Intro

Ethereum is turning from Proof-of-Work (PoW) to Proof-of-Stake (PoS) for higher transactions-per-second (TPS) and efficiency. Most of the major blockchains that support smart contracts use PoS, such as Solana, Cardano, and Avalanche.

Most blockchains turn to PoS because PoS empower them to embrace high performance, faster finality, environmental sustainability, scalability, low cost of security, and flexibility in architecture compared to PoW approach.

PoS gives users a new way to earn stable yields. Delegate the native assets to the staking node, users can earn 10%-20% yields. This is like the treasury bond of countries. It is stable and low-risk and it is much more profitable than stablecoin farming on popular DEXs and lending platforms.

Hopefully these crypto treasuries can help investors overcome fiat currency inflation. The following chart illustrates the inflation rate around the world. The fiat currency inflation is around 3% to 6%.

Staking mechanism

Different blockchains have different staking mechanisms, differing in withdrawal period and slashing rules.

Ethereum

Ethereum is turning from PoW to PoS for sustainability and scalability.

Ethereum describes staking on Ethereum as “Staking is the act of depositing 32 ETH to activate validator software. As a validator, you’ll be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This will keep Ethereum secure for everyone and earn you new ETH in the process. This process, known as proof-of-stake, is being introduced by the Beacon Chain.”

In short, the user needs to stake 32 ETH and run a validator node to become a staker. Users can withdraw staked ETH at least after the merge.

Currently, users will get around 4.2% APR, not deducting the server cost. After the merge, Kraken expects the APR to increase to 8.5% — 11.5% in the report “The State of Staking Q1 2022”. The Ethereum node doesn’t require high-end hardware. The server cost is relatively low. The recommended specifications are:

• 4+ cores CPU
• 16 GB+ RAM
• SSD with at least 500 GB of free space
• 25+ MBit/s bandwidth

Based on the node type, the disk space requirements varies from 400 GB to 6 TB.

In the ETH2 network, a proposer mints the new block, and the attester vote for this block to be part of the canonical chain.

Slashing means the validator violates rules and is forced to exit. There are three slashing conditions:

• As a proposer, the node sign more than one beacon block for one slot
• As an attester, the node signs more than one attestation on the same target
• As an attester, the node sign an attestation conflict with the history

If any of these behaviors is caught, the node is forced to exit the beacon chain around 36 days in the future. The penalties will continue to incur for around 36 days until the node can exit. The penalty number varies based on the network condition.

Slashing forces validators to exit the network, but penalties don’t. Penalties conditions can be put into the following categories:

• Attester penalties
• Inactive leak penalty

There are a total of 13,310,531 ETH staked and 396,982 total validators. The following charts illustrate the ETH 2.0 staking rate and staked ETH.

The inflow chart reveals some peak inflow time points. Some big inflow happened in Dec. 2020 and March 2022.

Kraken is the 1st staker in ETH 2.0. CEXs still has advantage in the market. They can turn their existing users into ETH 2.0 stakers.

For liquid staking, Lido dominates the market. Liquid staking derivatives help user liquid their staking assets and improve capital efficiency.

ALT

Lots of smart-contract-enabled chains use PoS considering TPS and sustainability.

They have different rules. Some chains allow users to delegate their staking to active validators. These validators run the node and charge commission fees from delegation staking. To withdraw their staking, users need to wait a period of time before undelegating.

Currently, Ethereum 2.0 has the lowest staking ratio.