ETH 2.0: The Staking Dilemma That Might Lead To Validator Centralization

Ethereum is all set to make the transition to Proof-of-stake-based ETH 2.0 in a fortnight and as the days of the official launch nears, the anticipation around the launch is only rising. Vitalik Buterin, the co-founder of Ethereum has dubbed the transition as the biggest update for the Ethereum network since its launch.

What Led to ETH 2.0?

Ethereum is working on a Proof-of-Work-based mining consensus which is deemed as one of the most secure mining consensuses, but not necessarily the most efficient one. All the miners on the network put in their hashpower to mine the next block, because of which a lot of mining output is wasted.

Ethereum aspired to be the supercomputer of the decentralized world, however, the scalability issues kept mounting overtime and only rose in 2020 with the defi boom. The gas fee rose to an all-time high and network congestions became quite common, and despite several efforts, it became quite clear that the ethereum network in its current form would not be able to scale to accommodate the growing ecosystem.

This led to the development of PoS based ETH 2.0 comprising of several new scalable features that Buterin claims would make ETH 2.0 to process transactions on par with centralized remittance giants such as VISA and Mastercard.

ETH 2.0 would be launched in three phases in a multi-year roadmap:

• Phase 0: The Beacon Chian – December 1st, 2020.
• Phase 1: The Shard Chain – 2021
• Phase 1.5: Mainnet Shard – 2021
• Phase 2: Complete Shard – 2021

ETH 2.0 on paper seems to be a well-elaborated roadmap to help ethereum become the top blockchain in the cryptocurrency space with high scalability, however, many analysts and trade pundits have pointed out the complexities that would come along the way. Let us look at some of the key issues associated with the ETH 2.0 rollout.

The Staking Dilemma

For the launch of The Beacon Chain on December 1st, a total of 16,384 validators would be needed, where each node validator must stake a minimum of 32 ETH. Thus for a possible launch of mainnet on the scheduled date, a total of 524,288 ETH would be required to be staked. At press time the total number of locked ETH has reached 94,880 ETH.

The target number of staked ETH might look far off at present, but the real concern lies in staking itself. Many crypto pundits believe the minimum number of ETH required to become a validator is too high in the long run as it costs near $14,500 on the current value of ETH. This would really limit the participation from small stakeholders which in turn would impact the decentralization of the network. Many believe that ETH maximalists and whales would dominate the validators which could lead to centralization in mining as well.

In fact, one particular address has staked 16,000 ETH which is equivalent to 500 validators.

Staking pools might become the go-to option for many who can afford 32 ETH on their own, apart from that even staking pool participation would depend on the staking rewards.

It’s Not a Good Time to be an ETH Miner

The worst affected because of the change of mining consensus from Proof-of-Work to Proof-of-Stake would be the miners, as in PoS based consensus validators with the highest on-chain staking rewards would mine the next block. Apart from that their current mining machines would become obsolete and they would be left with no choice but to either sell their mining rigs at discounted rates or start mining other coins.

This is primarily because PoW based mining rigs are highly specialized and currently in its third generation with ASIC mining rigs.

High Risks and Vulnerabilities

Staking would be the central aspect of the ETH 2.0 that would lead to a boom in staking service via third-parties and staking pools. However, third-party staking comes with its own set of disadvantages and risks quite similar to holding once cryptocurrency on crypto exchanges. Third-party vulnerabilities are well known and extensive, thus the security of the staked coins would be a big concern.

Staking pools would be no different and possess the risk of exit scams as has been the case on several occasions. Many a time inexperienced traders often fall for these scams where the staking pools offer high lucrative returns and exit scams once they reach their desired goal of coins.

Are Staking Rewards Worth It?

The amount of ETH required to become a validator on ETH 2.0 might look too expensive, but the staking rewards are even more discouraging as the highest limit has been set to only 18.1% while the returns can go as low as 1.36%. If we look at both these aspects, it’s not too lucrative for miners to stake their ETH on ETH 2.0. On top of that stakers would also be required to fulfill their task as a validator failing which there would cost penalties which would make it even more difficult for the validators to make a profit.

Looking at the complexities involved in staking on ETH 2.0 at present, staking as a service might rise as a prominent market in the near future.

Conclusion

Vitalik Buterin has projected ETH 2.0 as the blockchain platform that would bear the qualities we have only read in theory like very high transaction capabilities at a very cheap price, 12-second block generation, and scalability being the central focus. However, many critics have pointed towards the complexities that would be involved on the technology side to achieve what he is promising. It would be quite interesting to see whether the mainnet launch on December 1st would pave the pathway for the dream envisioned by Vitalik