There is a lot of excitement regarding the launch of Ethereum 2.0. With sufficient funds deposited to active Phase 0, staking ETH becomes all the more interesting. However, this process is not necessarily as straightforward as people may assume at first.
A Lengthy Lockup for Funds
It has been known for a while now, but the rollout of Ethereum 2.0 will occur through different stages. Because of this approach, users staking their ETH today will need to part with access over their funds for an extended period of time. It will not be possible to move any staked Ether until phase 1 kicks in, which may take anywhere from a few months up to several years.
Even then, users will not be able to reclaim their funds and end their period as an Ethereum 2.0 validator. To do so, they must wait until phase 1.5 activates on the network. Again, there is no official timeline for this upgrade. It can take months or years before one is able to access their funds again. For most users, especially speculators and investors, this may be far too long.
Top Rewards Won’t be Around for Long
Due to the amount of ETH submitted to the Ethereum 2,0 launch contract, the rewards for running an Ethereum validator will be lower than one may think. In the top tier, users would get an APY of up to 22.95% per year. For a 32-ETH node, that results in a lot of funds being credited to the account every year. Maximum returns are roughly estimated at $4,033 per year, at the current price.
However, there are different reward tiers, based on the amount of total ETH used to power Ethereum 2.0 validators. As more validators are running on the network, the rewards will keep decreasing. Once 1 million ETH is staked, the rewards drop from 22.95% to 16.62% per year. That yields a 5.3184 ETH staking reward per annum, or $3,276. A decent amount, but already a clear difference compared to the top tier.
Assuming the Ethereum price does not retrace again, running a validator can be a good way to speculate on the ETH value. With funds being locked up, one cannot sell on an exchange. Moreover, the value of the rewards in USD value may increase significantly, assuming the value of Ethereum keeps rising as well. A $3,276 annual reward can be worth 10 times as much by 2023, for all one knows.
Trusting a Third Party Ethereum 2.0 Validator
One possible option for those without sufficient technical knowledge is to delegate one’s stake to a third-party Ethereum 2.0 validator. An appealing approach, but it has many different drawbacks.
- Giving up control over funds to a third party, which is absolutely unnecessary.
- There will be a “service fee”, cutting deeply into staking rewards
- Bad behavior by validators results in reduced staking rewards
This latter aspect is rather worrisome. No one knows for sure if someone else will try to game the system, especially if its not their own funds being on the line. With rewards being slashed as a result for bad behavior, the end user will be affected, rather than the service provider. Self-staking is clearly the better option, but requires a fair bit of work until more suitable solutions come to market.
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