With Ethereum's transition to proof-of-stake (PoS) expected as early as September 2022, a multitude of questions and misconceptions around staking ether and the workings of the consensus layer are all the more relevant to clarify.
What are validators?
One of the core components of proof-of-stake is a validator. Like miners on proof-of-work, validators are responsible for processing transactions on Ethereum and, by doing so, helping secure the network. Anyone can become a validator on PoS by depositing (staking) a minimum of 32 ether (ETH) into the specific contract. The protocol then randomly selects participants to propose and vote on new blocks. Three pieces of software are required to become a validator on Ethereum: an execution client, a consensus client and a validator.
There are more than 400,000 validators on the Beacon Chain, the foundation of Ethereum's future proof-of-stake network. Slots for new validators occur every 12 seconds to create a new block and send it out to other nodes (participants) on the network.
What are epochs?
In blockchain networks, an epoch is a period of time that dictates when certain events will occur. Examples include the rate at which rewards are distributed or when a new group of validators will be assigned to validate transactions. Blockchain protocols that utilize epochs vary in what time period defines an epoch. With PoS Ethereum, an epoch occurs every 32 slots (6.4 minutes). Each slot in an epoch represents a set time for a committee of validators (groups of at least 128 validators) to propose and attest to (vote on) the validity of new blocks.
How do committees work in Ethereum?
In order to ensure fairness in the validating process, the Beacon Chain randomly groups stakers together into committees of at least 128 validators and assigns them to slots. It is important to note, however, that the block proposer may or may not be a committee member for the specific slot – it’s independent.
How do validators get rewarded?
Now that you understand validators, committees and epochs, you can start to unpack how validators earn what’s known as a block reward. In each epoch, there are 32 sets of committees. After a committee is assigned to a block, one random person out of the 128 in the committee is selected as the block proposer. That person is the only one who can propose a new block of transactions while the other 127 people vote on the proposal and attest to the transactions. Once a majority agrees, the block is added to the blockchain and the validator who proposed the block receives a variable amount of ETH based on a formulaic calculation.
See also: How Does Ethereum Staking Work?
How are validators penalized for bad behavior?
There are penalties if validators behave dishonestly or go offline. For example, proposing multiple blocks (equivocating) or submitting contradictory attestations (votes) results in punishments called slashings, which means validators lose a percentage of their staked ETH. The amount of ether slashed depends on the number of validators being slashed around the same time, otherwise known as the "correlation penalty." It can range from 1% for a single validator to 100% of a validator's stake slashed.
How is finality determined on PoS?
Finality is the concept that transactions on a blockchain become immutable. It guarantees that data cannot be altered, canceled or lost once included in the canonical chain. The time to reach a state of finality depends on the blockchain's latency level.
Finality with PoS Ethereum is organized through a deterministic method and what’s known as "checkpoint" blocks. The first block in each epoch (every 32 slots) is a checkpoint. Participants then vote on pairs of checkpoints that are considered valid.
Once a checkpoint gains a supermajority vote (two-thirds of the total staked ETH), it becomes justified. When its child checkpoint gets justified, it is upgraded to finalized and all previous epochs are also finalized. In essence, the difference between justified or finalized checkpoints depends on where it sits in the timeline.
As finality on PoS requires at least two-thirds (supermajority vote), an attacker could prevent finality by voting with at least one-third of the total ETH staked. But this is where the inactivity leak comes in. If the chain doesn't reach finality for more than four epochs, the inactivity leak will reduce staked ether from validators voting against the majority, and allow honest validators to finalize the chain.
Can a 51% attack happen when Ethereum moves to proof-of-stake?
A 51% attack is when a group of miners, or nodes, have enough ownership over a blockchain's hash power to alter how it functions. While it is still possible to do this with PoS Ethereum, an attacker would need to have 51% of the total staked ETH, which would mean controlling billions and billions of dollars' worth of ETH.
However, even if an attacker could use his or her influence to create an altered version of Ethereum (due to a majority voting power), with PoS, the community could mount a counterattack. Honest validators and participants could keep building on the minority chain, and encourage others to do the same.
Overall, despite being extremely expensive to launch and maintain, the higher the number of participants on a network, the more difficult it becomes to launch a successful cyberattack.
Can I participate in staking without setting up hardware?
Yes, you can do so with SaaS providers.
SaaS, short for Software as a Service, helps validators run and operate their clients (hardware) for a small fee. This service allows users the benefit of earning block rewards without worrying about hardware specs, setup, node maintenance and upgrades. While validators do not have to provide access to keys that allow withdrawals or transfers of staked funds, validators are still at risk of SaaS operators acting in a malicious way or being subject to strict regulation – and therefore requiring a higher degree of trust in a third party.
Why is solo staking considered the “best”?
Solo staking is viewed as the gold standard as it allows users to retain complete autonomy over their hardware and funds. Alongside solo staking, however, there are other methods such as SaaS and pooled staking. While all validators are required to stake a minimum of 32 ETH, staking as a service or pooled staking are more suited to people who are either uncomfortable handling the required hardware or can’t meet the 32 ETH threshold. Here’s what you should consider when deciding if you want to start solo staking.
How can I participate in staking if I don’t have 32 ETH?
You can join what’s known as a staking pool. Pooled staking is a method suited for anyone unable to deposit 32 ETH. While it also removes the need to maintain hardware, as with SaaS, risks still involve trusting a third party to run and maintain the node, and will cost you some sort of fee. Along with giving rewards for staking ETH, numerous staking pools offer a liquidity token that represents a claim on staked ETH and the rewards generated. Another benefit is that staking pools allow users to retain control over their funds and use staked ETH as collateral in DeFi (decentralized finance) applications.
When the Merge takes place, what will happen to my staked ETH?
Although it depends on the provider, unstaking ETH will not be allowed until after the Shanghai hard fork. Nonetheless, a derivative token called stETH (staked ether) is freely tradable in the meantime. In addition, once withdrawals are enabled, the exit rates for validators will be staggered by the protocol to help prevent any market fluctuation or security risks. According to the Ethereum website, only six validators may exit per epoch (every 6.4 minutes, so 1,350 per day, or only ~43,200 ETH per day out of 10 million ETH staked). Furthermore, although ETH will still remain locked for a period of time post-Merge, validators will have immediate access to the fee rewards/MEV (miner extractable value) earned during block proposals.
Is staked ETH the same as staking ETH? How are they connected?
No, staking ETH is the process of depositing and locking up any amount of ether to help validate and secure the consensus layer (the Beacon Chain) and receive rewards for doing so. On platforms like Lido Finance, users can stake their ETH and receive stETH, which can be traded or used for other DeFi applications like lending. In essence, it allows users the option to continue trading or transacting while their ETH currency is locked in the deposit contract. Holders of stETH can also redeem their tokens for an equivalent, or 1:1, amount of ether (along with accrued yields) once the transition to proof-of-stake is complete.
Why isn’t staked ETH (stETH) pegged to ETH?
Unlike wETH, which is tradable for ETH on a 1:1 basis at all times, parity between stETH and ether was never assumed. To prevent larger players (like Lido) from rapidly selling stETH and negatively affecting the price of ETH during market volatility, stETH is not pegged to ETH. This is also because – according to a June 16 report by Coinshares – unlike a stablecoin, stETH does not need a 1:1 correlation to function correctly. Rather, its value is backed by the inflexible nature of ETH that is locked for a set duration of time.
Does PoS give preferential treatment to people who stake more ETH?
Validators are selected via a pseudorandom process through RANDAO. Because RANDAO is part of the infrastructure in the Ethereum ecosystem, the basic premise is that at every epoch, the Beacon Chain utilizes RANDAO to assign block proposers to each slot and shuffles validators around to different committees.
Although RANDAO is still subject to potential bias or manipulation when generating the final number, for now, it’s considered secure enough. With that said, Ethereum might integrate what’s known as a verifiable delay function (VDF) in the future that makes the calculation time longer, more difficult to predict, and able to eliminate any last-level random deviation. As randomness is foundational to the Beacon Chain and is inspired by Dfinity's concept of a randomness beacon, despite larger entities like Coinbase being able to propose more blocks, every validator has exactly the same expected payout and an equal probability of being selected for duties.
Does PoS help the rich get richer?
A common argument amongst proponents of proof-of-work is that proof-of-stake favors the rich and reduces the rewards for those with less ether. Although users earn a higher return proportionate to the amount of ETH staked (and some can run multiple validator clients), the fixed annual yield of 5% to 15% will apply to all participants regardless of whether a single validator stakes 32 ETH or an institution stakes 100 ETH + across multiple accounts.
Both proof-of-work and proof-of-stake have levers that can be pulled by investing more money in one way or another. By buying more mining rigs or finding cheaper sources of energy, miners on proof-of-work can increase their computational power. By staking more ETH in proof-of-stake, people will have more chances to be selected to validate transactions.
The main advantage, in terms of investment, of PoS is that unlike with PoW, it offers lower ongoing costs. It is less energy intensive and does not require constant upgrades to the mining setups that proof-of-work demands. But ultimately, supply and demand determines many of the costs to participate in both consensus mechanisms, and those costs will always fluctuate.