agree on a single source of truth. More simply, a consensus algorithm is a system that maintains agreement in a distributed setting.
The proof of stake algorithm randomly selects a validator to add the next block, validators could also be chosen based on size of stake or the age of the ether staked. This process of adding a new block is called forging, as opposed to mining, which is the term used in proof of work.
Validators with bigger stakes stand a chance of being the one to forge the next block. So that the process does not neglect validators with smaller stakes, more methods of selection are employed. Randomized block selection and coin age selection are two of the most popular selection methods.
Randomized block selection method, selects validators based on lowest hash values and highest stake. This makes the next validator predictable.
Coin age selection method will choose the next forger or validator based on how long their tokens have been staked for.
Proof of stake has its own rules and methods based on the cryptocurrencies preference.
Essentially the stake is a motivator for the validator not to create fake transactions. A whiff of fraudulent behavior by the network and the validator stands a chance to lose his staked ETH.
How to stake in Ethereum 2.0
However, staking pools give a group of ETH holders the chance to bring their resources together and stake as one validator.
This group of holders combine their stakes and share the reward proportionally to the contribution each brings to the pool.
Staking can also be done with cold wallets. Offline crypto wallets otherwise known as cold wallets can also be used for staking. Large volumes of crypto are usually kept in cold wallets which are not susceptible to hacks, ETH can be staked securely on them while the holder earns on rewards. If the staked coins leave the wallet the rewards will stop.
Proof of stake opens a new way for people to get into the blockchain space with ease. The staking pools make it even easier for those that do not have funds but desire to be validators, to take part in the PoW process.
While staking isn’t without risk, it is a very lucrative way to earn passive income. However, it is important to DYOR before venturing into staking.