How Does Ethereum Staking Work?

The launch of the Beacon Chain network in December introduced the first iteration of protocol-level staking for Ethereum investors.

Put simply, Ethereum staking is the process of locking up an amount of ETH – the native cryptocurrency of the Ethereum blockchain – for a specified period of time in order to contribute to the security of the blockchain and earn network rewards.

People who do this are known as “validators” or “stakers,” and are tasked with processing transactions, storing information and adding blocks to the Beacon Chain – the new consensus model of Ethereum. As a reward for their active involvement in the network, validators receive interest on their staked coins, denominated in ether.

This method of staking not only serves as a passive income opportunity for contributors, but it also helps to secure the next iteration of the Ethereum network, dubbed Ethereum 2.0. Ethereum 2.0 is the next phase of Ethereum that runs on the Beacon Chain, Ethereum’s proof-of-stake (PoS) consensus model.

What is proof-of-stake?

As part of plans to enable a faster and environmentally friendly transaction validation process, Ethereum protocol developers are expected to execute a switch from a consensus model known as proof-of-work (PoW) to PoS.

Proof-of-stake is the name of the consensus mechanism that requires users to stake an amount of cryptocurrency to become validators, as described above, as opposed to something like proof-of-work that requires users to purchase and run mining equipment, or proof-of-authority, where users have to provide evidence of their identities.

Oftentimes, a validator in a PoS system will increase the chances of earning rewards on the network by staking more coins. Depending on the PoS system, users may also be able to delegate their stake to another user who can perform the responsibilities of being a validator on their behalf.

Why is Ethereum switching to PoS?

One of the main reasons for the consensus switch is to dramatically reduce the energy requirements for validating transactions and issuing new ETH. According to an Ethereum Foundation blog post, the team expects the new PoS system will reduce the amount of energy consumed during the validation process by 99.95%.

One reason for that is the minimum hardware requirements to run a PoS validator node are significantly cheaper and easier to access for the average user than the advanced computer hardware needed to be a crypto miner. Staking, unlike mining, can be done on everyday computers or laptops, and so it removes the need for electricity-guzzling mining equipment. Because it’s more accessible, it also means there’s a strong possibility the new 2.0 system will attract more node operators. That, in turn, will help boost the new network’s decentralization.

PoS on Ethereum is also intended to lay the groundwork for “sharding” – a partitioning technique that allows multiple parallel chains to share data and transaction load efficiently. These shard chains, when combined with a secondary scaling product known as “rollups,” could allow Ethereum to process upward of 100,000 transactions per second. That’s a huge leap compared with the 10-15 transactions per second it currently processes.

Rollups involve batching dozens of transactions together off the main chain, creating a cryptographic proof for them (evidence of their validity) and then submitting that to the main chain.

How does ethereum staking work?

Unlike the PoW-based blockchain, the PoS-powered blockchain bundles 32 blocks of transactions during each round of validation, lasting 6.4 minutes on average. These bundles of blocks are what’s known as “epochs.” An epoch is considered finalized – that is, the transactions contained are irreversible – when the blockchain adds two more epochs after it.

During the validating process (also known as the “attesting process”), the Beacon Chain randomly groups stakers into “committees” of 128 and assigns them to a particular shard block.

Each committee has a set time for proposing a new block and validating the transactions inside of it, called a “slot.” There are 32 slots in each epoch, meaning 32 sets of committees are required to complete the validation process in each epoch.

Once a committee is assigned to a block, one random member of the group is granted the exclusive right to propose a new block of transactions while the remaining 127 members vote on the proposal and attest to the transactions.

Once a majority of the committee has attested the new block, it’s added to the blockchain and a “cross-link” is created to confirm its insertion. Only then does the staker who was chosen to propose the new block receive their reward.

• Cross-linking is the process of reconciling individual shard states with the main chain, which is also called the Beacon Chain. The final state of each shard must reflect on the Beacon Chain through cross-linking.

Note that block proposers and attesters…

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