Ethereum 2.0

ETH2.0 beacon chain first anniversary: Staking and the shift to a proof-of-stake network

December saw the first anniversary of the ETH2.0 beacon chain and 6 months since Sygnum launched ETH2.0 staking-as-a-service. With these milestones, we look to share what is important for Ethereum in previous developments and looking ahead.

As the first bank to offer ETH2.0 staking, this service provides yield for many of our clients. As such, we often receive questions on what staking is, how it works, and how it relates to the upgrade from the existing Ethereum network to Ethereum 2.0.

How has ETH2.0 evolved in its first year?

Since inception of ETH2.0, as Ethereum moves towards becoming a proof-of-stake network, the following upgrades were made:

  • April 2021: The Berlin hard fork, which reduced costs, simplified processes, and enabled bundling for transactions, and increased the expenses associated with launching denial-of-service (DoS) attacks.
  • August 2021: The London upgrades, responsible for driving deflationary pressure on Ethereum’s supply and reducing the volatility of Ethereum gas prices. The former is possible with the introduction of a base fee that is burned alongside a tip for miners for every transaction executed on Ethereum. This has burned over 1 million Ether to date.
  • October 2021: The Altair upgrade, which included tests for the merge of the ETH2.0 beacon chain and the mainnet, enabled support for validators on low-power devices like mobile phones for broader participation, and increased penalties for validators offline or not fulfilling their role.

What is important to note for ETH2.0 staking?

Looking ahead, no firm date is set for the change to proof-of-stake network – with the merge of the ETH2.0 and the main Ethereum chain. The current estimate is that the merge will take place around mid 2022.

What is expected is that staking rewards will increase once the proof-of-work mainnet chain is no longer running in parallel, and it is merged with the proof-of-stake chain.

Background on Ethereum

Ethereum is currently the second largest cryptocurrency by market capitalisation after Bitcoin and the dominant smart contract platform. It was launched in 2015, realising the founders’ vision that putting executable smart contracts on a blockchain would facilitate the development of a wide range of applications.

This first version of Ethereum still uses the energy intensive proof-of-work consensus mechanism, but founder Vitalik Buterin promised a switch to proof-of-stake before the network even went live. Developers have been working on the consensus mechanism switch over the last few years and have been updating the system to Ethereum 2.0.

The switch to proof-of-stake is intended to improve the scalability of Ethereum, enhance security, and lower the barriers to participating in the transaction validation process (and thus earning fees and rewards). Although there is a minimum number of tokens that validator nodes need to deposit, all token holders can participate and earn staking rewards by using third party pooling services.

Ethereum being a more efficient technology, it currently uses slightly over half of the energy used by Bitcoin, but this is still a very significant amount. The upgrade is expected to reduce the energy consumption by 99.95%. As the Ethereum Foundation stated in one of their blogs, Ethereum energy consumption will be similar to a small town rather than a small country.

This upgrade is especially interesting as ETH2.0 offers investors the opportunity to earn a yield on their ETH holdings.

Learn more about Sygnum’s staking offering here.

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