Ethereum 2.0 (ETH2) is an Ethereum network upgrade aiming to improve security and scalability. This upgrade involves Ethereum shifting the current mining model to a staking model. So, let's discuss What is Ethereum 2.0 staking? and What are the risks of staking ETH and becoming a validator on Ethereum 2.0?
What is Ethereum 2.0 staking?
Holding a certain amount of Ether (ETH) to participate in the network and obtain a reward in return.
The process of staking involves locking up an amount of cryptocurrency given in a wallet to participate in the operation of a blockchain in return for rewards. Theoretically, anyone can participate in staking on any blockchain operating a proof-of-stake consensus. Proof- of stake has several variations, which also allow people to participate in staking.
Ethereum 2.0, involves re-engineering the entire Ethereum platform, a more scalable version. The Ethereum network is currently in a transition period from a proof-of-work (PoW) consensus algorithm to a proof-of-stake (PoS) consensus algorithm. This means that instead of miners competing to solve complex mathematical problems in order to validate transactions and earn rewards, users who hold ETH will be able to stake their ETH and earn rewards for validating transactions.
How do you get rewarded for staking on Ethereum 2.0?
As a validator on Ethereum 2.0, you get rewarded for proposing and attesting the next block in the chain. You will receive rewards in ETH for making valid proposals and attestations.
Rewards are dynamically calculated based on the state of the network upon epoch completion. Network-level reward issuance rates are a function of the total amount of ETH staked and the average % online of the validator(s). Individual validator reward rates depend on the number of validators run and the % uptime of the validator.
Rewards minus penalties are transferred to validators every epoch (384 seconds ~6.5 minutes). As a result, the reward you expect to receive when being randomly selected to be a validator may be different than what a validator actually receives. Check out the Ethereum 2.0 Calculator for an idea of the types of rewards for staking on Ethereum 2.0.
What are the risks of staking ETH and becoming a validator on Ethereum 2.0?
An upside to participating as a validator is that you can earn rewards of ETH. There is, however, a risk of losing funds through the 'slashing' of the ETH you staked on the network. With a small amount of care, this risk is negligible.
The first way a validator might lose funds is by being offline and not performing its duties correctly. This incurs a relatively mild penalty: roughly the same as the reward you could have made. As long as you are currently participating for at least 50% of the time, you will not lose your stake.
The other way a validator can lose funds is to publish contradictory information about the chain. In this case, the validator is slashed and ejected from the system. Depending on other factors, the amount slashed is between 1 ETH and the entire stake amount. Being slashed is easy to protect against and should never happen unless a validator deliberately acts maliciously.
